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Financial Analysis of Union Oil Company of California
Financial Analysis of Union Oil Company of California - February 15th, 2011
Union Oil Company of California, dba Unocal (pronounced /ˈjuːnɵkæl/) is a defunct company that was a major petroleum explorer and marketer in the late 19th century, through the 20th century, and into the early 21st century. It was headquartered in El Segundo, California, United States.
On August 10, 2005, Unocal merged with Chevron Corporation and became a wholly owned subsidiary. Unocal has now ceased operations as an independent company, but continues to conduct many operations as Union Oil Company of California, a Chevron company.
United Airlines (Nasdaq:UAUA) is an international airline service. With hubs in Los Angeles, San Francisco, Denver, Chicago and Washington D.C., United operates approximately 3,300 flights per day to over 230 destinations domestically and internationally. In 2009, United Airlines was the first in on-time performance for scheduled domestic flights, with 81% of all domestic flights arriving approximately on time. As of December 31, 2009, United Airlines has a 13.7% market share
As with all airlines, oil prices are a significant factor in the company's performance. United was hit particularly hard by the sharp increases in fuel costs in 2008, as higher fuel prices led to a 38.2% increase in United's Cost per Available Seat Mile (CASM), from 11.39¢ to 15.74¢. Furthermore, United entered into hedging agreements at about $104/barrel in 2008 to protect itself from increasing fuel prices. However, in the second half of 2008 fuel prices plummeted dramatically, reaching about $37/barrel in December 2008. As a result, United posted losses of $568 million in 2008 and $51 million in 1Q09  because of devalued hedging contracts. By the end of 2009, however, dramatic decreases in fuel costs accounted for a 55.9% decrease in total fuel expenses from $7,772 billion to $3,405 billion.
1 Business Overview
1.1 Merger with Continental Airlines
1.2 Financial Analysis
2 Financial Analysis
2.1 2010 Third Quarter Overview
2.2 2010 Second Quarter Overview
2.3 2010 First Quarter Overview
2.4 2009 Overview
2.5 2008 Highlights
3 Business Segments
3.1 Mainline Services (80.6% of Revenue)
3.2 United Express (14.6% of Revenue)
3.3 United Cargo (4% of Revenue)
3.4 United Services and Other (0.8% of Revenue)
4 Key Trends and Forces
4.1 Airline industries are more sensitive to the economy than other industries
4.2 Fuel Costs
6 Market Share
Because of its high fuel costs and other operating expenses, United has a 2009 Cost per Available Seat Mile of 11.05 cents. As a result of high operating expenses and declining consumer demand for travel, United has significantly reduced its capacity or Available Seat Miles (ASM). In 2007, UAUA cut its ASMs by about 1% and by 4.3% in 2008 , and by 7.4% in 2009.
United Airlines operates approximately 3,300 flights daily to more than 230 destinations worldwide on its Mainline United and United Express services. United Airlines operated 642 airlines as of 2010, a 6.8% decrease from its combined fleet of 689 aircraft. In 2010, United planned to buy 25 next-generation Airbus and 25 next-generation Boeing aircraft to improve efficiency in fuel costs. In addition to its airline travel services, United also earns revenue through its United Cargo and airline services businesses.
Merger with Continental Airlines
Continental said that 98% of votes cast and 75% of shares outstanding favored the $3.15 billion merger with United Airlines. United Airlines (UAUA) stockholders also approved of the transaction. The merger is closed on October 1st, and the combined company currently trades in NYSE under the stock ticker "UAL." The merger leaves just three other major network carriers: American Airlines (AMR), US Airways Group (LCC) and Delta Air Lines Inc. (DAL). This improves UAUA's competitive landscape substantially. American Airlines has the highest cost structure and has been unable to acquire a lower-cost company due to Delta acquiring Northwest and UAUA acquiring CAL. Though not as high as AMR, US Airways also has a high cost structure, reducing its ability to attract both customers and suitors for acquisition. 
Some of United's key operating metics are shown below:
Year Revenue Passenger Miles (Millions) Available Seat Miles (ASM) (Seat Capacity x Miles Flown) (Millions) Load Factor (% of aircraft capacity that is utilized) Revenue per Available Seat Mile (Cents) Cost per Available Seat Mile (CASM) (Cents)
2005 114,272 140,300 81.4% 10.66 12.5
2006 117,470 143,095 82.1% 11.49 13.2
2007 117,399 141,890 82.7% 12.03 13.5
2008  110,061 135,861 81.0% 12.58 15.74
2009 114,245 140,716 81.2% 11.34 12.69
(Read more on analysis and trends...)
