UNITED CONTINENTAL HOLDINGS, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2016 AND 2015

Three Months Ended
March 31,

%
Increase/
(Decrease)

(In millions, except per share data)

2016

2015

Operating revenue:

Passenger: (A)

Mainline

$

5,577

$

5,938

(6.1)

Regional

1,413

1,482

(4.7)

Total passenger revenue

6,990

7,420

(5.8)

Cargo

194

242

(19.8)

Other operating revenue

1,011

946

6.9

Total operating revenue

8,195

8,608

(4.8)

Operating expense:

Salaries and related costs

2,490

2,301

8.2

Aircraft fuel (B)

1,218

1,864

(34.7)

Landing fees and other rent

525

543

(3.3)

Regional capacity purchase

522

570

(8.4)

Depreciation and amortization

479

429

11.7

Aircraft maintenance materials and outside repairs

402

397

1.3

Distribution expenses

303

312

(2.9)

Aircraft rent

178

201

(11.4)

Special charges (C)

190

64

NM

Other operating expenses

1,239

1,186

4.5

Total operating expense

7,546

7,867

(4.1)

Operating income

649

741

(12.4)

Nonoperating income (expense):

Interest expense

(159)

(173)

(8.1)

Interest capitalized

14

12

16.7

Interest income

8

5

60.0

Miscellaneous, net (C)

(18)

(74)

(75.7)

Total nonoperating expense

(155)

(230)

(32.6)

Income before income taxes

494

511

(3.3)

Income tax expense (D)

181

3

NM

Net income

$

313

$

508

(38.4)

Earnings per share, basic

$

0.88

$

1.33

(33.8)

Earnings per share, diluted

$

0.88

$

1.32

(33.3)

Weighted average shares, basic

354

382

(7.3)

Weighted average shares, diluted

355

384

(7.6)

NM Not meaningful

UNITED CONTINENTAL HOLDINGS, INC.

NOTES (UNAUDITED)

(A)         Select passenger revenue information is as follows (in millions):

1Q 2016
Passenger
Revenue
(millions)

Passenger
Revenue
vs.
1Q 2015

PRASM
vs.
1Q 2015

Yield
vs.
1Q 2015

Available
Seat Miles
vs.
1Q 2015

Domestic

$

2,868

(2.8%)

(5.5%)

(4.3%)

2.8%

Atlantic

1,040

(11.9%)

(8.9%)

(4.1%)

(3.3%)

Pacific

952

(10.1%)

(9.4%)

(7.8%)

(0.8%)

Latin America

717

(4.0%)

(14.5%)

(15.1%)

12.3%

International

2,709

(9.3%)

(10.5%)

(8.7%)

1.4%

Mainline

5,577

(6.1%)

(8.0%)

(6.5%)

2.1%

Regional

1,413

(4.7%)

(4.1%)

(3.7%)

(0.5%)

Consolidated

$

6,990

(5.8%)

(7.4%)

(6.1%)

1.8%

UNITED CONTINENTAL HOLDINGS, INC.

NOTES (UNAUDITED)

(B)         UAL's results of operations include fuel expense for both mainline and regional operations.

Three Months Ended
March 31,

%
Increase/
(Decrease)

(In millions, except per gallon)

2016

2015

Mainline fuel expense excluding hedge impacts

$

885

$

1,396

(36.6)

Hedge losses reported in fuel expense (a)

(138)

(161)

NM

Total mainline fuel expense

1,023

1,557

(34.3)

Regional fuel expense

195

307

(36.5)

Consolidated fuel expense

1,218

1,864

(34.7)

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

(5)

(39)

NM

Fuel expense including all losses from settled hedges

$

1,223

$

1,903

(35.7)

Mainline fuel consumption (gallons)

734

737

(0.4)

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

$

1.21

$

1.89

(36.0)

Mainline average aircraft fuel price per gallon

$

1.39

$

2.11

(34.1)

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

$

1.40

$

2.17

(35.5)

Regional fuel consumption (gallons)

156

159

(1.9)

Regional average aircraft fuel price per gallon

$

1.25

$

1.93

(35.2)

Consolidated fuel consumption (gallons)

890

896

(0.7)

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

$

1.21

$

1.90

(36.3)

Consolidated average aircraft fuel price per gallon

$

1.37

$

2.08

(34.1)

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

$

1.37

$

2.12

(35.4)

(a) 

Includes losses from settled hedges that were designated for hedge accounting. UAL allocates 100 percent of hedge accounting gains (losses) to mainline fuel expense.

(b) 

Includes ineffectiveness losses on settled hedges and losses on settled hedges that were not designated for hedge accounting. Ineffectiveness gains (losses) and gains (losses) on hedges that do not qualify for hedge accounting are recorded in Nonoperating income (expense): Miscellaneous, net.

