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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
United Continental 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"). 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.
2018 Financial Highlights
| • | 2018 net income was $2.1 billion, or $7.70 diluted earnings per share, as compared to $2.1 billion, or $7.06 diluted earnings per share, in 2017. |
| • | Revenue for 2018 increased $3.5 billion over 2017 due to a 4.9% growth in ASMs and a PRASM increase of 4.3% in 2018 compared to 2017. |
| • | Aircraft fuel cost for 2018 increased 34.6% over 2017 mainly due to higher fuel prices. |
| • | In 2018, UAL repurchased approximately 17.5 million shares of its common stock for $1.2 billion. As of December 31, 2018, the Company had approximately $1.8 billion remaining to purchase shares under its share repurchase program. |
| • | UAL ended 2018 with $6.0 billion in unrestricted liquidity, which consisted of unrestricted cash, cash equivalents, short-term investments and available capacity under the revolving credit facility of its Amended and Restated Credit and Guaranty Agreement (as amended, the "Credit Agreement"). |
2018 Operational Highlights
| • | RPMs for 2018 increased 6.4% as compared to 2017, and ASMs increased 4.9% from the prior year, resulting in a load factor of 83.6% in 2018 versus 82.4% in 2017. |
| • | For 2018 and 2017, the Company recorded U.S. Department of Transportation on-time arrival rates of 79.8% and 81.9%, respectively, and mainline completion factors of 99.2% and 99.0%, respectively. |
Outlook
Set forth below is a discussion of matters that we believe could impact our financial and operating performance and cause our results of operations in future periods to differ materially from our historical operating results and/or from our anticipated results of operations described in the forward-looking statements in this report. See Part I, Item 1A., Risk Factors, of this report and the factors described under "Forward-Looking Information" below for additional discussion of these and other factors that could affect us.
Growth Strategy. In 2018, the Company completed the first year of its multi-year growth strategy, increasing ASMs 4.9% compared to 2017. Our priorities for 2019 are delivering top-tier operational reliability and customer service while continuing to execute on our growth plan by strengthening our domestic network through strategic and efficient growth and investing in our people and product.
Fuel. The Company's average aircraft fuel price per gallon including related taxes was $2.25 in 2018 as compared to $1.74 in 2017. Based on the Company's projected fuel consumption in 2019, a one-dollar change in the price of a barrel of crude oil would change the Company's projected fuel expense by approximately $104 million.
Results of Operations
2018 Compared to 2017
Operating Revenue
The table below illustrates the year-over-year percentage change in the Company's operating revenues for the years ended December 31 (in millions, except percentage changes):
| 2018 | 2017 | Increase (Decrease) | % Change | ||||||||||
| Passenger revenue | $ | 37,706 | $ | 34,460 | $ | 3,246 | 9.4 | ||||||
| Cargo | 1,237 | 1,114 | 123 | 11.0 | |||||||||
| Other operating revenue | 2,360 | 2,210 | 150 | 6.8 | |||||||||
| Total operating revenue | $ | 41,303 | $ | 37,784 | $ | 3,519 | 9.3 |
The table below presents selected passenger revenue and operating data of the Company, broken out by geographic region, expressed as year-over-year changes:
| Increase (decrease) from 2017 (a): | ||||||||||||||||||||
| Domestic | Atlantic | Pacific | Latin | Total | ||||||||||||||||
| Passenger revenue (in millions) | $ | 2,340 | $ | 688 | $ | 185 | $ | 33 | $ | 3,246 | ||||||||||
| Passenger revenue | 11.1 | % | 11.7 | % | 4.3 | % | 1.0 | % | 9.4 | % | ||||||||||
| Average fare per passenger | 2.8 | % | 0.2 | % | 8.5 | % | 2.5 | % | 2.3 | % | ||||||||||
| Yield | 3.8 | % | (0.4 | )% | 2.7 | % | (0.3 | )% | 2.8 | % | ||||||||||
| PRASM | 4.1 | % | 6.3 | % | 3.0 | % | 0.8 | % | 4.3 | % | ||||||||||
| Passengers | 8.1 | % | 11.5 | % | (3.9 | )% | (1.4 | )% | 6.9 | % | ||||||||||
| RPMs (traffic) | 7.0 | % | 12.1 | % | 1.5 | % | 1.3 | % | 6.4 | % | ||||||||||
| ASMs (capacity) | 6.7 | % | 5.1 | % | 1.3 | % | 0.3 | % | 4.9 | % | ||||||||||
| Passenger load factor (points) | 0.2 | 5.1 | 0.2 | 0.8 | 1.2 | |||||||||||||||
| (a) See Part II, Item 6, Selected Financial Data, of this report for the definition of these statistics. |
Passenger revenue increased $3.2 billion, or 9.4%, in 2018 as compared to 2017, primarily due to a 6.4% increase in traffic. PRASM increased 4.3% in 2018 as compared to 2017. The increase in PRASM was driven by improvements in scheduling, higher corporate demand, increases in close-in bookings in the domestic markets and premium cabin demand improvements in the Atlantic and Pacific markets.
Cargo revenue increased $123 million, or 11.0%, in 2018 as compared to 2017, primarily due to freight volume and higher yield in the Atlantic and Pacific markets.
Other operating revenue increased $150 million, or 6.8%, in 2018 as compared to 2017, primarily due to increased revenue related to MileagePlus miles sales.
Operating Expense
The table below includes data related to the Company's operating expense for the years ended December 31 (in millions, except percentage changes):
| 2018 | 2017 | Increase (Decrease) | % Change | |||||||||||
| Salaries and related costs | $ | 11,458 | $ | 10,941 | $ | 517 | 4.7 | |||||||
| Aircraft fuel | 9,307 | 6,913 | 2,394 | 34.6 | ||||||||||
| Regional capacity purchase | 2,601 | 2,232 | 369 | 16.5 | ||||||||||
| Landing fees and other rent | 2,359 | 2,240 | 119 | 5.3 | ||||||||||
| Depreciation and amortization | 2,240 | 2,149 | 91 | 4.2 | ||||||||||
| Aircraft maintenance materials and outside repairs | 1,767 | 1,856 | (89 | ) | (4.8 | ) | ||||||||
| Distribution expenses | 1,558 | 1,435 | 123 | 8.6 | ||||||||||
| Aircraft rent | 433 | 621 | (188 | ) | (30.3 | ) | ||||||||
| Special charges | 487 | 176 | 311 | NM | ||||||||||
| Other operating expenses | 5,801 | 5,550 | 251 | 4.5 | ||||||||||
| Total operating expenses | $ | 38,011 | $ | 34,113 | $ | 3,898 | 11.4 |
Salaries and related costs increased $517 million, or 4.7%, in 2018 as compared to 2017, primarily due to higher pay rates, higher benefit expenses (primarily health and pension costs), and a 0.7% increase in average full-time employees.
