UNITED  CONTINENTAL  HOLDINGS  ,  INC    

SHIYU  SONG      

00A  

h"p://ir.unitedcon0nentalholdings.com/phoenix.zhtml?c=83680&p=irol-­‐IRHome

Chief  Execu0ve  Officer Jeffery  A.  Smisek

Global  Headquarter Chicago,  Illinois

Ending  Date  of  Latest  Fiscal  Year December  31st  2012

Principal  Service Air  Transporta0on,  Air  Cargo

Main  Geographic  Area  of  Ac0vity United  States,  La0n  America,  Asia-­‐Pacific,  Europe,  Africa  and  Middle  East

Independent  Auditor Ernst  &  Young  

Auditor’s  Comments The  consolidated  financial  reports  in  2012  and  consolidated  results  from  its  opera0on  and  its  cash  flow  for  the  past  three  years    present  fairly  and  in  accordance  to  US.    Generally  accepted  accountant  principles.  Ernst  &  Young  expressed  an  unqualified  opinion  thereon  towards  the  company's  internal    control  system.  By  adop0ng  the  updates  of  FASB  Accoun0ng  Standards  Codifica0on,  the  company  changed  its  method  of  accoun0ng  in  mul0ple  deliverable  revenue  recogni0on.  

Most  Recent  Stock  Price $32.64

Twelve  Month  Trading  Range   $17.45-­‐$35.27

Dividend  Per  Share $2.1500(Last  Dividend  01/07/2008)

Date  of  Above  Informa0on 05/31/2013

Opinion  Towards  the  Company’s  Stock HOLD

Format Mul0step  Income  Statement

Comments The  company  had  a  con0nuous  slight  increase  in  its  opera0ng  revenue.  Most  of  the  opera0ng  expense  and  non-­‐opera0ng  expense  increased  or  decreased  slightly,  which  had    li"le  to  negligible  effects  to  the  net  income.  The  special  charges  in  the  opera0ng  revenue  increased  more  than  800  million  dollars,  which  was  the  single  largest  increase  in  opera0ng  expenses.  Also,  there  was  a  approximately  1000  million  dollars  increase  in  aircraj  fuel,  which  is  one  of  the  main  expenses  of  air  carriers.  The  drama0c  increase  in  air  fuels  and  special  charges  mainly  brought  the  company’s  net  income  to  nega0ve  in  fiscal  year  2012  from  posi0ve  in  fiscal  year  2011.

Gross  Profit  (Millions)

OperaAon  Income(Millions)

Net  Income  (Millions)

2011 $840* $37,110 $840

2012 $(723)* $37,152 $(723)

*Since  the  company  only  provides  air  service,  the  cost  of  the  service  in  this  company  equals  to  its  opera0ng  cost.

Assets = LiabiliAes + Shareholder’s  Equity

2011 37988 = 36182 + 1806

2012 37628 = 37147 + 481

•  In  General,  the  Shareholder’s  Equity  account  changes  the  most.  

•  In  Assets  account,  opera0ng  property  and  equipment  account  changes  the  most  

•  In  Liabili0es  account,  current  liability  account  changes  the  most  

•  In  Shareholders’  Equity  account,  the  capital  invested  changes  the  most.  

Assets The  total  unrestricted  cash,  cash  equivalents  and  shot-­‐term  investment  decrease  approximately  12  million  in  the  fiscal  year  2012.  Even  though  the  increase  in  prepaid  expense  offset  some  effects  from  the  decrease  of  cash  and  short-­‐term  investment,  it  s0ll  lead  a  decrease  of  a  900  million  in  current  assets.  There  was  a  nearly  1500  million  increase  in  equipment,  which  brought  up  opera0ng  property  and  equipment.  The  sec0on  of  other  assets  had  a  small  change  of  200  million.

Liabili0es The  company  saw  a  drama0c  increase  in  current  maturi0es  of  long-­‐term  debt,  which  was  nearly  700  million  dollars  and    a  200  million  dollar  increase  in  accrued    wages  and  benefits.  These  two  components  brought  up  the  company’s  current  liabili0es.  The  company  had  a  nearly  500  million  decrease  in  frequent  flyer  deferral  revenue;  however,  the  company  had  a  nearly  700  million  increase  in  pension  liability.  Most  of  other  components  of  company’s  long  term  liabili0es  has  a  slight  decrease,  which  brought  down  company’s  long  term  liabili0es  about  300  million  dollars.  Also,  we  should  pay  a"en0on  that  the  company  has  a  700  million  increase  in  addi0onal  capital  investment  in  fiscal  year  2012.

