Item 2. Management’s Discussion and Analysis
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 the COVID-19 Pandemic and Outlook
The novel coronavirus (COVID-19) pandemic, together with the measures implemented or recommended 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. 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 the efficacy and speed of vaccination programs in curbing the spread of the virus in different markets, the introduction and spread of new variants of the virus that may be resistant to currently approved vaccines and the continuation of existing or implementation of new government travel restrictions.
Capacity. The Company began experiencing a significant decline in international and domestic travel demand related to COVID-19 during the first quarter of 2020, and this reduction in demand has continued through the date of this report. However, since March 2021, the Company has seen increasing demand for travel both domestically and in countries where entry is permitted. The Company cut, relative to second quarter 2019 capacity, approximately 46% of its scheduled capacity for the second quarter of 2021 and expects its third quarter scheduled capacity to be down approximately 26% versus the third quarter of 2019. The Company will continue to monitor booking trends for future travel and adjust its capacity as needed.
Cost Reductions . The Company has identified over $2.0 billion of annual permanent structural cost reductions including improvements in labor efficiencies. During the first quarter of 2021, the Company offered voluntary leaves of absences to certain U.S.-based front-line employees. This program included (based on employee group, age and completed years of service) a partially-paid leave of absence with active health care coverage and travel privileges. Employees who separate from the Company after the end of such program receive certain separation benefits, such as post-employment health benefits and travel privileges. Approximately 4,500 employees elected to participate in this program, and it is expected that the majority of them will separate from employment at the end of their leave of absence. See Note 5 and Note 9 to the financial statements included in Part I, Item 1 of this report for additional information on charges related to these programs.
Liquidity . The Company entered into a number of transactions to improve its liquidity and manage its capital. In the first half of 2021, the Company:
• issued, through a private offering to eligible purchasers, $4.0 billion in aggregate principal amount of two series of notes, consisting of $2.0 billion in aggregate principal amount of 4.375% senior secured notes due 2026 (the "2026 Notes") and $2.0 billion in aggregate principal amount of 4.625% senior secured notes due 2029 (the "2029 Notes" and, together with the 2026 Notes, the "Notes," and each a "series" of Notes);
• entered into a new Term Loan Credit and Guaranty Agreement (the "New Term Loan Facility") initially providing term loans up to an aggregate amount of $5.0 billion and a new Revolving Credit and Guaranty Agreement (the "New Revolving Credit Facility" and, together with the New Term Loan Facility, the "New Loan Facilities") initially providing revolving loan commitments of up to $1.75 billion;
• repaid in full the $1.4 billion aggregate principal amount outstanding under the term loan facility (the "2017 Term Loan Facility") included in the Amended and Restated Credit and Guaranty Agreement, dated as of March 29, 2017 (the "Existing Credit Agreement");
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• repaid in full the $1.0 billion aggregate principal amount outstanding under the revolving credit facility (the "2017 Revolving Credit Facility") included in the Existing Credit Agreement;
• repaid in full the $520 million aggregate principal amount outstanding under the Loan and Guarantee Agreement, dated as of September 28, 2020, among United, UAL, the U.S. Treasury Department ("Treasury") and the Bank of New York Mellon, as administrative agent, as amended (the "CARES Act Loan"), which was entered into pursuant to the loan program established pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act");
• entered into approximately $0.6 billion in new enhanced equipment trust certificates ("EETC"); and
• raised approximately $0.5 billion in net cash proceeds from the issuance and sale of UAL common stock.
In addition to the foregoing transactions, United entered into the following agreements with Treasury:
PSP2. On January 15, 2021, United entered into a Payroll Support Program Extension Agreement (the "PSP2 Agreement") with Treasury providing the Company with total funding of approximately $3.0 billion, pursuant to the Payroll Support Program established under Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021. These funds were used to pay for the wages, salaries and benefits of United employees, including the payment of lost wages, salaries and benefits to returning employees. Approximately $2.1 billion was provided as a direct grant and $870 million as indebtedness evidenced by a 10-year senior unsecured promissory note (the "PSP2 Note"). See Note 2 to the financial statements included in Part I, Item 1 of this report for additional information on the warrants issued in connection with the PSP2 Note and Note 8 of this report for a discussion of the PSP2 Note. As a result of the PSP2 Agreement, the Company offered an opportunity to return to active employment to U.S. employees who were impacted by involuntary furloughs.