Aircraft fuel expense increased $2.4 billion, or 34.6%, in 2018 as compared to 2017, primarily due to increased fuel prices and a 4.9% increase in capacity. The table below presents the significant changes in aircraft fuel cost per gallon for the years ended December 31 (in millions, except percentage changes and per gallon data):
| 2018 | 2017 | % Change | ||||||||
| Fuel expense | $ | 9,307 | $ | 6,913 | 34.6 | |||||
| Total fuel consumption (gallons) | 4,137 | 3,978 | 4.0 | |||||||
| Average price per gallon | $ | 2.25 | $ | 1.74 | 29.3 |
Regional capacity purchase costs increased $369 million, or 16.5%, in 2018 as compared to 2017, primarily due to increased flying related to the Company's initiative to improve connectivity at its domestic hubs, as well as rate increases under various capacity purchase agreements ("CPAs") with regional carriers.
Landing fees and other rent increased $119 million, or 5.3%, in 2018 as compared to 2017, primarily due to increased rates and our capacity growth.
Depreciation and amortization increased $91 million, or 4.2%, in 2018 as compared to 2017, primarily due to additions of new and used aircraft, aircraft improvements and increases in information technology infrastructure and application development projects.
Aircraft maintenance materials and outside repairs decreased $89 million, or 4.8%, in 2018 as compared to 2017, primarily due to optimization of fleet retirement schedules and related maintenance costs for those aircraft and timing of certain maintenance events.
Distribution expenses increased $123 million, or 8.6%, in 2018 as compared to 2017, primarily due to higher credit card and travel agency booking fees as a result of the overall increase in passenger revenue.
Aircraft rent decreased $188 million, or 30.3%, in 2018 as compared to 2017, primarily due to the purchase of leased aircraft, conversion of certain operating leases to capital leases and lease term expirations.
The table below presents special charges incurred by the Company during the years ended December 31 (in millions):
| 2018 | 2017 | ||||||
| Impairment of assets | $ | 377 | $ | 25 | |||
| Termination of an engine maintenance service agreement | 64 | — | |||||
| Severance and benefit costs | 41 | 116 | |||||
| (Gains) losses on sale of assets and other special charges | 5 | 35 | |||||
| Total special charges | $ | 487 | $ | 176 |
See Note 14 to the financial statements included in Part II, Item 8 of this report for additional information.
Other operating expenses increased $251 million, or 4.5%, in 2018 as compared to 2017, primarily due to an increase in purchased services related to our airport operations resulting from capacity growth, technology initiatives, facility projects, crew-related lodging and trucking and handling of cargo shipments.
Nonoperating Income (Expense)
The following table illustrates the year-over-year dollar and percentage changes in the Company's nonoperating income (expense) for the years ended December 31 (in millions, except percentage changes):
| 2018 | 2017 | Increase (Decrease) | % Change | |||||||||||
| Interest expense | $ | (729 | ) | $ | (671 | ) | $ | 58 | 8.6 | |||||
| Interest capitalized | 70 | 84 | (14 | ) | (16.7 | ) | ||||||||
| Interest income | 101 | 57 | 44 | 77.2 | ||||||||||
| Miscellaneous, net | (76 | ) | (101 | ) | (25 | ) | (24.8 | ) | ||||||
| Total nonoperating expense, net | $ | (634 | ) | $ | (631 | ) | $ | 3 | 0.5 |
Interest expense increased $58 million, or 8.6%, in 2018 as compared to 2017, primarily due to debt issued for the acquisition of new aircraft and the conversion of certain operating leases to capital leases.
Interest income increased $44 million, or 77.2%, in 2018 as compared to 2017, primarily due to increased interest rates.
Miscellaneous, net decreased $25 million, or 24.8%, in 2018 as compared to 2017, primarily due to a decrease in pension benefit costs that was partially offset by an increase in foreign exchange losses and an increase in equity earnings from affiliates.
2017 Compared to 2016
Operating Revenue
The table below illustrates the year-over-year percentage change in the Company's operating revenues for the years ended December 31 (in millions, except percentage changes):
| 2017 | 2016 | Increase (Decrease) | % Change | |||||||||||
| Passenger revenue | $ | 34,460 | $ | 33,429 | $ | 1,031 | 3.1 | |||||||
| Cargo | 1,114 | 934 | 180 | 19.3 | ||||||||||
| Other operating revenue | 2,210 | 2,195 | 15 | 0.7 | ||||||||||
| Total operating revenue | $ | 37,784 | $ | 36,558 | $ | 1,226 | 3.4 |
The table below presents selected passenger revenue and operating data of the Company, broken out by geographic region, expressed as year-over-year changes:
| Increase (decrease) in 2017 from 2016 (a): | |||||||||||||||||||
| Domestic | Atlantic | Pacific | Latin | Total | |||||||||||||||
| Passenger revenue (in millions) | $ | 885 | $ | 117 | $ | (144 | ) | $ | 173 | $ | 1,031 | ||||||||
| Passenger revenue | 4.4 | % | 2.0 | % | (3.2 | )% | 5.8 | % | 3.1 | % | |||||||||
| Average fare per passenger | 0.2 | % | 1.5 | % | (0.1 | )% | 4.0 | % | (0.3 | )% | |||||||||
| Yield | (0.3 | )% | 1.1 | % | (2.4 | )% | 4.1 | % | 0.2 | % | |||||||||
| PRASM | (0.5 | )% | 1.6 | % | (6.0 | )% | 3.3 | % | (0.4 | )% | |||||||||
| Passengers | 4.2 | % | 0.5 | % | (3.1 | )% | 1.7 | % | 3.4 | % | |||||||||
| RPMs (traffic) | 4.7 | % | 0.9 | % | (0.9 | )% | 1.6 | % | 2.8 | % | |||||||||
| ASMs (capacity) | 4.9 | % | 0.4 | % | 2.9 | % | 2.4 | % | 3.5 | % | |||||||||
| Passenger load factor (points) | (0.2 | ) | 0.4 | (3.0 | ) | (0.7 | ) | (0.5 | ) | ||||||||||
| (a) See Part II, Item 6, Selected Financial Data, of this report for the definition of these statistics. |
Passenger revenue increased $1.0 billion, or 3.1%, in 2017 as compared to 2016, primarily due to a 2.8% increase in traffic. PRASM decreased 0.4% in 2017 as compared to 2016. The decline in PRASM was driven by factors including more aggressive low-cost carrier pricing in our hub markets, temporary share loss during roll-out of our Basic Economy pricing, and softer demand in China and Guam. Our revenue in 2017 was negatively impacted by severe storms during the third quarter.
Cargo revenue increased $180 million, or 19.3%, in 2017 as compared to 2016 due to higher year-over-year international freight volume and yield.