2010 Third Quarter Overview
United Airlines and Continental Airlines (CAL) completed their merger at the end of the third quarter of 2010 on October 1st 2010. All accountable measures of company health for the fourth quarter will be updated to include both Continental and United Airlines under the merged company named United Continental Group. However, the third quarter data released by UAL is exclusive to United Airlines and reports data before the merger.
United Airlines reported third quarter 2010 net income of $473 million excluding special items, which is an increase of $533 million since year ago third quarter. The special item included the merger costs, and along with miscellaneous costs, amounted to $87 million in costs. United passenger revenue increased 21.4 percent in the third quarter 2010 compared to the same period in 2009. For the third quarter of 2010, United's total revenue was $5.4 billion, an increase of 21.7 percent compared to the same period in 2009. United's total consolidated expenses for the third quarter 2010, excluding certain special items, increased $463 million or 10.7 percent compared to the third quarter of 2009, of which $211 million was due to higher fuel costs. The large increase in revenue compared to the smaller increase in costs highlights United's abilities to improve cost efficiency.
Continental reported third quarter 2010 net income of $367 million or $2.24 diluted earnings per share excluding certain special items, an improvement of $365 million year-over-year. Including special items, Continental reported third quarter net income of $354 million. Continental passenger revenue increased 20.6 percent in the third quarter 2010 compared to the same period in 2009. Continental's total revenue for the third quarter of 2010 was $4.0 billion, an increase of 19.2 percent compared to the same period in 2009. Continental's total expenses increased $256 million or 7.9 percent compared to the third quarter of 2009. Expenses for the third quarter 2010, excluding fuel, profit-sharing programs and certain special items, increased $102 million or 4.3 percent.
For both CAL and UAUA, the companies have streamlined and improved their cost efficiency. However, some of that improvement was diminished due to unexpected increases in fuel costs.
2010 Second Quarter Overview
For the second quarter of 2010, the company reported its first quarterly operating profit since 2007 of $430 million, an improvement of $751 million since year ago 2nd quarter. Most of the profit was due to a 26.9% increase in PRASM since year ago 2nd quarter. The 57% increase in cargo revenue also played a part in the increase in profits. Net income was $273 million in the 2nd quarter, the largest improvement since 2007. $65 million of the operating income were distributed as dividends to their employees for their profit sharing program, while tax accounted for much of the remaining difference between net and operating incomes.
Once again, United Airlines is ranked first in on-time arrivals in the six months of 2010. United Airlines also had other milestones such as completing the first flight using natural gas synthetic fuel and is working towards reducing fuel costs and improving usage of fuel alternatives. The company initated a merger with Continental Airlines (CAL) and expects to begin the integration process and finish the transaction by the end of the year.
2010 First Quarter Overview
For the first quarter of 2010, the company:
Reported an operating profit of $69 million.
Reported a first quarter net loss of $92 million, narrowing its net loss by $479 million compared to the first quarter of 2009.
Reported a 19.0% year-over-year increase in consolidated passenger revenue per available seat mile (PRASM) for the first quarter.
Reported a 4.8% year-over-year increase in consolidated unit cost per available seat mile (CASM) for the quarter, against a reduction in consolidated capacity of 3.3% year-over-year in the previous year's 1st quarter.
Ranked No. 1 in on-time arrivals among the five largest U.S. global carriers for the first quarter based on preliminary industry results based on U.S. Department of Transportation releases.
Finalized agreements for 25 Boeing 787 Dreamliner and 25 Airbus A350 aircraft orders planned in 4th quarter of 2009.
In 2009, revenues for both mainline and other segments were negatively impacted by yield decreases of 15% and 13%, respectively, as compared to 2008. The yield decreases were a result of the weak economic environment in 2009 In order to mitigate the losses from reduced recessionary-level demands, UAUA took action to reduce capacity. The company reduced its mainline domestic and international capacity by 5% and 8%, respectively, during the fourth quarter of 2009, as compared to the prior year. Mainline domestic capacity decreased 10% while international capacity decreased 9% for the full year of 2009, as compared to 2008.  United Airlines ended the year with a net loss of 651 million, which is a 87.9% improvement since 2008's net loss of $5.4 billion. On the revenue side, UAUA had a 19.1% decrease in revenues from $20.194 billion in 2008 to $16.335 in 2009.