PSP3. On April 29, 2021, in connection with the Payroll Support Program established under Section 7301 of the American Rescue Plan Act of 2021, United entered into a Payroll Support Program 3 Agreement (the "PSP3 Agreement") with Treasury providing the Company with total funding of approximately $2.8 billion. Approximately $2.0 billion was provided as a direct grant and $810 million as indebtedness evidenced by a 10-year senior unsecured promissory note (the "PSP3 Note"). These funds will be used by United exclusively for the continuation of payment of its employee wages, salaries and benefits. See Note 2 to the financial statements included in Part I, Item 1 of this report for additional information on the warrants issued in connection with the PSP3 Note and Note 8 of this report for a discussion of the PSP3 Note.
United Next . On June 27, 2021, United entered into a supplemental agreement to that certain Purchase Agreement, dated May 15, 2018 with The Boeing Company ("Boeing") for a firm narrowbody aircraft order of 200 Boeing 737 MAX aircraft. The order consists of 150 Boeing 737 MAX 10s and 50 Boeing 737 MAX 8s. Also on June 27, 2021, United entered into an amendment to that certain Purchase Agreement, dated December 3, 2019 with Airbus S.A.S. ("Airbus") for a firm narrowbody aircraft order of 70 Airbus A321neo aircraft. The firm orders of 200 Boeing 737 MAX aircraft and 70 Airbus A321neo aircraft are expected to be delivered starting in 2023 through 2028 and 2026, respectively.
The "United Next" plan will have a transformational effect on the customer experience and is expected to increase the total number of available seats per domestic departure by almost 30% by 2026 and significantly lower carbon emissions per seat.
The new aircraft order will come with a new signature interior that includes seat-back entertainment in every seat, larger overhead bins for every passenger's carry-on bag and the industry's fastest available in-flight WiFi, as well as a bright look-and-feel with LED lighting. Adding these new 737 MAX and Airbus A321neo aircraft means the Company will replace older, smaller mainline jets and at least 200 single-class regional jets with larger aircraft, which we expect will lead to significant sustainability benefits compared to older planes: an expected 11% overall improvement in fuel efficiency and an expected 17-20% lower carbon emission per seat compared to older planes.
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 June 30, 2021 as compared to the corresponding period in 2020.
Second Quarter 2021 Compared to Second Quarter 2020
The Company recorded a net loss of $434 million in the second quarter of 2021 as compared to a net loss of $1.6 billion in the second quarter of 2020. The Company considers a key measure of its performance to be operating income (loss), which was a $270 million loss for the second quarter of 2021, as compared to a $1.6 billion loss for the second quarter of 2020, a $1.4 billion decrease year-over-year, primarily as a result of improvements in demand for air travel. Significant components of the
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Company's operating results for the three months ended June 30 are as follows (in millions, except percentage changes):
2021 2020 Increase (Decrease) % Change
Operating revenue $ 5,471 $ 1,475 $ 3,996 270.9
Operating expense 5,741 3,112 2,629 84.5
Operating loss (270) (1,637) (1,367) (83.5)
Nonoperating expense, net (294) (366) (72) (19.7)
Income tax benefit (130) (376) (246) (65.4)
Net loss $ (434) $ (1,627) $ (1,193) (73.3)
Certain consolidated statistical information for the Company's operations for the three months ended June 30 is as follows:
2021 2020 Increase (Decrease) % Change
Passengers (thousands) (a) 23,909 2,813 21,096 749.9
Revenue passenger miles ("RPMs" or "traffic") (millions) (b) 28,514 2,970 25,544 860.1
Available seat miles ("ASMs" or "capacity") (millions) (c) 39,613 8,963 30,650 342.0
Passenger load factor (d) 72.0 % 33.1 % 38.9 pts. N/A
Passenger revenue per available seat mile ("PRASM") (cents) 11.02 7.60 3.42 45.0
Average yield per revenue passenger mile ("Yield") (cents) (e) 15.31 22.93 (7.62) (33.2)
Cargo revenue ton miles ("CTM") (millions) (f) 892 496 396 79.8
Cost per available seat mile ("CASM") (cents) 14.49 34.72 (20.23) (58.3)
Average price per gallon of fuel, including fuel taxes $ 1.97 $ 1.18 $ 0.79 66.9
Fuel gallons consumed (millions) 625 204 421 206.4
Employee headcount, as of June 30 84,400 91,800 (7,400) (8.1)