Operating Expense
The table below includes data related to the Company's operating expense for the years ended December 31 (in millions, except percentage changes):
| 2017 | 2016 | Increase (Decrease) | % Change | |||||||||||
| Salaries and related costs | $ | 10,941 | $ | 10,176 | $ | 765 | 7.5 | |||||||
| Aircraft fuel | 6,913 | 5,813 | 1,100 | 18.9 | ||||||||||
| Landing fees and other rent | 2,240 | 2,165 | 75 | 3.5 | ||||||||||
| Regional capacity purchase | 2,232 | 2,197 | 35 | 1.6 | ||||||||||
| Depreciation and amortization | 2,149 | 1,977 | 172 | 8.7 | ||||||||||
| Aircraft maintenance materials and outside repairs | 1,856 | 1,749 | 107 | 6.1 | ||||||||||
| Distribution expenses | 1,435 | 1,395 | 40 | 2.9 | ||||||||||
| Aircraft rent | 621 | 680 | (59 | ) | (8.7 | ) | ||||||||
| Special charges | 176 | 745 | (569 | ) | NM | |||||||||
| Other operating expenses | 5,550 | 5,317 | 233 | 4.4 | ||||||||||
| Total operating expenses | $ | 34,113 | $ | 32,214 | $ | 1,899 | 5.9 |
Salaries and related costs increased $765 million, or 7.5%, in 2017 as compared to 2016, primarily due to higher pay rates and benefit expenses driven by collective bargaining agreements finalized in 2016, and a 2.5% increase in average full-time equivalent employees, partially offset by a decrease in profit sharing and other employee incentives.
Aircraft fuel expense increased $1.1 billion, or 18.9%, in 2017 as compared to 2016, primarily due to increased fuel prices and a 3.5% increase in capacity. The table below presents the significant changes in aircraft fuel cost per gallon for the years ended December 31 (in millions, except percentage changes and per gallon data):
| (In millions) | Average price per gallon | ||||||||||||||||||
| 2017 | 2016 | % Change | 2017 | 2016 | % Change | ||||||||||||||
| Total aircraft fuel purchase cost excluding fuel hedge impacts | $ | 6,911 | $ | 5,596 | 23.5 | $ | 1.74 | $ | 1.43 | 21.7 | |||||||||
| Hedge losses reported in fuel expense | 2 | 217 | NM | — | 0.06 | NM | |||||||||||||
| Fuel expense | $ | 6,913 | $ | 5,813 | 18.9 | $ | 1.74 | $ | 1.49 | 16.8 | |||||||||
| Total fuel consumption (gallons) | 3,978 | 3,904 | 1.9 |
Landing fees and other rent increased $75 million, or 3.5%, in 2017 as compared to the year-ago period due to higher rental and landing fee rates.
Regional capacity purchase costs increased $35 million, or 1.6%, in 2017 as compared to the year-ago period despite regional capacity being down 3.8% in 2017 as compared to 2016 due to increases in annual rates, maintenance cycle-related costs and lease return costs.
Depreciation and amortization increased $172 million, or 8.7%, in 2017 as compared to 2016, primarily due to additions of new and used aircraft, aircraft improvements and increases in information technology infrastructure and application development projects.
Aircraft maintenance materials and outside repairs increased $107 million, or 6.1%, in 2017 as compared to 2016, primarily due to an increase in airframe and engine maintenance visits and additional repairs to wireless and inflight entertainment equipment.
Aircraft rent decreased $59 million, or 8.7%, in 2017 as compared to 2016, primarily due to the purchase of leased aircraft and lower lease renewal rates.
The table below presents special charges incurred by the Company during the years ended December 31 (in millions):
| 2017 | 2016 | ||||||
| Severance and benefit costs | $ | 116 | $ | 37 | |||
| Impairment of assets | 25 | 412 | |||||
| Cleveland airport lease restructuring | — | 74 | |||||
| Labor agreement costs | — | 171 | |||||
| (Gains) losses on sale of assets and other special charges | 35 | 51 | |||||
| Total special charges | $ | 176 | $ | 745 |
See Note 14 to the financial statements included in Part II, Item 8 of this report for additional information.
Other operating expenses increased $233 million, or 4.4%, in 2017 as compared to 2016, primarily due to increased costs in food, marketing and technology associated with the Company's enhanced customer experience initiatives, and due to volume-driven increases in cargo trucking and handling costs.
Nonoperating Income (Expense)
The following table illustrates the year-over-year dollar and percentage changes in the Company's nonoperating income (expense) for the years ended December 31 (in millions, except percentage changes):
| 2017 | 2016 | Increase (Decrease) | % Change | |||||||||||
| Interest expense | $ | (671 | ) | $ | (674 | ) | $ | (3 | ) | (0.4 | ) | |||
| Interest capitalized | 84 | 72 | 12 | 16.7 | ||||||||||
| Interest income | 57 | 42 | 15 | 35.7 | ||||||||||
| Miscellaneous, net | (101 | ) | (11 | ) | 90 | NM | ||||||||
| Total nonoperating expense, net | $ | (631 | ) | $ | (571 | ) | $ | 60 | 10.5 |
Miscellaneous, net increased $90 million in 2017 as compared to 2016 primarily due to 2016 curtailments gains related to changes in the new labor agreements. See Note 14 to the financial statements included in Part II, Item 8 of this report for additional information.
Liquidity and Capital Resources
As of December 31, 2018, the Company had $4.0 billion in unrestricted cash, cash equivalents and short-term investments, an increase of $0.2 billion from December 31, 2017. The Company had its entire commitment capacity of $2.0 billion under the revolving credit facility of the Credit Agreement available for borrowings as of December 31, 2018.
We have a significant amount of fixed obligations, including debt, aircraft leases and financings, leases of airport property and other facilities and pension funding obligations. At December 31, 2018, the Company had approximately $14.7 billion of debt and capital lease obligations, including $1.4 billion that are due within the next 12 months. In addition, we have substantial noncancelable commitments for capital expenditures, including the acquisition of new aircraft and related spare engines. As of
December 31, 2018, our current liabilities exceeded our current assets by approximately $6.0 billion. However, approximately $6.7 billion of our current liabilities are related to our advance ticket sales and frequent flyer deferred revenue, both of which largely represent revenue to be recognized for travel in the near future and not cash outlays. The deficit in working capital does not have an adverse impact to our cash flows, liquidity or operations.
For 2019, the Company expects approximately $4.7 billion of gross capital expenditures. See Note 13 to the financial statements included in Part II, Item 8 of this report for additional information on commitments.
As of December 31, 2018, a substantial portion of the Company's assets, principally aircraft, route authorities and airport slots, was pledged under various loan and other agreements. Collateral pledged under these loans continues to be sufficient to satisfy the loan covenants. We must sustain our profitability and/or access the capital markets to meet our significant long-term debt and capital lease obligations and future commitments for capital expenditures, including the acquisition of aircraft and related spare engines. See Note 10 to the financial statements included in Part II, Item 8 of this report for additional information on assets provided as collateral by the Company.