UNITED CONTINENTAL HOLDINGS, INC.

NOTES (UNAUDITED)

(C)      Special items include the following:

Three Months Ended
March 31,

(In millions)

2016

2015

Operating:

Labor agreement costs

$

100

$

—

Cleveland airport lease restructuring

74

—

Severance and benefit costs

8

50

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

8

14

Special charges

190

64

Nonoperating and income taxes:

Loss on extinguishment of debt and other

8

6

Income tax benefit related to special charges

(72)

—

Total operating and nonoperating special charges, net of income taxes

126

70

Mark-to-market (MTM) losses from fuel derivative contracts settling in future periods

—

36

Prior period losses on fuel derivative contracts settled in the current period

(4)

(32)

Total special items, net of income taxes

$

122

$

74

2016 - Special items

Labor agreement costs: The fleet service, passenger service, storekeeper and other employees represented by the Int'l Association of Machinists and Aerospace Workers ratified seven new contracts with the company which extended the contracts through 2021. The company recorded a $100 million ($64 million net of taxes) special charge for bonus payments to be made in conjunction with the ratification of these contracts.

Cleveland airport lease restructuring: During the three months ended March 31, 2016, the City of Cleveland agreed to amend the lease, which runs through 2029, associated with certain excess airport terminal space (principally Terminal D) and related facilities at Hopkins International Airport ("Cleveland"). The company recorded an accrual for remaining payments under the lease for facilities that the company no longer uses and will continue to incur costs under the lease without economic benefit to the company. This liability was measured and recorded at its fair value when the company ceased its right to use such facilities leased to it pursuant to the lease. The company reduced its flight operations at Cleveland in 2014 and had been evaluating its options for the excess space. The company recorded a net charge of $74 million ($47 million net of taxes) related to the amended lease.

Severance and benefit costs: During the three months ended March 31, 2016, the company recorded $8 million ($5 million net of taxes) of severance and benefit costs primarily related to a voluntary early-out program for its flight attendants. In 2014, more than 2,500 flight attendants elected to voluntarily separate from the company and will receive a severance payment, with a maximum value of $100,000 per participant, based on years of service, with retirement dates through the end of 2016.

Loss on extinguishment of debt and other: During the three months ended March 31, 2016, the company recorded $8 million of losses due to exchange rate changes in Venezuela applicable to funds held in local currency.

MTM losses from fuel derivative contracts settling in future periods and prior period losses on fuel derivative contracts settled in the current period: The company uses certain combinations of derivative contracts that are economic hedges but do not qualify for hedge accounting under U.S. generally accepted accounting principles. Additionally, the company may enter into contracts at different times and later combine those contracts into structures designated for hedge accounting. As with derivatives that qualify for hedge accounting, the economic hedges and individual contracts are part of the company's program to mitigate the adverse financial impact of potential increases in the price of fuel. The company records changes in the fair value of these various contracts that are not designated for hedge accounting to Nonoperating income (expense): Miscellaneous, net in the statements of consolidated operations. During the three months ended March 31, 2016, the company did not record any MTM gains or losses on fuel derivative contracts that will settle in future periods. For fuel derivative contracts that settled in the three months ended March 31, 2016, the company recorded MTM losses of $4 million in prior periods.

2015 - Special items

Severance and benefit costs: During the three months ended March 31, 2015, the company recorded $50 million of severance and benefit costs primarily related to a voluntary early-out program for its flight attendants. In 2014, more than 2,500 flight attendants elected to voluntarily separate from the company and will receive a severance payment, with a maximum value of $100,000 per participant, based on years of service, with retirement dates through the end of 2016.

(Gains) losses on sale of assets and other special charges: During the three months ended March 31, 2015, the company recorded $18 million of integration-related charges, $5 million of other charges, and approximately $9 million of gains on the sale of assets.

Loss on extinguishment of debt and other: During the three months ended March 31, 2015, the company recorded $6 million of losses as part of Nonoperating income (expense): Miscellaneous, net due to the write-off of the debt discount related to the redemption of the 6% Notes due 2026 and 6% Notes due 2028.

MTM losses from fuel derivative contracts settling in future periods and prior period losses on fuel derivative contracts settled in the current period: The company uses certain combinations of derivative contracts that are economic hedges but do not qualify for hedge accounting under U.S. generally accepted accounting principles. Additionally, the company may enter into contracts at different times and later combine those contracts into structures designated for hedge accounting. As with derivatives that qualify for hedge accounting, the economic hedges and individual contracts are part of the company's program to mitigate the adverse financial impact of potential increases in the price of fuel. The company records changes in the fair value of these various contracts that are not designated for hedge accounting to Nonoperating income (expense): Miscellaneous, net in the statements of consolidated operations. During the three months ended March 31, 2015, the company recorded $36 million in MTM losses on fuel derivative contracts that will settle in future periods. For fuel derivative contracts that settled in the three months ended March 31, 2015, the company recorded MTM losses of $32 million in prior periods. 