(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 June 30 (in millions, except for percentage changes):
2021 2020 Increase (Decrease) % Change
Passenger revenue $ 4,366 $ 681 $ 3,685 541.1
Cargo 606 402 204 50.7
Other operating revenue 499 392 107 27.3
Total operating revenue $ 5,471 $ 1,475 $ 3,996 270.9
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The table below presents selected second quarter passenger revenue and operating data, broken out by geographic region, expressed as year-over-year changes:
Increase (decrease) from 2020:
Domestic Atlantic Pacific Latin Total
Passenger revenue (in millions) $ 2,746 $ 266 $ 98 $ 575 $ 3,685
Passenger revenue 506.6 % 466.7 % 288.2 % 1,197.9 % 541.1 %
Average fare per passenger (22.5) % (22.0) % (8.8) % (49.7) % (24.6) %
Yield (32.7) % (35.2) % 13.8 % (44.8) % (33.2) %
PRASM 57.0 % 14.4 % 42.7 % (10.1) % 45.0 %
Passengers 682.3 % 626.7 % 325.7 % 2,481.7 % 749.9 %
RPMs (traffic) 801.8 % 775.2 % 241.3 % 2,250.5 % 860.1 %
ASMs (capacity) 286.1 % 396.3 % 172.1 % 1,343.1 % 342.0 %
Passenger load factor (points) 47.6 20.2 4.9 27.3 38.9
Passenger revenue increased $3.7 billion, or 541.1%, in the second quarter of 2021 as compared to the year-ago period, primarily due to improvements in demand for air travel as COVID-19 vaccinations are increasingly available in the United States and certain other jurisdictions and as more governments are lifting travel and quarantine restrictions.
Cargo revenue increased $204 million, or 50.7%, in the second quarter of 2021 as compared to the year-ago period, primarily due to an increase in cargo-only flights as a result of increased demand for critical goods during the COVID-19 pandemic and continued capacity growth across markets.
Other operating revenue increased $107 million, or 27.3%, in the second quarter of 2021 as compared to the year-ago period, primarily due to an increase in mileage revenue from non-airline partners, including the co-branded credit card partner, JPMorgan Chase Bank, N.A.
Operating Expenses. The table below includes data related to the Company's operating expenses for the three months ended June 30 (in millions, except for percentage changes):
2021 2020 Increase (Decrease) % Change
Salaries and related costs $ 2,276 $ 2,170 $ 106 4.9
Aircraft fuel 1,232 240 992 413.3
Depreciation and amortization 620 618 2 0.3
Landing fees and other rent 564 429 135 31.5
Regional capacity purchase 547 388 159 41.0
Aircraft maintenance materials and outside repairs 302 110 192 174.5
Distribution expenses 139 31 108 348.4
Aircraft rent 52 47 5 10.6
Special charges (credits) (948) (1,449) (501) NM
Other operating expenses 957 528 429 81.3
Total operating expenses $ 5,741 $ 3,112 $ 2,629 84.5
Salaries and related costs increased $106 million, or 4.9%, in the second quarter of 2021 as compared to the year-ago period, despite the 8.1% decrease in headcount, primarily due to several factors including an increase in front-line employees' salaries from higher flight capacity, prior year schedule reductions for management and administrative employees, prior year Company offered leaves of absence by front-line employees and $34 million in lower tax credits provided by the Employee Retention Credit under the CARES Act.
Aircraft fuel expense increased by $992 million, or 413.3%, in the second quarter of 2021 as compared to the year-ago period, due to both higher average price per gallon and increased consumption. The table below presents the significant changes in
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aircraft fuel cost per gallon in the three months ended June 30, 2021 as compared to the year-ago period:
(In millions) Average price per gallon
2021 2020 % Change 2021 2020 % Change
Fuel expense $ 1,232 $ 240 413.3 % $ 1.97 $ 1.18 66.9 %
Fuel consumption (gallons) 625 204 206.4 %
Landing fees and other rent increased $135 million, or 31.5%, in the second quarter of 2021 as compared to the year-ago period, primarily due to an increase in capacity-based rent and landing fees.
Regional capacity purchase increased $159 million, or 41.0%, in the second quarter of 2021 as compared to the year-ago period, primarily due to increased regional flying and increased pass-through maintenance costs.
Aircraft maintenance materials and outside repairs increased $192 million, or 174.5%, in the second quarter of 2021 as compared to the year-ago period, primarily due to higher volumes of flying and the timing of airframe maintenance events.