United has hedged about 25% of its fuel for 2009 at an average of $101/barrel which will lead to more losses unless oil spikes in 2009.. After a $2.740 billion net loss in 2Q08, UAUA posted a modest profit of $28 million in 2Q09. Still, operating revenue fell by 25.2%, and more specifically, passenger revenue from the United Airlines segment fell by 28.2%. However, operating expense declined by 51.5% between 2Q09 and 2Q08, led by a 61.7% drop in fuel expense through the company's operations, as average price per gallon fell from $3.31 to $1.41. Nonetheless, the reduced demand from the recessionary environment is reflected in a 9% and 17.2% decline in ASMs and Passenger Revenue per ASM (PRASM), respectively.
UAUA posted a $57 million loss in 3Q09, though this reflects a $735 million improvement as compared to 3Q08. While revenue fell by over 20% to $4.433 billion in 3Q09, UAUA was nonetheless able to decrease its operating expenses by over 28%, resulting in operating income of $88 million. In particular, the company benefited from falling oil prices, as airline fuel expense decreased by 57.8% between 3Q08 and 3Q09 to $1.06 billion. UAUA's current ratio of 0.68 and debt to asset ratio of 1.14 illustrate the company's large debt load. Further, despite decreasing ASM by 5.7% in 3Q09 in response to lower demand, the company's PRASM fell by 14.7%.
By the end of the 2009, UAUA's PRASM decreased 12.3% since 2008 matched with a 27.7% decrease in CASM. 4th Quarter 2009 resulted in a $240 million net loss, though a 1.1 billion improvement from 4th quarter of 2008. To improve liquidity, United Airlines increased current unrestricted cash balance by $1 billion in 2009. United Airlines ended the year with a net loss of 651 million, which is a 87.9% improvement since 2008's net loss of $5.4 billion.
United earned $20.194 billion in revenue in 2008, a 0.3% increase from 2007. This increase was attributed mainly to slight fare increases as well as 6.9% increase in yield, or mainline passenger revenue excluding industry and employee discounted fares per RPM, to 13.89¢. However, United, much like other airlines, reduced its capacity, or Available Seat Miles (ASM), by 4.2% to 135,861 million during 2008 because of slumping consumer demand for travel and increases in operating expenses, most significantly fuel.
United had a $5.348 billion net loss in 2008, compared to net income of $403 million in 2007. However, United posted a $22.7 billion gain in 2006 because of benefits associated with its restructuring, and the company otherwise would have operated at a small loss during the year. UAUA's net income in 2007 appeared to be a first step in the positive direction following an average $8.5 billion annual loss from 2003-2005; however, by 2008, the airline was once again plagued by factors that led to consistent losses, such as a 4Q08 Cost per Available Seat Mile of 16.7 cents, which is 12.1% higher than the industry average.
UAUA's operating expenses increased 28.9% in 2008, driven by a 60.9% increase per ASM in mainline fuel costs. Fuel costs have been a driving factor to United's increasing operating expenses, as its average price per gallon of fuel has risen from $1.79 in 2005 to $3.54 in 2008.
Overall, this increase led to a 38.2% increase in the company's Cost per Available Seat Mile (CASM) in 2008.
To combat increases in fuel prices, UAUA enters into fuel hedge agreements, hedging about 50% of their fuel needs in 2008. However, United secured its fuel at $104/barrel and as a result, posted losses of $779 million and $370 million in Q3 and Q4 2008 as oil prices plummeted.
Mainline Services (80.6% of Revenue)
United's mainline services operated 409 aircraft in 2008, serving destinations within the U.S. and Canada (domestic) as well as in Europe, Asia and Latin America (international). In 2008 mainline services provided $17.1 billion in operating revenue for UAUA, a slight increase from $17.0 billion in 2007 United earned 57% of its revenue from its domestic operations in 2008, with the remaining revenue coming from its international operations which are broken down into the Pacific, Atlantic, and Latin American regions. Overall, the mainline services produced about 135.8 million Available Seat Miles (ASM) in 2008, a 4.2% decrease from its 141.9 million ASMs in 2007, as the company reduced its capacity because of higher operating costs and decreased demand. On June 4, 2008, United announced its cancellation of its "Ted Airlines", which was the company's attempt to enter into the budget airline sector.