•  For  the  past  two  year,  the  cash  flows  from  opera0ons  were  more  than  net  income  

•  The  company  did  not  grow  through  inves0ng  ac0vi0es.  As  the  statement  of  cash  flow  shows  that    the  fiscal  year  2011  showed  a  1799  million  dollars  loss,  and  the  fiscal  year  2012  had  a  1957  million  dollars  loss    in  inves0ng  ac0vi0es.  However,  the  company  used  to  have  3320  million  dollars  net  cash  flow  in  fiscal  year  2010  from  inves0ng  ac0vi0es  

•  The  company’s  primary  source  of  financing  was  issuing  long-­‐term  debt  •  The  company's  cash  saw  a  con0nuous  decrease  in  the  past  two  years,  and    

each  year  decreased  around  50  percent  

OperaAng  (Millions)

Financing  (Millions)  

InvesAng  (Millions)

2011 $2408 ($1799) ($454)

2012 $935 ($1957) ($2432)

Revenue  Recogni0on    •  Passenger  Revenue  Recogni0on:  The  value  of  unused  passenger  0ckets  is  included  in  current  liabili0es  

as  advance  0cket.  Tickets  sold  by  other  airlines  are  recorded  at  the  es0mated  values  to  be  billed  to  the  other  airlines.  Fees  charged  in  associa0on  with  changes  or  extensions  to  non-­‐refundable  0ckets  are  recorded  as  other  revenue  at  the  0me  the  fee  is  incurred.  

•  Frequent  Flyer  Accoun0ng  and  Co-­‐Branded  Credit  Card:  Company  accounted  for  the  sale  of  air  transporta0on  by  deferring  the  fair  value  of  miles  and  recognizing  the  residual  amount  of  0cket  proceeds  as  passenger  revenue    at  the  0me  the  air  transporta0on  was  provided.  The  change  to  ASU2009-­‐13  accoun0ng  method  over  the  Co-­‐Branded  Credit  Card  product  would  decrease  the  overall  opera0ng  revenue  in  that  area.  

•  Regional  Capacity  Purchase:  United  paid  regional  airline  full  cost  of  opera0on,  and  0cket  sale  associated  with  this  flight  account  as  United’s  income.  

•  Third  Party  Business:  United  has  third-­‐party  business  revenue  that  includes  fuel  sales,  catering,  ground  handling,  maintenance  services  and  frequent  flyer  award  non-­‐air  redemp0ons,  and  third-­‐party  business  revenue  is  recorded  in  other  revenue.  

•  Short-­‐Term  Investment:  Short-­‐term  investments  are  classified  as  available-­‐for-­‐sale  and  are  stated  at  fair  value.  Realized  gains  and  losses  on  sales  of  investments  are  reflected  in  nonopera0on  income  (expense)  in  the  consolidated  statements  of  opera0ons.  Unrealized  gains  and  losses  on  available-­‐for-­‐sale  securi0es  are  reflected  as  a  component  of  accumulated  other  comprehensive  income/loss.  

 •  Property  and  Equipment:  The  Company  records  addi0ons  to  owned  opera0ng  property  

and  equipment  at  cost  when  acquired.  Property  under  capital  leases  and  the  related  obliga0on  for  future  lease  payments  are  recorded  at  an  amount  equal  to  the  ini0al  present  value  of  those  lease  payments.  Deprecia0on  and  amor0za0on  of  owned  depreciable  assets  is  based  on  the  straight-­‐line  method  over  the  assets’  es0mated  useful  lives.

•  Account  Receivables:  United  provides  an  allowance  for  uncollec0ble  accounts  equal  to  the  es0mated  losses  expected  to  be  incurred  based  on  historical  write-­‐offs  and  other  specific  analyses.  Bad  debt  expense  and  write-­‐offs  were  not  material  for  the  years  ended  December  31,  2012,  2011  and  2010.    

•  Cash:  Highly  liquid  investments  with  a  maturity  of  three  months  or  less  on  their  acquisi0on  date  are  classified  as  cash  and  cash  equivalents.  

•  Lease  Fair  Value  Adjustment:  Lease  fair  value  adjustments,  which  arose  from  recording  opera0ng  leases  at  fair  value  under  fresh  start  accoun0ng  or  the  Merger,  are  amor0zed  on  a  straight  line  basis  over  the  related  lease  term.  