Distribution expenses increased $108 million, or 348.4%, in the second quarter of 2021 as compared to the year-ago period, primarily due to higher credit card fees, commissions and higher volume of global distribution fees as a result of the overall increase in passenger revenue.
Details of the Company's special charges (credits) include the following for the three months ended June 30 (in millions):
2021 2020
CARES Act grant $ (1,079) $ (1,589)
Impairment of assets 59 80
Severance and benefit costs 11 63
(Gains) losses on sale of assets and other special charges 61 (3)
Special charges (credits) $ (948) $ (1,449)
See Note 9 to the financial statements included in Part I, Item 1 of this report for additional information on the Company's special charges (credits).
Other operating expenses increased $429 million, or 81.3%, in the second quarter of 2021 as compared to the year ago period, primarily due to improved flight activities which resulted in an increase in our catering, airport ground handling, 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 June 30 (in millions, except for percentage changes):
2021 2020 Increase (Decrease) % Change
Interest expense $ (426) $ (196) $ 230 117.3
Interest capitalized 22 17 5 29.4
Interest income 12 11 1 9.1
Unrealized gains on investments, net 147 9 138 NM
Miscellaneous, net (49) (207) (158) (76.3)
Total $ (294) $ (366) $ (72) (19.7)
Interest expense increased $230 million, or 117.3%, in the second quarter of 2021 as compared to the year-ago period, primarily due to the issuance of new debt to provide additional liquidity to the Company during the COVID-19 pandemic.
Unrealized gains on investments, net, was $147 million in the second quarter of 2021 as compared to $9 million in the year-ago period, primarily due to the change in the market value of the Company's equity investment in Azul Linhas Aéreas Brasileiras S.A. ("Azul") and Clear Secure, Inc. (formerly Alclear, Inc.) ("Clear"). See Note 6 to the financial statements included in Part I, Item 1 of this report for information related to these equity investments.
Miscellaneous, net decreased $158 million in the second quarter of 2021 as compared to the year-ago period, primarily due to $231 million of special termination benefits and settlement losses related to voluntary separation programs under the Company's postretirement medical programs and defined benefit plans recorded in the second quarter of 2020. See Notes 5, 6, 7 and 9 to the financial statements included in Part I, Item 1 of this report for additional information.
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I ncome Taxes. See Note 4 to the financial statements included in Part I, Item 1 of this report for information related to income taxes.
First Six Months 2021 Compared to First Six Months 2020
The Company recorded a net loss of $1.8 billion in the first six months of 2021 as compared to a net loss of $3.3 billion in the first six months of 2020. The Company considers a key measure of its performance to be operating income (loss), which was a $1.7 billion loss for the first six months of 2021, as compared to a $2.6 billion loss for the first six months of 2020, a $958 million decrease year-over-year. Significant components of the Company's operating results for the six months ended June 30 are as follows (in millions, except percentage changes):
2021 2020 Increase (Decrease) % Change
Operating revenue $ 8,692 $ 9,454 $ (762) (8.1)
Operating expense 10,343 12,063 (1,720) (14.3)
Operating loss (1,651) (2,609) (958) (36.7)
Nonoperating expense, net (664) (1,508) (844) (56.0)
Income tax benefit (524) (786) (262) (33.3)
Net loss $ (1,791) $ (3,331) $ (1,540) (46.2)
Certain consolidated statistical information for the Company's operations for the six months ended June 30 is as follows:
2021 2020 Increase (Decrease) % Change
Passengers (thousands) 38,583 33,172 5,411 16.3
RPMs (millions) 45,762 46,199 (437) (0.9)
ASMs (millions) 69,983 69,901 82 0.1
Passenger load factor 65.4 % 66.1 % (0.7) pts. N/A
PRASM (cents) 9.55 11.08 (1.53) (13.8)
Yield (cents) 14.60 16.77 (2.17) (12.9)
CTM (millions) 1,657 1,191 466 39.1
CASM (cents) 14.78 17.26 (2.48) (14.4)
Average price per gallon of fuel, including fuel taxes $ 1.87 $ 1.76 $ 0.11 6.3
Fuel gallons consumed (millions) 1,115 1,114 1 0.1
Employee headcount, as of June 30 84,400 91,800 (7,400) (8.1)