The following is a discussion of the Company's sources and uses of cash from 2016 through 2018.
Operating Activities
2018 Compared to 2017
Cash flow provided by operations for the year ended December 31, 2018 was $6.2 billion compared to $3.4 billion in the same period in 2017. The following were significant working capital items in 2018:
| • | MileagePlus sales. In 2018, we received $1.3 billion more for MileagePlus miles sales to our partners as compared to 2017, mainly due to our domestic co-branded credit card partner fully utilizing the $0.9 billion remaining balance in its pre-purchased miles in 2017. |
| • | Advance ticket sales and deferred revenue. Our 2018 traffic growth and yield improvements contributed to a $0.7 billion increase in advance ticket sales and frequent flyer deferred revenue. |
2017 Compared to 2016
Cash flow provided by operations for the year ended December 31, 2017 was $3.4 billion compared to $5.5 billion in the same period in 2016, the decrease resulting from lower operating income and reduced cash flows from certain changes in working capital items. Excluding the non-cash impairment of the Newark slots, operating income for 2017 was approximately $1.2 billion lower than 2016. Working capital changes reduced cash flow from operations by an additional $1.2 billion year-over-year in 2017 as compared to 2016. The following were significant working capital items in 2017:
| • | $0.9 billion decrease in advanced purchase of miles due to increased utilization of pre-purchased miles. |
| • | $0.4 billion increase in prepayments for maintenance contracts. |
Investing Activities
2018 Compared to 2017
The Company's capital expenditures were $4.2 billion and $4.0 billion in 2018 and 2017, respectively. The Company's capital expenditures for both years were primarily attributable to the purchase of aircraft, aircraft improvements, facility and fleet-related costs and the purchase of information technology assets.
On November 29, 2018, United, as lender, entered into a Term Loan Agreement (the "Synergy Loan Agreement") with affiliates of Synergy Aerospace Corporation ("Synergy"), as borrower and guarantor, respectively, and on November 30, 2018, pursuant to the Synergy Loan Agreement, United provided a secured $456 million term loan to Synergy. Synergy is the majority shareholder of Avianca Holdings S.A. ("AVH"), the parent company of Avianca. The loan was made in conjunction with a revenue-sharing joint business agreement among United, Avianca and Copa Airlines as described in Part 1, Item 1 of this report. For additional information regarding the Synergy Loan Agreement and related agreements, see Notes 9 and 13 to the financial statements included in Part II, Item 8 of this report.
In April 2018, through a wholly-owned subsidiary, the Company invested $138 million in Azul Linhas Aéreas Brasileiras S.A. ("Azul") thus increasing its preferred equity stake in Azul to approximately 8% (representing approximately 2% of the total capital stock of Azul).
2017 Compared to 2016
The Company's capital expenditures were $4.0 billion and $3.2 billion in 2017 and 2016, respectively. The Company's capital expenditures for both years were primarily attributable to the purchase of aircraft, aircraft improvements, facility and fleet-related costs and the purchase of information technology assets.
Financing Activities
Significant financing events in 2018 were as follows:
Share Repurchases
The Company used $1.2 billion of cash to purchase approximately 17.5 million shares of its common stock during 2018. As of December 31, 2018, the Company had approximately $1.8 billion remaining to purchase shares under its share repurchase program.
Debt Issuances
During 2018, United received and recorded $1.2 billion of proceeds as debt related to enhanced equipment trust certificate ("EETC") offerings created in 2018 to finance the purchase of aircraft.
During 2018, United borrowed approximately $424 million aggregate principal amount from various financial institutions to finance the purchase of several aircraft delivered in 2018.
Debt and Capital Lease Principal Payments
During the year ended December 31, 2018, the Company made debt and capital lease principal payments of $1.9 billion.
Significant financing events in 2017 were as follows:
Share Repurchases
The Company used $1.8 billion of cash to purchase approximately 27.8 million shares of its common stock during 2017, completing its July 2016 repurchase authorization. In December 2017, UAL's Board of Directors authorized a new $3.0 billion share repurchase program to acquire UAL's common stock. As of December 31, 2017, the Company had approximately $3.0 billion remaining to purchase shares under its share repurchase program.
Debt Issuances
During 2017, United received and recorded $1.8 billion of proceeds as debt related to enhanced equipment trust certificate ("EETC") offerings created in 2016 and 2017 to finance the purchase of aircraft.
In 2017, UAL issued, and United guaranteed, (i) $400 million aggregate principal amount of unsecured 4.25% Senior Notes due October 1, 2022, and (ii) $300 million aggregate principal amount of unsecured 5% Senior Notes due February 1, 2024.
In 2017, United and UAL, as borrower and guarantor, respectively, increased the term loan under the Credit Agreement by approximately $440 million.
During 2017, United borrowed approximately $497 million aggregate principal amount from various financial institutions to finance the purchase of several aircraft delivered in 2017.
Debt and Capital Lease Principal Payments
During the year ended December 31, 2017, the Company made debt and capital lease principal payments of $1.0 billion.
Significant financing events in 2016 were as follows:
Share Repurchases
The Company used $2.6 billion of cash to purchase 50.3 million shares of its common stock during 2016 under its share repurchase programs.
Debt Issuances
In 2016, United completed two EETC offerings for a total principal amount of $2.0 billion. Of the $2.0 billion, United received and recorded $708 million of proceeds as debt as of December 31, 2016 to finance the purchase of 17 aircraft. In 2016, United borrowed approximately $369 million aggregate principal amount from various financial institutions to finance the purchase of several aircraft delivered in 2016.
Debt and Capital Lease Principal Payments
During the year ended December 31, 2016, the Company made debt and capital lease principal payments of $1.4 billion.
For additional information regarding these Liquidity and Capital Resource matters, see Notes 3, 10, 11 and 12 to the financial statements included in Part II, Item 8 of this report. For information regarding non-cash investing and financing activities, see the Company's statements of consolidated cash flows.
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 | BB | Ba2 | BB | ||
| United | BB | * | BB | ||
| *The credit agency does not issue corporate credit ratings for subsidiary entities. |
These credit ratings are below investment grade levels. Downgrades from these rating levels, among other things, could restrict the availability, or increase the cost, of future financing for the Company.
Other Liquidity Matters
Below is a summary of additional liquidity matters. See the indicated notes to our consolidated financial statements included in Part II, Item 8 of this report for additional details related to these and other matters affecting our liquidity and commitments.
| Pension and other postretirement plans | Note 8 |
| Long-term debt and debt covenants | Note 10 |
| Leases and capacity purchase agreements | Note 11 |
| Commitments and contingencies | Note 13 |
Contractual Obligations. The Company's business is capital intensive, requiring significant amounts of capital to fund the acquisition of assets, particularly aircraft. In the past, the Company has funded the acquisition of aircraft with cash, by using EETC financing, by entering into capital or operating leases, or through other financings. The Company also often enters into long-term lease commitments with airports to ensure access to terminal, cargo, maintenance and other required facilities.