United generates revenue through agreements with other airlines, primarily under its Star Alliance program, the largest airline network in the world serving 900 destinations worldwide in 159 countries with over 16,500 daily flights. Some features of United's alliance agreements include shared frequent flier programs, code sharing of flight operations, coordination of reservations, ticketing and baggage handling. Under code sharing agreements some seats of one carrier's flight can be marketed and sold under the brand name of another carrier. Some key partner airlines include Air Canada, Air China, Lufthansa, and US Airways Group (LCC).
United Express (14.6% of Revenue)
The United Express segment earns revenue through flights operated by third party carriers under contract. These carriers include SkyWest Airlines, Mesa Airlines, Colgan Airlines, Chautuaqua Airlines, Shuttle America, Trans State Airlines, GoJet Airlines and ExpressJet Airlines. In 2008, UAUA earned $3.1 billion in revenue from its United Express operations, the same as in 2007, with a fleet of 280 aircraft. Under their contracts with these carriers United pays contractually agreed fees for operating the flights; in return United determines the pricing, revenues, inventory and schedules for flights operated by these carriers. United Express is typically operated by smaller aircraft between smaller airports and United's hub airports. In 2007, United Express produced about 16.2 million Available Seat Miles (ASM), unchanged from a year earlier.
United Cargo (4% of Revenue)
United also offers cargo services for both domestic and international shipping. Freight shipments accounted for 85% of the cargo segment's volume in 2008 with mail shipments accounting for the remaining 15%. In 2008 Cargo generated $854 million in revenue, an 11% increase from 2007.
United Services and Other (0.8% of Revenue)
United Services is an airline support business that provides maintenance and repair services globally. In 2008 United generated $167 million in third party revenue, a decrease of 8.7% from 2007. Furthermore, UAUA also sells jet fuel through its subsidiary United Aviation Fuels Corporation, which earned approximately $1.1 billion in revenue in 2007.
Key Trends and Forces
Airline industries are more sensitive to the economy than other industries
Typically, airline companies and aircraft manufacturers are more prone to swings in revenue and equity market prices due to the release of economic indicators. Consumers tend to reduce travel if personal economic conditions are suboptimal, forcing airlines to cut capacity and production. Indicators such as unemployment indices, personal income, and even home sales affect airline industries in exaggerated fashion.
Since early July, the airline index has gained 13% as carriers reported monthly double-digit unit revenue after last year's slump. But now the industry is facing a slower travel season while economic data seem to indicate a general slowdown in the recovery. For the last two weeks of August 2010, many economic indicators revealed that the U.S economy has erased all of its employment recovery since one year ago. Unemployment increased unexpectedly to November 2009 levels, and existing homesales decreased by more than 27%. Even though such recessionary indications typically reduce fuel futures prices, this does not fully offset the reduction in travel demand that follows a recession, and will affect the bottom line of airline companies.
Like other airlines, fuel costs are United's largest operating expense, accounting for 26.2% of the company's total operating expenses in 2007. Furthermore, United's fuel prices have steadily increased, with its average cost per gallon climbing from 94 cents in 2003 to $2.18 in 2007. Additionally, as oil has inched up past $120 a barrel in early 2008, fuel costs accounted for over 57% of United's operating expenses in Q1 2008. Although United routinely hedges its oil, rising oil prices still caused United's fuel costs to skyrocket in 2008- United is paying $2.81 per gallon of fuel in Q4 2008. Additionally, higher fuel costs led to a 31% increase in United's Cost per Available Seat Mile (CASM) in Q3 2008.
Because of increasing oil prices, United entered into hedging agreements for its fuel at an average $104/barrel in 2008 and $101/barrel in 2009. However, oil prices have dropped significantly since its peak in Q2 2008, reaching about $37/barrel in December 2008. As a result of declining oil prices, United now faces the other harm of volatile oil prices- overvalued hedging contracts. In Q3 2008, for example, United posted a $779 million loss because of devalued hedging contracts. Moreover, United has already secured about 25% of its 2009 fuel needs in hedges at around $101/barrel. Unless oil prices climb back up, United will face more losses into 2009 as its hedging contracts lock the company into fuel prices much greater than market value.
United competes primarily with large carriers like American Airlines (AMR) and Delta Air Lines Inc. (DAL) but also competes with low-cost carriers like Southwest Airlines Company (LUV), both domestically and internationally. Because of high fuel and other operating expenses, United has the highest Cost per Available Seat Mile in the airline industry, 13.5 cents. To combat its increasing operating expenses, United has implemented several strategies prevalent throughout the airline industry including cutting food and beverage services and charging customers extra fees to check in baggage. In May 2008, United instituted a $25 service fee to check in a second piece of luggage. In Q3, United increased this fee to $50 per baggage, in attempts to further insulate itself from increasing operating costs.