Operating Revenue. The table below shows year-over-year comparisons by type of operating revenue for the six months ended June 30 (in millions, except for percentage changes):
2021 2020 Increase (Decrease) % Change
Passenger revenue $ 6,682 $ 7,746 $ (1,064) (13.7)
Cargo 1,103 666 437 65.6
Other operating revenue 907 1,042 (135) (13.0)
Total operating revenue $ 8,692 $ 9,454 $ (762) (8.1)
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The table below presents selected passenger revenue and operating data, broken out by geographic region, expressed as year-over-year changes for the six months ended June 30, 2021 compared to the six months ended June 30, 2020:
Increase (decrease) from 2020:
Domestic Atlantic Pacific Latin Consolidated
Passenger revenue (in millions) $ (46) $ (601) $ (501) $ 84 $ (1,064)
Passenger revenue (0.9) % (53.2) % (69.4) % 9.9 % (13.7) %
Average fare per passenger (17.3) % (18.0) % 38.9 % (26.1) % (25.8) %
Yield (16.2) % (29.1) % 78.7 % (15.8) % (12.9) %
PRASM (3.8) % (48.3) % (40.2) % (29.7) % (13.8) %
Passengers 19.8 % (42.9) % (78.0) % 48.8 % 16.3 %
RPMs (traffic) 18.3 % (33.9) % (82.9) % 30.5 % (0.9) %
ASMs (capacity) 3.0 % (9.5) % (48.8) % 56.4 % 0.1 %
Passenger load factor (points) 9.8 (17.3) (43.3) (12.1) (0.7)
Passenger revenue in the first six months of 2021 decreased $1.1 billion, or 13.7%, as compared to the year-ago period, primarily due to the impacts of the worldwide spread of COVID-19 and travel restrictions that started in the latter part of the first quarter of 2020.
Cargo revenue increased $437 million, or 65.6%, in the first six months of 2021 as compared to the year-ago period, primarily due to an increase in cargo-only flights as a result of increased demand for critical goods during the COVID-19 pandemic. With long haul passenger demand now increasing we will cease most cargo-only flights for the remainder of 2021 although we continue to project strong cargo yields for the remainder of the year.
Other operating revenue decreased $135 million, or 13.0%, in the first six months of 2021 as compared to the year-ago period, primarily due to lower passenger volumes, lower United Club lounge usage, and a decline in mileage revenue from non-airline partners, including the co-branded credit card partner, JPMorgan Chase Bank, N.A.
Operating Expenses. The table below includes data related to the Company's operating expenses for the six months ended June 30 (in millions, except for percentage changes):
2021 2020 Increase (Decrease) % Change
Salaries and related costs $ 4,500 $ 5,125 $ (625) (12.2)
Aircraft fuel 2,083 1,966 117 6.0
Depreciation and amortization 1,243 1,233 10 0.8
Landing fees and other rent 1,083 1,052 31 2.9
Regional capacity purchase 1,026 1,125 (99) (8.8)
Aircraft maintenance materials and outside repairs 571 544 27 5.0
Distribution expenses 224 326 (102) (31.3)
Aircraft rent 107 97 10 10.3
Special charges (credits) (2,325) (1,386) 939 NM
Other operating expenses 1,831 1,981 (150) (7.6)
Total operating expenses $ 10,343 $ 12,063 $ (1,720) (14.3)
Salaries and related costs decreased $625 million, or 12.2%, in the first six months of 2021 as compared to the year-ago period, primarily due to lower headcount as a result of various employee voluntary separation programs since the start of the COVID-19 pandemic and a $206 million increase in tax credits provided by the Employee Retention Credit under the CARES Act.
Aircraft fuel expense increased $117 million, or 6.0%, in the first six months of 2021 as compared to the year-ago period, primarily due to the higher average price per gallon of fuel. The table below presents the significant changes in aircraft fuel cost
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per gallon in the six months ended June 30, 2021 as compared to the year-ago period:
(In millions) Average price per gallon
2021 2020 %
Change 2021 2020 %
Change
Fuel expense $ 2,083 $ 1,966 6.0 % $ 1.87 $ 1.76 6.3 %
Fuel consumption (gallons) 1,115 1,114 0.1 %
Regional capacity purchase decreased $99 million, or 8.8%, in the first six months of 2021 as compared to the year-ago period, primarily due to reduced regional flying in the first half of 2021 as a result of COVID-19 compared to the first half of 2020 which did not experience significantly reduced flying until March of that time period.