(D)

The company's effective tax rate for the three months ended March 31, 2016 was 36.6%, which represented a blend of federal, state and foreign taxes and the impact of certain nondeductible items. The effective rate for the three months ended March 31, 2015 was 0.5% due primarily to the existing income tax valuation allowance against deferred income tax assets, primarily net operating losses. During 2015, after considering all positive and negative evidence, the company concluded that its deferred income taxes would be more likely than not to be realized. The company released substantially all of its valuation allowance in 2015.

UNITED CONTINENTAL HOLDINGS, INC.

STATISTICS

Three Months Ended
March 31,

%
Increase/
(Decrease)

Mainline:

Passengers (thousands)

22,277

21,378

4.2

Revenue passenger miles (millions)

40,856

40,660

0.5

Available seat miles (millions)

51,165

50,125

2.1

Cargo ton miles (millions)

622

662

(6.0)

Passenger load factor:

Mainline

79.9%

81.1%

(1.2)

pts.

Domestic

83.4%

84.4%

(1.0)

pt.

International

76.5%

78.1%

(1.6)

pts.

Passenger revenue per available seat mile (cents)

10.90

11.85

(8.0)

Average yield per revenue passenger mile (cents)

13.65

14.60

(6.5)

Aircraft in fleet at end of period

719

700

2.7

Average stage length (miles)

1,859

1,917

(3.0)

Average daily utilization of each aircraft (hours)

          9:36

       9:55

(3.2)

Regional:

Passengers (thousands)

9,810

10,144

(3.3)

Revenue passenger miles (millions)

5,726

5,784

(1.0)

Available seat miles (millions)

7,108

7,144

(0.5)

Passenger load factor

80.6%

81.0%

(0.4)

pts.

Passenger revenue per available seat mile (cents)

19.88

20.74

(4.1)

Average yield per revenue passenger mile (cents)

24.68

25.62

(3.7)

Aircraft in fleet at end of period

503

532

(5.5)

Average stage length (miles)

575

561

2.5

Consolidated (Mainline and Regional):

Passengers (thousands)

32,087

31,522

1.8

Revenue passenger miles (millions)

46,582

46,444

0.3

Available seat miles (millions)

58,273

57,269

1.8

Passenger load factor

79.9%

81.1%

(1.2)

pts.

Passenger revenue per available seat mile (cents)

12.00

12.96

(7.4)

Total revenue per available seat mile (cents)

14.06

15.03

(6.5)

Average yield per revenue passenger mile (cents)

15.01

15.98

(6.1)

Aircraft in fleet at end of period

1,222

1,232

(0.8)

Average stage length (miles)

1,461

1,473

(0.8)

Average full-time equivalent employees (thousands)

82.5

81.7

1.0

Note: See Part II, Item 6 Selected Financial Data of the company's annual report on Form 10-K for the year ended December 31, 2015 for the definition of these statistics.

UNITED CONTINENTAL HOLDINGS, INC.

NON-GAAP FINANCIAL RECONCILIATION

UAL evaluates its financial performance utilizing various accounting principles generally accepted in the United States of America (GAAP) and Non-GAAP financial measures, including income (loss) before income taxes excluding special items, net income (loss) excluding special items, net earnings (loss) per share excluding special items, and CASM, among others. CASM is a common metric used in the airline industry to measure an airline's cost structure and efficiency. Pursuant to SEC Regulation G, UAL has included the following reconciliation of reported Non-GAAP financial measures to comparable financial measures reported on a GAAP basis. UAL believes that adjusting for special items is useful to investors because special charges are non-recurring charges not indicative of UAL's ongoing performance. In addition, the company believes that adjusting for MTM gains and losses from fuel derivative contracts settling in future periods and prior period gains and losses on fuel derivative contracts settled in the current period is useful because the adjustments allow investors to better understand the cash impact of settled fuel derivative contracts in a given period. UAL also believes that excluding third-party business expenses, such as maintenance, ground handling and catering services for third parties, fuel sales and non-air mileage redemptions, provides more meaningful disclosure because these expenses are not directly related to UAL's core business. UAL also believes that excluding fuel costs from certain measures is useful to investors because it provides an additional measure of management's performance excluding the effects of a significant cost item over which management has limited influence. UAL excludes profit sharing because this exclusion allows investors to better understand and analyze our recurring cost performance and provides a more meaningful comparison of our core operating costs to the airline industry. UAL also believes that adjusting capital expenditures for fully reimbursable projects is useful to investors in order to appropriately reflect the non-reimbursable funds spent on capital expenditures.