The table below provides a summary of the Company's material contractual obligations as of December 31, 2018 (in billions):
| 2019 | 2020 | 2021 | 2022 | 2023 | After 2023 | Total | ||||||||||||||||||||||
| Long-term debt (a) | $ | 1.2 | $ | 1.3 | $ | 1.3 | $ | 1.7 | $ | 0.7 | $ | 7.4 | $ | 13.6 | ||||||||||||||
| Capital lease obligations—principal portion | 0.2 | 0.1 | 0.1 | 0.1 | — | 0.9 | 1.3 | |||||||||||||||||||||
| Total debt and capital lease obligations | 1.4 | 1.4 | 1.4 | 1.8 | 0.7 | 8.3 | 14.9 | |||||||||||||||||||||
| Interest on debt and capital lease obligations (b) | 0.7 | 0.6 | 0.5 | 0.4 | 0.4 | 1.1 | 3.6 | |||||||||||||||||||||
| Aircraft operating lease obligations | 0.8 | 0.7 | 0.6 | 0.4 | 0.4 | 1.2 | 4.1 | |||||||||||||||||||||
| Regional CPAs (c) | 2.2 | 2.0 | 1.8 | 1.4 | 0.8 | 3.1 | 11.3 | |||||||||||||||||||||
| Other operating lease obligations | 1.3 | 1.4 | 1.1 | 1.0 | 1.0 | 7.0 | 12.8 | |||||||||||||||||||||
| Postretirement obligations (d) | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.5 | 1.0 | |||||||||||||||||||||
| Pension obligations (e) | — | — | — | 0.3 | 0.2 | 0.5 | 1.0 | |||||||||||||||||||||
| Capital purchase obligations (f) | 4.2 | 5.3 | 3.5 | 2.8 | 1.9 | 7.0 | 24.7 | |||||||||||||||||||||
| Total contractual obligations | $ | 10.7 | $ | 11.5 | $ | 9.0 | $ | 8.2 | $ | 5.5 | $ | 28.7 | $ | 73.4 |
(a) Long-term debt presented in the Company's financial statements is net of $191 million of debt discount, premiums and debt issuance costs which are being amortized over the debt terms. Contractual payments do not include the debt discount, premiums and debt issuance costs.
(b) Includes interest portion of capital lease obligations of $124 million in 2019, $104 million in 2020, $80 million in 2021, $63 million in 2022, $57 million in 2023 and $410 million thereafter. Interest payments on variable interest rate debt were calculated using London interbank offered rates ("LIBOR") applicable at December 31, 2018.
(c) Represents our estimates of future minimum noncancelable commitments under our CPAs and does not include the portion of the underlying obligations for aircraft and facility rent that is disclosed as part of aircraft and nonaircraft operating leases. Amounts also exclude a portion of United's capital lease obligation recorded for certain of its CPAs. See Note 11 to the financial statements included in Part II, Item 8 of this report for the significant assumptions used to estimate the payments.
(d) Amounts represent postretirement benefit payments, net of subsidy receipts, through 2028. Benefit payments approximate plan contributions as plans are substantially unfunded.
(e) Represents an estimate of the minimum funding requirements as determined by government regulations for United's U.S. pension plans. Amounts are subject to change based on numerous assumptions, including the performance of assets in the plans and bond rates. See Critical Accounting Policies, below, for a discussion of our current year assumptions regarding United's pension plans.
(f) Represents contractual commitments for firm order aircraft, spare engines and other capital purchase commitments. See Note 13 to the financial statements included in Part II, Item 8 of this report for a discussion of our purchase commitments.
Off-Balance Sheet Arrangements. An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity, or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support, or that engages in leasing, hedging or research and development arrangements. The Company's primary off-balance sheet arrangements include operating leases, which are summarized in the contractual obligations table under Contractual Obligations, above, and certain municipal bond obligations, as discussed below.
As of December 31, 2018, United had cash collateralized $73 million of letters of credit, which generally have evergreen clauses and are expected to be renewed on an annual basis. As of December 31, 2018, United also had $418 million of surety bonds securing various obligations with expiration dates through 2022.
As of December 31, 2018, United is the guarantor of approximately $1.9 billion in aggregate principal amount of tax-exempt special facilities revenue bonds and interest thereon. These bonds, issued by various airport municipalities, are payable solely from rentals paid under long-term agreements with the respective governing bodies. The leasing arrangements associated with a majority of these obligations are accounted for as operating leases. The leasing arrangements associated with a portion of these obligations are accounted for as capital leases. The annual lease payments for those obligations are included in the contractual obligations table under Contractual Obligations, above.
In connection with funding the Synergy Loan Agreement, the Company entered into an agreement with AVH's significant minority shareholder, Kingsland Holdings Limited ("Kingsland"), pursuant to which, in return for Kingsland's pledge of its 144.8 million shares of AVH common stock (equivalent to 18.1 million American Depositary Receipts ("ADRs")) and its consent to Synergy's pledge of its AVH common stock to United under the Synergy Loan Agreement, United (1) granted to Kingsland the right to put its shares of AVH common stock to United at market price on the fifth anniversary of the Synergy Loan Agreement, and (2) guaranteed Synergy's obligation to pay Kingsland (which amount, if paid by United, will increase United's secured loan to Synergy by such amount) if the market price of AVH common stock on the fifth anniversary is less than $12 per ADR on the NYSE, for an aggregate maximum possible combined put payment and guarantee amount on the fifth anniversary of $217.2 million. Accordingly, the Company recorded a liability of $31 million for the fair value of its guarantee to loan additional funds to Synergy if required. Any additional loans to Synergy would be collateralized by Synergy's shares of AVH stock and other collateral.
As of December 31, 2018, United is the guarantor of $145 million of aircraft mortgage debt issued by one of United's regional carriers. The aircraft mortgage debt is subject to increased cost provisions and the Company would potentially be responsible for those costs under the guarantees. The increased cost provisions in the $145 million of aircraft mortgage debt are similar to those in certain of the Company's debt agreements. See discussion under Increased Cost Provisions, below, for additional information on increased cost provisions related to the Company's debt.