Distribution expenses decreased $102 million, or 31.3%, in the first six months of 2021 as compared to the year-ago period, primarily due to lower credit card fees, commissions and lower volume of global distribution fees as a result of the overall decrease in passenger revenue due to the COVID-19 pandemic.
Details of the Company's special charges (credits) include the following for the six months ended June 30 (in millions):
2021 2020
CARES Act grant $ (2,889) $ (1,589)
Impairment of assets 59 130
Severance and benefit costs 428 63
(Gains) losses on sale of assets and other special charges 77 10
Special charges (credits) $ (2,325) $ (1,386)
See Note 9 to the financial statements included in Part I, Item 1 of this report for additional information on the Company's special charges (credits).
Other operating expenses decreased $150 million, or 7.6%, in the first six months of 2021 as compared to the year-ago period, primarily due to the impacts of COVID-19 on our catering and crew-related expenses, as well as lower advertising and other discretionary spend.
Nonoperating Income (Expense). The following table illustrates the year-over-year dollar and percentage changes in the Company's nonoperating income (expense) for the six months ended June 30 (in millions, except for percentage changes):
2021 2020 Increase (Decrease) % Change
Interest expense $ (779) $ (367) $ 412 112.3
Interest capitalized 39 38 1 2.6
Interest income 19 37 (18) (48.6)
Unrealized gains (losses) on investments, net 125 (310) 435 NM
Miscellaneous, net (68) (906) (838) (92.5)
Total $ (664) $ (1,508) $ (844) (56.0)
Interest expense increased $412 million, or 112.3%, in the first six months of 2021 as compared to the year-ago period, primarily due to the issuance of new debt to provide additional liquidity to the Company during the COVID-19 pandemic.
Unrealized gains on investments, net, was $125 million in the first six months of 2021 as compared to $310 million in unrealized losses in the year-ago period, primarily due to the change in the market value of the Company's equity investment in Azul. See Note 6 to the financial statements included in Part I, Item 1 of this report for information related to this equity investment.
Miscellaneous, net decreased $838 million in the first six months of 2021 as compared to the year-ago period, primarily due to the $697 million of credit loss allowances associated with the Company's Term Loan Agreement, with, among others, BRW Aviation Holding LLC and BRW Aviation LLC, and the related guarantee recorded in the first quarter of 2020, and lower special termination benefits related to voluntary separation programs under the Company's non-pilot U.S. defined benefit pension plan and postretirement medical programs. See Notes 5, 6, 7 and 9 to the financial statements included in Part I, Item 1 of this report for additional information.
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Income Taxes. See Note 4 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 June 30, 2021, the Company had $21.1 billion in unrestricted cash, cash equivalents and short-term investments, as compared to $11.7 billion at December 31, 2020. As of June 30, 2021, the Company also had $1.75 billion available for borrowing under the New Revolving Credit Facility at any time until April 21, 2025.
The Company has taken a number of actions in response to the significant decline in international and domestic demand for air travel related to the COVID-19 pandemic, as discussed under "Impact of the COVID-19 Pandemic and Outlook" above. The Company continues to focus on reducing expenses and managing its liquidity but has also begun preparing for an eventual recovery from the COVID-19 pandemic. Since March 2021, we have seen increasing demand for travel both domestically and in countries where entry is permitted, and we are taking steps, which include making certain investments in the recovery, to be prepared if demand for travel continues to increase in line with recent customer booking trends. However, the timing of demand recovery will be dependent on a number of factors outside of our control, and we expect to continue to modify our cost management structure and capacity as the timing of demand recovery becomes more certain.
On January 15, 2021, United entered into the PSP2 Agreement with Treasury, providing the Company with total funding of approximately $3.0 billion, consisting of approximately $2.1 billion as a direct grant and $870 million as indebtedness evidenced by the PSP2 Note. See Note 8 to the financial statements included in Part I, Item 1 of this report for a discussion of the PSP2 Note.
On April 29, 2021, United entered into a PSP3 Agreement with Treasury, providing the Company with total funding of approximately $2.8 billion, consisting of approximately $2.0 billion as a direct grant and $810 million as indebtedness evidenced by the PSP3 Note. See Note 8 to the financial statements included in Part I, Item 1 of this report for a discussion of the PSP3 Note.
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 or repurchase stock. As of June 30, 2021, UAL and United were in compliance with their respective debt covenants.