Three Months Ended
March 31,

$
Increase/
(Decrease)

%
Increase/
(Decrease)

(in millions)

2016

2015

Operating expenses

$

7,546

$

7,867

$

(4.1)

Less: Special charges (C)

190

64

126

NM

Operating expenses, excluding special charges

7,356

7,803

(447)

(5.7)

Less: Third-party business expenses

67

66

1

1.5

Less: Fuel expense

1,218

1,864

(646)

(34.7)

Less: Profit sharing, including taxes

93

70

23

32.9

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

$

5,978

$

5,803

$

175

3.0

Income before income taxes

$

494

$

511

$

(17)

(3.3)

Less: Special items before income taxes (C)

194

74

120

NM

Income before income taxes and excluding special items

$

688

$

585

$

103

17.6

Net income

$

313

$

508

$

(195)

(38.4)

Less: Special items, net of tax (C)

122

74

48

NM

Net income, excluding special items

$

435

$

582

$

(147)

(25.3)

Diluted earnings per share

$

0.88

$

1.32

$

(0.44)

(33.3)

Add back: Special items, net of tax

0.35

0.20

0.15

NM

Diluted earnings per share, excluding special items

$

1.23

$

1.52

$

(0.29)

(19.1)

UNITED CONTINENTAL HOLDINGS, INC.

NON-GAAP FINANCIAL RECONCILIATION (Continued)

Three Months Ended
March 31,

%
Increase/
(Decrease)

2016

2015

CASM Mainline Operations (cents)

Cost per available seat mile (CASM)

12.47

12.99

(4.0)

Less: Special charges (C)

0.37

0.13

NM

CASM, excluding special charges

12.10

12.86

(5.9)

Less: Third-party business expenses

0.13

0.13

—

CASM, excluding special charges and third-party business expenses

11.97

12.73

(6.0)

Less: Fuel expense

2.00

3.10

(35.5)

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

9.97

9.63

3.5

Less: Profit sharing per available seat mile

0.18

0.14

28.6

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

9.79

9.49

3.2

CASM Consolidated Operations (cents)

Cost per available seat mile (CASM)

12.95

13.74

(5.7)

Less: Special charges (C)

0.33

0.11

NM

CASM, excluding special charges

12.62

13.63

(7.4)

Less: Third-party business expenses

0.11

0.12

(8.3)

CASM, excluding special charges and third-party business expenses

12.51

13.51

(7.4)

Less: Fuel expense

2.09

3.25

(35.7)

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

10.42

10.26

1.6

Less: Profit sharing per available seat mile

0.16

0.13

23.1

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

10.26

10.13

1.3

UNITED CONTINENTAL HOLDINGS, INC.

CAPITAL EXPENDITURES AND FREE CASH FLOW

Capital Expenditures (in millions)

Three Months Ended
March 31, 2016

Capital expenditures – GAAP

$

816

Property and equipment acquired through the issuance of debt

59

Airport construction financing

9

Fully reimbursable projects

(61)

Adjusted capital expenditures – Non-GAAP

$

823

UNITED CONTINENTAL HOLDINGS, INC.

RETURN ON INVESTED CAPITAL (ROIC)

ROIC is a Non-GAAP financial measure that we believe provides useful supplemental information for management and investors by measuring the effectiveness of our operations' use of invested capital to generate profits.

(in millions)

Twelve Months Ended
March 31, 2016

Net Operating Profit After Tax (NOPAT)

Pre-tax income excluding special items (a)

$

4,601

NOPAT adjustments (b)

1,078

NOPAT

$

5,679

Effective cash tax rate (c)

0.3

%

Invested Capital (five-quarter average)

Total assets

$

39,966

Invested capital adjustments (d)

12,617

Average Invested Capital

$

27,349

Return on Invested Capital

20.8

Notes:

Twelve Months Ended
March 31, 2016

Pre-tax income

$

4,202

Add: Special items

399

Pre-tax income excluding special items

$

4,601

(b) 

NOPAT adjustments include: adding back (net of tax shield) interest expense, the interest component of capitalized aircraft rent, and net interest on pension.

(c)

Effective cash tax rate is calculated by dividing cash taxes paid by adjusted pre-tax income. 

(d) 

Invested capital adjustments include: adding back capital aircraft rent (at 7.0X) and deferred income taxes, less advance ticket sales, frequent flyer deferred revenue, tax valuation allowance, and other non-interest bearing liabilities.