Must-know: United’s leverage compared to its peers

Market Realist

Overview: United Continental Holdings' 2Q earnings (Part 8 of 11)

(Continued from Part 7)

United’s leverage compared to its peers

United’s debt and capital lease obligation as of 2Q14 was $12.3 billion. In 2Q14, United repaid $333 million debt and plans to repay an additional $575 million in the second half of the year. It raised $949 million of debt through enhanced equipment trust certificates at a blended rate of 4.13% to purchase 13 Boeing 737-900 ERs, nine Embraer 175s, two 787-8 Dreamliners, and one 787-9 Dreamliner. During the quarter, 27 aircraft were debt financed.

Debt repayment plans

For the next four years, the annual debt and capital lease payments are estimated at ~$1.1 billion—almost half of United’s annual maturities over the past four years. This is expected to reduce interest expense by 30% in 2014 compared to the interest expense four years ago. The plans to increase the revolving credit facility by $350 million to $1.35 billion may support the debt repayments. United’s long-term goal is to reduce non-aircraft debt and maintain debt at $15 billion with a $5–$6 billion liquidity target.

United’s debt compared to its peers

According to the management, a substantial amount of company’s assets were pledged under loan agreements. United’s (UAL) debt as a percentage of capital was 78%—higher than most of its peers. Delta’s debt (DAL) was 45%, JetBlue’s (JBLU) was 55%, and Southwest’s (LUV) was only 26%. However, American Airlines (AAL) has a higher debt as a percentage of capital of 80% after the merger of American Airlines and U.S. Airways. Except for Southwest, which has an investment grade credit rating, all U.S. airlines including United’s credit rating is below investment grade. For more details refer to the Market Realist series Southwest is the only U.S. airline with an investment grade rating.

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