EETCs. As of December 31, 2018, United had $8.8 billion principal amount of equipment notes outstanding issued under EETC financings. Generally, the structure of these EETC financings consists of pass-through trusts created by United to issue pass-through certificates, which represent fractional undivided interests in the respective pass-through trusts and are not obligations of United. The proceeds of the issuance of the pass-through certificates are used to purchase equipment notes which
are issued by United and secured by its aircraft. The payment obligations under the equipment notes are those of United. Proceeds received from the sale of pass-through certificates are initially held by a depositary in escrow for the benefit of the certificate holders until United issues equipment notes to the trust, which purchases such notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by United and are not reported as debt on United's consolidated balance sheet because the proceeds held by the depositary are not United's assets. In February 2019, United completed a $1.0 billion EETC offering to finance certain 2018 and 2019 aircraft deliveries. See Note 10 to the financial statements included in Part II, Item 8 of this report for additional information.
Increased Cost Provisions. In United's financing transactions that include loans, United typically agrees to reimburse lenders for any reduced returns with respect to the loans due to any change in capital requirements and, in the case of loans in which the interest rate is based on LIBOR, for certain other increased costs that the lenders incur in carrying these loans as a result of any change in law, subject, in most cases, to obligations of the lenders to take certain limited steps to mitigate the requirement for, or the amount of, such increased costs. At December 31, 2018, the Company had $3.5 billion of floating rate debt and $27 million of fixed rate debt, with remaining terms of up to 12 years, that are subject to these increased cost provisions. In several financing transactions involving loans or leases from non-U.S. entities, with remaining terms of up to 12 years and an aggregate balance of $3.2 billion, the Company bears the risk of any change in tax laws that would subject loan or lease payments thereunder to non-U.S. entities to withholding taxes, subject to customary exclusions.
Fuel Consortia. United participates in numerous fuel consortia with other air carriers at major airports to reduce the costs of fuel distribution and storage. Interline agreements govern the rights and responsibilities of the consortia members and provide for the allocation of the overall costs to operate the consortia based on usage. The consortia (and in limited cases, the participating carriers) have entered into long-term agreements to lease certain airport fuel storage and distribution facilities that are typically financed through tax-exempt bonds, either special facilities lease revenue bonds or general airport revenue bonds, issued by various local municipalities. In general, each consortium lease agreement requires the consortium to make lease payments in amounts sufficient to pay the maturing principal and interest payments on the bonds. As of December 31, 2018, approximately $1.7 billion principal amount of such bonds were secured by significant fuel facility leases in which United participates, as to which United and each of the signatory airlines has provided indirect guarantees of the debt. As of December 31, 2018, the Company's contingent exposure was approximately $164 million principal amount of such bonds based on its recent consortia participation. The Company's contingent exposure could increase if the participation of other air carriers decreases. The guarantees will expire when the tax-exempt bonds are paid in full, which ranges from 2022 to 2051. The Company did not record a liability at the time these indirect guarantees were made.
Critical Accounting Policies
Critical accounting policies are defined as those that are affected by significant judgments and uncertainties which potentially could result in materially different accounting under different assumptions and conditions. The Company has prepared the financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ from those estimates under different assumptions or conditions. The Company has identified the following critical accounting policies that impact the preparation of the financial statements.
Frequent Flyer Accounting. United's MileagePlus loyalty program builds customer loyalty by offering awards, benefits and services to program participants. Members in this program earn miles for travel on United, United Express, Star Alliance members and certain other airlines that participate in the program. Members can also earn miles by purchasing the goods and services of our network of non-airline partners. We have contracts to sell miles to these partners with the terms extending from one to eight years. These partners include domestic and international credit card issuers, retail merchants, hotels, car rental companies and our participating airline partners. Miles can be redeemed for free (other than taxes and government imposed fees), discounted or upgraded air travel and non-travel awards. Miles expire after 18 months of member account inactivity.
Miles Earned in Conjunction with Travel. When frequent flyers earn miles for flights, the Company recognizes a portion of the ticket sales as revenue when the travel occurs and defers a portion of the ticket sale representing the value of the related miles as a separate performance obligation. The Company determines the estimated selling price of travel and miles as if each element is sold on a separate basis. The total consideration from each ticket sale is then allocated to each of these elements, individually, on a pro-rata basis. At the time of travel, the Company records the portion allocated to the miles to Frequent flyer deferred revenue on the Company's consolidated balance sheet and subsequently recognizes it into revenue when miles are redeemed for air travel and non-air travel awards.
The Company's estimated selling price of miles is based on an equivalent ticket value less breakage, which incorporates the expected redemption of miles, as the best estimate of selling price for these miles. The equivalent ticket value is based on the prior 12 months' weighted average equivalent ticket value of similar fares as those used to settle award redemptions while
taking into consideration such factors as redemption pattern, cabin class, loyalty status and geographic region. The estimated selling price of miles is adjusted by breakage that considers a number of factors, including redemption patterns of various customer groups. The Company reviews its breakage estimates annually based upon the latest available information regarding redemption and expiration patterns. The Company's estimate of the expected expiration of miles requires significant management judgment. Current and future changes to expiration assumptions or to the expiration policy, or to program rules and program redemption opportunities, may result in material changes to the deferred revenue balance as well as recognized revenues from the program. For the portion of the outstanding miles that we estimate will not be redeemed, we recognize the associated value proportionally as the remaining miles are redeemed.
Co-Brand Agreement. United has a significant contract (the "Co-Brand Agreement") to sell MileagePlus miles to its co-branded credit card partner Chase Bank USA, N.A. ("Chase"). Chase awards miles to MileagePlus members based on their credit card activity. United identified the following significant separately identifiable performance obligations in the Co-Brand Agreement:
| • | MileagePlus miles awarded – United has a performance obligation to provide MileagePlus cardholders with miles to be used for air travel and non-travel award redemptions. The Company records Passenger revenue related to the travel awards when the transportation is provided and records Other revenue related to the non-travel awards when the goods or services are delivered. The Company records the cost associated with non-travel awards in Other operating revenue. |
| • | Marketing – United has a performance obligation to provide Chase access to its customer list and the use of its brand. Marketing revenue is recorded to Other operating revenue as miles are delivered to Chase. |
| • | Advertising – United has a performance obligation to provide advertising in support of the MileagePlus card in various customer contact points such as United's website, email promotions, direct mail campaigns, airport advertising and in-flight advertising. Advertising revenue is recorded to Other operating revenue as miles are delivered to Chase. |
| • | Other travel-related benefits – United's performance obligations are comprised of various items such as waived bag fees, seat upgrades and lounge passes. Lounge passes are recorded to Other operating revenue as customers use the lounge passes. Bag fees and seat upgrades are recorded to Passenger revenue at the time of the associated travel. |
We account for all the payments received (including monthly and one-time payments) under the Co-Brand Agreement by allocating them to the separately identifiable performance obligations. The fair value of the separately identifiable performance obligations is determined using management's estimated selling price of each component. The objective of using the estimated selling price based methodology is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. Accordingly, we determine our best estimate of selling price by considering multiple inputs and methods including, but not limited to, discounted cash flows, brand value, volume discounts, published selling prices, number of miles awarded and number of miles redeemed. The Company estimated the selling prices and volumes over the term of the Co-Brand Agreement in order to determine the allocation of proceeds to each of the components to be delivered. We also evaluate volumes on an annual basis, which may result in a change in the allocation of the estimated consideration from the Co-Brand Agreement on a prospective basis.