The merger with Continental Airlines (CAL) leaves just three other major network carriers: American Airlines (AMR), US Airways Group (LCC) and Delta Air Lines Inc. (DAL). This improves UAUA's competitive landscape substantially. American Airlines has the highest cost structure and has been unable to acquire a lower-cost company due to Delta acquiring Northwest and UAUA acquiring CAL. Though not as high as AMR, US Airways also has a high cost structure, reducing its ability to attract both customers and suitors for acquisition. 
AirTran Holdings (AAI): AirTran Holdings (Nasdaq:AAI) is one of America’s largest low-fare passenger airlines. The airline has managed to achieve low operating costs despite relying on a hub-and-spoke system, in which most of its flights originate and terminate at its hub in Atlanta, Georgia. Given AirTran's continued reliance on the hub and spoke system, airline management has cited other operational factors as cause for the airline having a cost structure that is among the lowest in the industry.
American Airlines (AMR): AMR is the parent company of American Airlines, the second largest airline in the world based on available seat miles and revenue passenger miles On an average day, American Airlines flies approximately 3,400 flights between 250 countries. The company recorded a net loss of $1.5 billion in 2009 compared to a net loss of $2.1 billion in 2008. In 2009, AMR experienced very weak demand for air travel driven by the continuing severe downturn in the global economy. 
Continental Airlines (CAL): is the world's fifth largest airline by revenue passenger miles. CAL serves 242 destinations worldwide, offering 2000 daily flights. Continental's cost per available seat mile of 10.75 cents is among the lowest in the airline industry. The company recently announced that they were being acquired by United Airlines.
Delta Air Lines Inc. (DAL): Delta Air Lines is the 2nd largest passenger airline in the world by available seat miles. In recent years, the company has faced financial difficulties due to price competition from discount airlines like JetBlue and Southwest. This has limited Delta's ability to raise prices to their natural supply/demand and cost reflective levels. As a result, Delta was forced into bankruptcy in September of 2005. Since exiting bankruptcy on April 30, 2007, the company has followed a revised operating strategy calling for a network shift towards more profitable international routings. 
JetBlue Airways (JBLU): JetBlue Airways is the 8th largest airline in the U.S. by revenue passenger miles. JetBlue differentiates itself from other airline travel companies with its low fares, made possible by low distribution and operating costs - largely due to the fact that it has the youngest fleet in all domestic airlines. JetBlue Airways specializes in cheap point-to-point flights with high levels of customer service to 52 destinations in 19 states, Puerto Rico, Mexico, and the Carribean.
Southwest Airlines Company (LUV): Southwest Airlines is the largest domestic carrier by total passengers, carrying over 101.3 million passengers in 2009 on over 1.18 million flights. Southwest thrives on maintaining low operating expenses, primarily through its extensive fuel hedging, which saved the company an estimated $1.1 billion in fuel costs in 2008. Because of its low costs, Southwest was able to remain profitable for 35 consecutive years, a feat unmatched in commercial aviation history. However, the percentage of fuel costs the company has hedged declines precipitously beyond 2009, and the drop in fuel prices caused by the global economic crisis renders Southwest's key advantage - its low fuel costs in comparison to its competitors - much less valuable.
US Airways Group (LCC) US Airways is a major domestic air carrier, which as of April 2008 operates 3,800 flights to 230 destinations across the U.S., Canada, the Caribbean, Latin America and Europe. The company’s finances suffered considerably due to reduced air travel following September 11th, forcing the airline to declare bankruptcy in 2002. However, unlike other carriers that improved and emerged stronger following Chapter 11 protection, US Airways never fully recovered. The combination of high fuel costs and tough labor negotiations forced the company into a merger with America West in 2005. While the US Airways name was maintained for brand purposes, the merger actually left America West executives and stockholders with more control over the new company.
2010 Top 10 U.S. Airlines Market Share based on Revenue Passenger Miles
Rank Carrier Market Share
1 American 13.8%
2 Southwest 13.8%
3 Delta 11.8%
4 United 10.4%
5 US Airways 8.0%
6 Continental 7.6%
7 Northwest 4.8%
8 JetBlue 4.3%
9 AirTran 3.4%
10 Alaska 3.1%
11 Other 19%
Last edited by netrashetty; February 15th, 2011 at 02:58 PM..
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