We have a significant amount of fixed obligations, including debt, leases of aircraft, airport and other facilities, and pension funding obligations. As of June 30, 2021, the Company had approximately $41.8 billion of debt, finance lease, operating lease and sale-leaseback obligations, including $2.6 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 June 30, 2021, United had firm commitments and options to purchase aircraft from Boeing and Airbus as presented in the table below:
Scheduled Aircraft Deliveries
Aircraft Type Number of Firm
Commitments (a) Last Six Months
of 2021 2022 2023 After 2022
Airbus A321XLR 50 — — — 50
Airbus A321neo 70 — — 16 54
Airbus A350 45 — — — 45
Boeing 737 MAX 380 13 40 122 205
Boeing 787 8 8 — — —
(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, or to the extent rights are exercised pursuant to the relevant agreements to modify the timing of deliveries, the amount and timing of the Company's future capital commitments could change.
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United also has an agreement to purchase six used Boeing 737-700 aircraft, which it intends to sell, with expected delivery dates in 2021. In addition, United has an agreement to purchase 11 used Airbus A319 aircraft, which it intends to sell, with expected delivery dates in 2021 and 2022.
In 2020, United entered into agreements with third parties to finance through sale and leaseback transactions new Boeing model 787 aircraft and Boeing model 737 MAX aircraft subject to purchase agreements between United and Boeing. In connection with the delivery of each aircraft from Boeing, United assigned its right to purchase such aircraft to the buyer, and simultaneous with the buyer's purchase from Boeing, United entered into a long-term lease for such aircraft with the buyer as lessor. Eleven Boeing model aircraft were delivered in 2021 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 in the last six months of 2021.
As of June 30, 2021, 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 $35.3 billion, of which approximately $3.1 billion, $3.4 billion, $7.4 billion, $4.7 billion, $4.3 billion and $12.4 billion are due in the last six months of 2021 and for the full years 2022, 2023, 2024, 2025 and thereafter, respectively. To the extent the Company and Boeing agree to modify the timing of Boeing 737 MAX deliveries, the amount and timing of the Company's future capital commitments could change.
We expect that our 2021 liquidity needs will be met through our existing liquidity levels. While we have been able to 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, we must return to profitability in order to service our debt and maintain appropriate liquidity levels for our long-term operating needs. We may also pursue financing options for our firm order aircraft and other related capital expenditures consistent with our historical practice prior to the onset of the COVID-19 pandemic. 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 8 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 June 30, 2021, a substantial portion of the Company's assets, principally aircraft and certain related assets, its loyalty program, certain route authorities and airport slots, was pledged under various loan and other agreements. As of April 21, 2021, the Company pledged as collateral for the Notes and the New Loan Facilities the following: (i) all of United's route authorities granted by the U.S. Department of Transportation to operate scheduled service between any international airport located in the United States and any international airport located in any country other than the United States (except Cuba), (ii) United's rights to substantially all of its landing and take-off slots at foreign and domestic airports, including at John F. Kennedy International Airport, LaGuardia Airport and Ronald Reagan Washington National Airport (subject to certain exclusions), and (iii) United's rights to use or occupy space at airport terminals, each to the extent necessary at the relevant time for servicing scheduled air carrier service authorized by an applicable route authority.
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 B+
United B+ * B+
* 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"), term loans and secured bond financings. 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 provided by operations were $3.1 billion for the six months ended June 30, 2021 compared to cash flows used in operations of $67 million for the same period in 2020. The increase is primarily attributable to improvements in the demand for passenger travel as well as government grant funding provided under the PSP2 Agreement and PSP3 Agreement of $4.1 billion partially offset by continuing operating losses as a result of the COVID-19 pandemic.
Investing Activities. Capital expenditures were approximately $1.3 billion and $2.0 billion in the six months ended June 30, 2021 and 2020, respectively. Capital expenditures for the six months ended June 30, 2021 were primarily attributable to advance deposits for future aircraft purchases.
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Financing Activities. Significant financing events in the six months ended June 30, 2021 were as follows:
Debt, Finance Lease and Other Financing Liability Principal Payments . During the six months ended June 30, 2021, the Company made payments for debt, finance leases and other financing liabilities of $4.1 billion, primarily for repayments of $1.4 billion aggregate principal amount outstanding under the 2017 Term Loan Facility, $1.0 billion aggregate principal amount outstanding under the 2017 Revolving Credit Facility and $520 million aggregate principal amount outstanding under the CARES Act Loan.