The  following  topics  of  notes  are  listed  in  the  financial  statement  

Use  of  Es0mates   Passenger  Revenue  Recogni0on

Frequent  Flyer  Accoun0ng   Cash  and  cash  equivalents  and  restricted  cash

Short  Term  Investment Aircraj  Fuel,  Spare  Parts  and  Supplies

Property  and  Equipment Maintenance  and  Repairs

Lease  Fair  Value  Adjustment Regional  Capacity  Purchase

Adver0sing Intangibles  

Long  Lives  Assets  Impairments Share  Based  Compensa0on

Ticket  Taxes Re0rement  of  Leased  Aircraj

Uncertain  Income  Tax  Posi0ons Labor  Cost

Third  Party  Business

RaAo 2011 2012

Working  Capital  (in  millions) (397) (2769)        

=Current  Assets-­‐Current  Liabili0es =10997-­‐11394 =10049-­‐12818

Current  Ra0o 0.97               0.82            

=Current  Assets/Current  Liabili0es =10997/11294 =10449/12818

Receivable  Turnover 17.81 21.42

=Net  Sales/Average  Account  Receivables =21155/(763+1613)/2 =20961/(1194+763)/2

Inventory  Turnover* N/A N/A

=Costs  of  Goods  Sold/Average  Inventory N/A N/A

*The  company  only  provides  service,  so  it  does  not  have  inventory.

RaAo 2011 2012

Average  days’  sales  Uncollected 20.49 17.04

=365/Receivable  Turnover =365/17.81 365/21.42

Average  Days’  Inventory  On  Hand* N/A N/A

=365/Inventory  Turnover N/A N/A

Opera0ng  Cycle 20.49 17.04

=Days  Inventory  On  Hand+  Days  Sales  Uncollected

=0+20.49 =0+17.04

•  The  company  had  a  nega0ve  working  capital  and  saw  a  huge  decrease  from  2011  to  2012.  

•  The  company  current  ra0o  and  Average  days’  sales  uncollected  decreased  from  2011  to  2012.  

•  The  company’s  receivable  turnover  on  hand  saw  a  steady  increase  from  2011  to  2012.  

*The  company  only  provides  service,  so  it  does  not  have  inventory.

RaAo 2011 2012

Profit  Margin 0.023 (0.0195)

=Net  Profit/Revenue =840/37110 =(723)/37152

Asset  Turnover 0.957 0.983

=Net  Sales/Average  Total  Assets =37110/(39598+37988)/2 =37152/(37628+37988)/2

Return  on  Assets 2.1% -­‐1.9%

=Net  Income/Average  Total  Assets =840/(39598+37988)/2 =(723)/(37628+37988)/2

Return  on  Equity 46.50% -­‐150.31%

=Net  Income/Shareholder  Equity =840/1806 =(723)/481

•  The  company  decreased  to  a  nega0ve  margin  in  2012  from  2011  because  the  company  had  a  net  loss  in  2012;  however  the  company  made  a  substan0al  profit  in  2011.  

•  The  company  saw  a  steady  increase  in  its  revenue,  which  brought  up  asset  turnover  ra0o.    •  Both  return  on  assets  and  return  on  equity  decreased  drama0cally  in  2012  because  of  the  

company’s  net  loss  in  2012  and  drama0c  change  in  shareholder’s  equity.

RaAos 2011 2012

Price/Earnings  per  share 2.55 -­‐0.397

=Net  Income/Average  Common  Shares

=840/(327922565+330906192)/2

=(723)/(332472779+330906192)/2

Dividend  Yield 0.00% 0.00%

=Annual  Dividends  Per  Share/Price  Per  Share

=0/price =0/price

•  The  Price/Earning  per  share  ra0o  decrease  drama0cally  from  2011  to  2012.  

•  United  Airline  has  not  issued  any  dividends  since  2008.

RaAo 2011 2012

Debt  to  Equity 20.03 77.2

=Total  Liability/  Shareholder’s  Equity

=36182/1806

=37147/481

Financing  Gap   -­‐0.17 -­‐4.15

=Opera0ng  Cycle-­‐Average  Days  Payable

=20.49-­‐20.66 =17.04-­‐21.19

•  The  company  had  a  huge  increase  of  financing  gap  in  2012  due  to  a  purchase  of  100  new  Boeing  737-­‐Max  and  50  Boeing  737-­‐900.  Also,  the  deep  integra0on  of  former  united  airline  and  con0nental  airline  brought  significant  cost  in  aircraj  pain0ng,  customer  service  and  launching  and  combining  products.    

•  The  company  also  saw  a  drama0c  increase  in  debt  to  equity  ra0o.

•  Airlines  are  companies  that  provide  passenger  transporta0on  and  freight.  The  industry  features  mainline  carriers  and  regional  carriers.  Mainline  carriers  serve  a  large  amount  of  interna0onal  routes  and  domes0c  routes  and  provide  a  rela0ve  comprehensive  routes  for  their  customers.  Regional  carriers  usually  have  fewer  routes  and  barely  have  long  haul  interna0onal  flight.    

•  The  airlines  today  use  codeshare  agreements  with  other  airlines  to  enlarge  their  routes  and  increase  frequency  of  connec0on  flights  for  their  customers.  Also,  selected  pres0gious  carriers  group  in  to  alliance  to  enhance  the  travel  experience  for  their  customers.  The  three  largest  alliance  are:  Star  Alliance,  Sky  Team  and  One  World.    

