United’s Hong Kong routes are performing so poorly the airline is re-evaluating what they are worth.
United Airlines expects to record a non-cash impairment charge of $90 million for the Fourth Quarter in specific regards to its Hong Kong routes. As civil unrest persist and demand weakens, United has scaled back its Hong Kong service, cutting Chicago – Hong Kong and reducing the frequency of its Newark – Hong Kong service.
> Read More: United Scales Back Hong Kong Service
In an 8-K filing with the SEC, United disclosed its Hong Kong routes are simply not worth what they once were:
“For fourth quarter 2019, the company expects to record a special non-cash impairment charge of $90 million associated with its Hong Kong routes.
“The company conducted its annual impairment review of intangible assets in the fourth quarter of 2019, which consisted of a comparison of the book value of specific assets to the fair value of those assets calculated using the discounted cash flow method.
“Due to a decrease in demand for the Hong Kong market and the resulting decrease in unit revenue, the company determined that the value of its Hong Kong routes had been fully impaired. Notwithstanding such impairments, the collateral pledged under the company’s term loan continues to be sufficient to satisfy the loan covenants.”
If United buys an airline or route, it can book an asset for that, called an “intangible asset”. Let’s say it paid $100MN for a route. This can be recorded as an asset for $100MN on day one. But United must assess, at least annually, whether the route is still “worth” $100MN. United does this on the basis of the discounted cash flows arising from all future flights on that route(s).
If the the new valuation is less than what the asset is recorded at, the difference is written off as an impairment charge.
This is not something United has to write a check for, but does effect the value (perceived and real) of the company. The impairment charge also does not necessarily have a tax implication, but will lower net profits.
United is continuing to struggle on its Hong Kong routes. The fourth quarter non-cash impairment charge is a fancy way of saying it no longer values its Hong Kong slots like it used to. More so for the sake of the people of Hong Kong than the airlines that serve it, hopefully stability will return to Hong Kong in 2020.
image: Phillip Capper / Wikimedia Commons