Frequent flyer deferred revenue. Miles in MileagePlus members' accounts are combined into one homogeneous pool and are thus not separately identifiable, for award redemption purposes, between miles earned in the current period and those in their beginning balance. Of the miles expected to be redeemed, the Company expects the majority of these miles to be redeemed within two years.
The following table summarizes information related to the Company's Frequent flyer deferred revenue liability:
| Frequent flyer deferred revenue at December 31, 2018 (in millions) | $ | 5,005 | ||
| Percentage of miles earned expected to expire | 14.5 | % | ||
| Impact of 1% change in outstanding miles expected to be redeemed or weighted average ticket value on deferred revenue (in millions) | $ | 50 |
Revenue Recognition. The Company presents Passenger revenue, Cargo revenue and Other operating revenue on its income statement. Passenger revenue is recognized when transportation is provided and Cargo revenue is recognized when shipments arrive at their destination. Other operating revenue is recognized as the related performance obligations are satisfied.
Passenger tickets and related ancillary services sold by the Company for mainline and regional flights are purchased primarily via credit card transactions, with payments collected by the Company in advance of the performance of related services. The Company initially records ticket sales in its Advance ticket sales liability, deferring revenue recognition until the travel occurs. For travel that has more than one flight segment, the Company deems each segment as a separate performance obligation and recognizes revenue for each segment as travel occurs. Tickets sold by other airlines where the Company provides the
transportation are recognized as passenger revenue at the estimated value to be billed to the other airline when travel is provided. Differences between amounts billed and the actual amounts may be rejected and rebilled or written off if the amount recorded was different from the original estimate. When necessary, the Company records a reserve against its billings and payables with other airlines based on historical experience.
The Company sells certain tickets with connecting flights with one or more segments operated by its other airline partners. For segments operated by its other airline partners, the Company has determined that it is acting as an agent on behalf of the other airlines as they are responsible for their portion of the contract (i.e. transportation of the passenger). The Company, as the agent, recognizes revenue within Other operating revenue at the time of the travel for the net amount representing commission to be retained by the Company for any segments flown by other airlines.
Refundable tickets expire after one year from the date of issuance. Non-refundable tickets generally expire on the date of the intended travel, unless the date is extended by notification from the customer on or before the intended travel date. The Company records breakage revenue on the travel date for its estimate of tickets that will expire unused. To determine breakage, the Company uses its historical experience with refundable and nonrefundable expired tickets and other facts, such as recent aging trends, program changes and modifications that could affect the ultimate expiration patterns of tickets. Fees charged in association with changes or extensions to non-refundable tickets are considered part of the Company's passenger travel obligation. As such, those fees are deferred at the time of collection and recognized at the time the travel is provided.
United initially capitalizes the costs of selling airline travel tickets and then recognizes those costs as Distribution expense at the time of travel. Passenger ticket costs include credit card fees, travel agency and other commissions paid, as well as global distribution systems booking fees.
Long-Lived Assets. The net book value of operating property and equipment for the Company was $28 billion and $26 billion at December 31, 2018 and 2017, respectively. The assets' recorded value is impacted by a number of accounting policy elections, including the estimation of useful lives and residual values and, when necessary, the recognition of asset impairment charges.
The Company records assets acquired, including aircraft, at acquisition cost. Depreciable life is determined through economic analysis, such as reviewing existing fleet plans, obtaining appraisals and comparing estimated lives to other airlines that operate similar fleets. The Company has generally estimated the lives of those aircraft to be between 25 and 30 years. Residual values are estimated based on historical experience with regard to the sale of both aircraft and spare parts and are established in conjunction with the estimated useful lives of the related fleets. Residual values are based on when the aircraft are acquired and typically reflect asset values that have not reached the end of their physical life. Both depreciable lives and residual values are revised periodically as facts and circumstances arise to recognize changes in the Company's fleet plan and other relevant information. A one-year increase in the average depreciable life of the Company's flight equipment would reduce annual depreciation expense on flight equipment by approximately $85 million.
The Company evaluates the carrying value of long-lived assets and intangible assets subject to amortization whenever events or changes in circumstances indicate that an impairment may exist. For purposes of this testing, the Company has generally identified the aircraft fleet type as the lowest level of identifiable cash flows for purposes of testing aircraft for impairment. An impairment charge is recognized when the asset's carrying value exceeds its net undiscounted future cash flows and its fair market value. The amount of the charge is the difference between the asset's carrying value and fair market value.
See Note 14 to the financial statements included in Part II, Item 8 of this report for additional information.
Indefinite-lived intangible assets. The Company has indefinite-lived intangible assets, including goodwill. Goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment on an annual basis as of October 1, or on an interim basis whenever a triggering event occurs. An impairment occurs when the fair value of an intangible asset is less than its carrying value.
See Note 2 to the financial statements included in Part II, Item 8 of this report for additional information.
Defined Benefit Plan Accounting. We sponsor defined benefit pension plans for eligible employees and retirees. The most critical assumptions impacting our defined benefit pension plan obligations and expenses are the weighted average discount rate and the expected long-term rate of return on the plan assets.
United's pension plans' under-funded status was $1.6 billion at December 31, 2018. Funding requirements for tax-qualified defined benefit pension plans are determined by government regulations. In 2019, we anticipate contributing at least $318 million to our pension plans. The fair value of the plans' assets was $3.8 billion at December 31, 2018.
When calculating pension expense for 2019, the Company assumed that its plans' assets would generate a long-term rate of return of approximately 7.4%. The expected long-term rate of return assumption was developed based on historical experience and input from the trustee managing the plans' assets. The expected long-term rate of return on plan assets is based on a target allocation of assets, which is based on a goal of earning the highest rate of return while maintaining risk at acceptable levels. Our projected long-term rate of return reflects the active management of our plans' assets. The plans strive to have assets sufficiently diversified so that adverse or unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio. Plan fiduciaries regularly review actual asset allocation and the pension plans' investments are periodically rebalanced to the targeted allocation when considered appropriate.