•  For  United  States  alone,  The  FAA  (Federal  Avia0on  Administra0on)  concludes  that  in  2008  US  avia0on  industry  supported  10.2  million  jobs  and  contributed  1.3  trillion  in  total  economic  ac0vity,  which  accounted  for  5.2  percent  of  US  GDP.  

•  The  industry  currently  faces  increasing  fuel  and  labor  costs  and  decreasing  profitability.  

Resource:  1.United  Stated  of  America.  US  Department  of  Transporta0on.  Federal  Avia0on  Administra0on.  The  Economic  Impact  of  Civil  Avia4on  on  the  U.S.  Economy.  By  Zoe  Ambargis,  David  Ballard,  and  Med  Badard.  Washington,  D.C.:  Federal  Avia0on  Administra0on,  2011.  Print.    2.Barne",  Arnold,  Cynthia  Barnhart,  and  Ameodo  Odoni.  "Global  Airline  Industry  Program."  Global  Airline  Industry  Program.  Massachuse"s  Ins0tute  of  Technology,  n.d.  Web.  23  June  2013.  <h"p://web.mit.edu/airlines/analysis/analysis_airline_industry.html>.    

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Resource:    1.United  Hub  Team.  "United  Announces  Order  for  Airbus  A350-­‐1000  Aircraj."  United  Hub.  United  Airline,  20  June  2013.  Web.  24  June  2013.  <h"ps://hub.united.com/en-­‐us/news/company-­‐opera0ons/Pages/united-­‐announces-­‐A350-­‐1000-­‐order.aspx>.    2.United  Hub  Team.  "United  Introduces  200th  Aircraj  with  Live  TV."  United  Hub.  United  Airline,  08  May  2013.  Web.  24  June  2013.  <h"ps://hub.united.com/en-­‐us/News/products-­‐services/Pages/united-­‐introduces-­‐200th-­‐aircraj-­‐with-­‐live-­‐tv.aspx>.    3.United  Hub  Team.  "United  Plans  New  Routes  for  2013."  United  Hub.  United  Airline,  19  Dec.  2012.  Web.  24  June  2013.  <h"ps://hub.united.com/en-­‐us/News/Company-­‐Opera0ons/Pages/united-­‐adds-­‐new-­‐routes-­‐for-­‐2013.aspx>.    

•  The  company  con0nues  to  invest  in  its  modern  and  state  of  arts  fleet,  which  includes  65  Boeing  787  Dreamliner,  100  Boeing  737  Max  ,  50  Boeing  737-­‐900ER  and  35  Airbus  A320-­‐1000.  

•  The  company  will  con0nue  to  enhance  its  customers’  travel  experience  through  upgrading  its  premium  services,  expanding  economy  plus  offerings,  installing  Wi-­‐Fi  and  in-­‐flight  entertainment  and  renova0ng  its  opera0ng  terminals  and  premium  lounges.    

•  United  expands  its  routes  in  2013,  which  includes  new  flights  to  Canada  and  La0n  America.  This  approach  strengthens  its  presence  as  the  NO.1  US  carrier  to  La0n  America.  

•  United  will  keep  the  current  terms  and  condi0ons  for  its  most  rewarding  frequent  flyer  program  in  the  world  :  Mileage  Plus.    

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 This    2012  annual  report  provides  an  analysis  and  evalua0on  of  the  current  and  prospec0ve  profitability,  liquidity  and  financial  stability  of  United  Con0nental  Holdings  Inc.  Method  of  analysis  used  in  this  project  includes  profitability  ra0os,  liquidity  ra0os,  solvency  ra0os,  and  market  strength  ra0os.  All  calcula0ons  are  based  on  the  data  that  disclosed  by  United’s  annual  report,  which  is  conformity  to  SEC’s  rules  for  Form  10-­‐K.  Results  of  data  analyzed  show  that  the  company’s  profitability  ra0o  is  not  sa0sfied,  especially  its  nega0ve  profit  margins.    

 The  report  finds  the  prospects  of  the  company  in  its  current  posi0on  are  not  posi0ve.  The  major  areas  of  weakness  require  further  inves0ga0on  and  remedial  ac0on  by  management.  1.  Improving  its  net  income  and  profit  margins.  2.  Improving  its  debt/equity  ra0o.  3.  Improving  its  working  capital.  

 The  projects  also  inves0gated  the  fact  that  the  huge  drop  of  net  income  from  2011  to  2012  was  due  to  its  merger  with  Con0nental  Airlines,  which  generate  huge  expenses.  The  analysis  conducted  in  this  project  also  has  limita0ons.  Some  of  the  limita0ons  include:  no  comparable  sta0s0cs  from  its  compe0tors  and  non  current(2013)  economic  data  is  used.