Debt Issuances. During the six months ended June 30, 2021, United received and recorded:
• $870 million from the PSP2 Note;
• $600 million of proceeds as debt from the EETC pass-through trusts established in February 2021;
• $810 million from the PSP3 Note;
• $5.0 billion from the New Term Loan Facility; and
• $4.0 billion from the 2026 Notes and 2029 Notes.
See Note 8 to the financial statements included in Part I, Item 1 of this report for additional information.
Share Issuance. During the six months ended June 30, 2021, the Company raised approximately $532 million in net cash proceeds from the issuance and sale of UAL common stock through "at the market offerings" under equity distribution agreements entered into in June 2020 and March 2021. During the quarter ended June 30, 2021, approximately 8,300 shares were sold through "at the market offerings" under such equity distribution agreements at an average price of $55.13 per share, with net proceeds to the Company totaling approximately $0.5 million.
Commitments, Contingencies and Liquidity Matters. As described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the "2020 Form 10-K"), 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 2020 Form 10-K and Notes 5, 6, 7, 8 and 9 to the financial statements contained in Part I, Item 1 of this report for additional information.
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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 2020 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," "intends," "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 conditional statements, 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 adverse impacts of the ongoing COVID-19 global pandemic, and possible outbreaks of another disease or similar public health threat in the future, on our business, operating results, financial condition, liquidity and near-term and long-term strategic operating plan, including possible additional adverse impacts resulting from the duration and spread of the pandemic; unfavorable economic and political conditions in the United States and globally; the highly competitive nature of the global airline industry and susceptibility of the industry to price discounting and changes in capacity; high and/or volatile fuel prices or significant disruptions in the supply of aircraft fuel; our reliance on technology and automated systems to operate our business and the impact of any significant failure or disruption of, or failure to effectively integrate and implement, the technology or systems; our reliance on third-party service providers and the impact of any significant failure of these parties to perform as expected, or interruptions in our relationships with these providers or their provision of services; adverse publicity, harm to our brand; reduced travel demand, potential tort liability and voluntary or mandatory operational restrictions as a result of an accident, catastrophe or incident involving us, our regional carriers, our codeshare partners, or another airline; terrorist attacks, international hostilities or other security events, or the fear of terrorist attacks or hostilities, even if not made directly on the airline industry; increasing privacy and data security obligations or a significant data breach; disruptions to our regional network and United Express flights provided by third-party regional carriers; the failure of our significant investments in other airlines, equipment manufacturers and other aviation industry participants to produce the returns or results we expect; further changes to the airline industry with respect to alliances and joint business arrangements or due to consolidations; changes in our network strategy or other factors outside our control resulting in less economic aircraft orders, costs related to modification or termination of aircraft orders or entry into less favorable aircraft orders, as well as any inability to accept or integrate new aircraft into our fleet as planned; our reliance on single suppliers to source a majority of our aircraft and certain parts, and the impact of any failure to obtain timely deliveries, additional equipment or support from any of these suppliers; the impacts of union disputes, employee strikes or slowdowns, and other labor-related disruptions on our operations; extended interruptions or disruptions in service at major airports where we operate; the impacts of seasonality and other factors associated with the airline industry; our failure to realize the full value of our intangible assets or our long-lived assets, causing us to record impairments; any damage to our reputation or brand image; the limitation of our ability to use our net operating loss carryforwards and certain other tax attributes to offset future taxable income for U.S. federal income tax purposes; the costs of compliance with extensive government regulation of the airline industry; costs, liabilities and risks associated with environmental regulation and climate change; the impacts of our significant amount of financial leverage from fixed obligations, the possibility we may seek material amounts of additional financial liquidity in the short-term and the impacts of insufficient liquidity on our financial condition and business; failure to comply with the covenants in the MileagePlus financing agreements, resulting in the possible acceleration of the MileagePlus indebtedness, foreclosure upon the collateral securing the MileagePlus indebtedness or the exercise of other remedies; failure to comply with financial and other covenants governing our other debt; changes in, or failure to retain, our senior management team or other key employees; current or future litigation and regulatory actions, or failure to comply with the terms of any settlement, order or arrangement relating to these actions; increases in insurance costs or inadequate insurance coverage; and other risks and uncertainties set forth under Part II, Item 1A.,
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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").
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in market risk from the information provided in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our 2020 Form 10-K.