The defined benefit pension plans' assets consist of return generating investments and risk mitigating investments which are held through direct ownership or through interests in common collective trusts. Return generating investments include primarily equity securities, fixed-income securities and alternative investments (e.g. private equity and hedge funds). Risk mitigating investments include primarily U.S. government and investment grade corporate fixed-income securities. The allocation of assets was as follows at December 31, 2018:
| Percent of Total | Expected Long-Term Rate of Return | ||||
| Equity securities | 36 | % | 9.5 | % | |
| Fixed-income securities | 37 | 5.8 | |||
| Alternatives | 16 | 7.3 | |||
| Other | 11 | 7.8 |
Pension expense increases as the expected rate of return on plan assets decreases. Lowering the expected long-term rate of return on plan assets by 50 basis points (from 7.4% to 6.9%) would increase estimated 2019 pension expense by approximately $20 million. Future pension obligations for United's plans were discounted using a weighted average rate of 4.2% at December 31, 2018. The Company selected the discount rate for substantially all of its plans by using a hypothetical portfolio of high quality bonds at December 31, 2018 that would provide the necessary cash flows to match the projected benefit payments. The pension liability and future pension expense both increase as the discount rate is reduced. Lowering the discount rate by 50 basis points (from 4.2% to 3.7%) would increase the pension liability at December 31, 2018 by approximately $585 million and increase the estimated 2019 pension expense by approximately $69 million. Future changes in plan asset returns, plan provisions, assumed discount rates, pension funding law and various other factors related to the participants in our pension plans will impact our future pension expense and liabilities. We cannot predict with certainty what these factors will be in the future.
Actuarial gains or losses are triggered by changes in assumptions or experience that differ from the original assumptions. Under the applicable accounting standards for defined benefit pension plans, those gains and losses are not required to be recognized currently as pension benefit expense, but instead may be deferred as part of accumulated other comprehensive income and amortized into expense over the average remaining service life of the covered active employees. All gains and losses in accumulated other comprehensive income are amortized to expense over the remaining years of service of the covered active employees. At December 31, 2018 and 2017, the Company had unrecognized actuarial losses for pension benefit plans of $1.4 billion and $1.6 billion, respectively, recorded in accumulated other comprehensive income.
Other Postretirement Benefit Plan Accounting. United's postretirement plan provides certain health care benefits, primarily in the United States, to retirees and eligible dependents, as well as certain life insurance benefits to certain retirees reflected as "Other Benefits." United also has retiree medical programs that permit retirees who meet certain age and service requirements to continue medical coverage between retirement and Medicare eligibility. Eligible employees are required to pay a portion of the costs of their retiree medical benefits, which in some cases may be offset by accumulated unused sick time at the time of their retirement. Plan benefits are subject to co-payments, deductibles and other limits as described in the plans.
The Company accounts for other postretirement benefits by recognizing the difference between plan assets and obligations, or the plan's funded status, in its financial statements. Other postretirement benefit expense is recognized on an accrual basis over employees' approximate service periods and is generally calculated independently of funding decisions or requirements. United has not been required to pre-fund its plan obligations, which has resulted in a significant net obligation, as discussed below. The Company's benefit obligation was $1.4 billion and $1.7 billion for the other postretirement benefit plans at December 31, 2018 and 2017, respectively.
The calculation of other postretirement benefit expense and obligations requires the use of a number of assumptions, including the assumed discount rate for measuring future payment obligations and the health care cost trend rate. The Company determines the appropriate discount rate for each of the plans based on current rates on high quality corporate bonds that would generate the cash flow necessary to pay plan benefits when due. The Company's weighted average discount rate to determine its
benefit obligations as of December 31, 2018 was 4.30%, as compared to 3.63% for December 31, 2017. The health care cost trend rate assumed for 2018 was 6.25%, declining to 5.0% in 2023, as compared to assumed trend rate for 2019 of 6.0%, declining to 5.0% in 2023. A 1% increase in assumed health care trend rates would increase the Company's total service and interest cost for the year ended December 31, 2018 by $9 million; whereas, a 1% decrease in assumed health care trend rates would decrease the Company's total service and interest cost for the year ended December 31, 2018 by $7 million. A one percentage point decrease in the weighted average discount rate would increase the Company's postretirement benefit liability by approximately $139 million and increase the estimated 2018 benefits expense by approximately $10 million.
Actuarial gains or losses are triggered by changes in assumptions or experience that differ from the original assumptions and prior service credits result from a retroactive reduction in benefits due under the plans. Under the applicable accounting standards for postretirement welfare benefit plans, actuarial gains and losses and prior service credits are not required to be recognized currently, but instead may be deferred as part of accumulated other comprehensive income and amortized into expense over the average remaining service life of the covered active employees or the average life expectancy of inactive participants. At December 31, 2018 and 2017, the Company had unrecognized actuarial gains for postretirement welfare benefit plans of $554 million and $301 million, respectively, recorded in accumulated other comprehensive income.
Forward-Looking Information
Certain statements throughout Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report 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," "anticipates," "indicates," "believes," "estimates," "forecast," "guidance," "outlook," "goals" 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 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: our ability to execute our strategic operating plan, including our growth, revenue-generating and cost-control initiatives; general economic conditions (including interest rates, foreign currency exchange rates, investment or credit market conditions, crude oil prices, costs of aircraft fuel and energy refining capacity in relevant markets); risks of doing business globally, including instability and political developments that may impact our operations in certain countries; demand for travel and the impact that global economic and political conditions have on customer travel patterns; our capacity decisions and the capacity decisions of our competitors; competitive pressures on pricing and on demand; changes in aircraft fuel prices; disruptions in our supply of aircraft fuel; our ability to cost-effectively hedge against increases in the price of aircraft fuel, if we decide to do so; the effects of any technology failures or cybersecurity breaches; disruptions to services provided by third-party service providers; potential reputational or other impact from adverse events involving our aircraft or operations, the aircraft or operations of our regional carriers or our code share partners or the aircraft or operations of another airline; our ability to attract and retain customers; the effects of any terrorist attacks, international hostilities or other security events, or the fear of such events; disruptions to our regional network; the impact of regulatory, investigative and legal proceedings and legal compliance risks; the success of our investments in other airlines, including in other parts of the world; industry consolidation or changes in airline alliances; the ability of other air carriers with whom we have alliances or partnerships to provide the services contemplated by the respective arrangements with such carriers; costs associated with any modification or termination of our aircraft orders; disruptions in the availability of aircraft, parts or support from our suppliers; our ability to maintain satisfactory labor relations and the results of any collective bargaining agreement process with our union groups; any disruptions to operations due to any potential actions by our labor groups; labor costs; an outbreak of a disease that affects travel demand or travel behavior; the impact of any management changes; extended interruptions or disruptions in service at major airports where we operate; U.S. or foreign governmental legislation, regulation and other actions (including Open Skies agreements, environmental regulations and the United Kingdom's withdrawal from the European Union); the seasonality of the airline industry; weather conditions; the costs and availability of aviation and other insurance; the costs and availability of financing; our ability to maintain adequate liquidity; our ability to comply with the terms of our various financing arrangements; our ability to realize the full value of our intangible assets and long-lived assets; and other risks and uncertainties set forth under Part I, Item 1A., 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 SEC.
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