聯合航空 (UAL) 2002 Q2 法說會逐字稿

Good morning and welcome to United Airlines conference call.

Your speaker today is Mr. Jake Brace, Senior Vice President and Chief Financial Officer.

Mister Brace, you may begin.

Thank you.

Good morning, everyone.

And thanks for joining us today.

On today's call with me are Rono Dutta our President and Patty Chaplinski, Director of Investor Relations.

Let me start by giving you a brief outline of the call.

I'm going to start out talking about the earnings for the quarter as of and then reviewing the expenses for the second quarter the then I'm going to turn it over to Rono who is going to talk about the revenue side as well as some of the early output from our strategic plan.

Then I'll come back and talk about our cash position, the status of discussions that out unions on labor cost reductions, the federal loan guarantee program and our outlook for the third quarter.

Now, before I begin, my favorite part of the call is to remind you all that we are discussing our expectations for future capacity costs, load factors, net earnings and yield.

This information is forward-looking and believe it or not, actual results could differ materially from expected results and the factors that could cause a significant difference between actual and expected results are noted in the 8-K that we filed yesterday with the SEC.

Let me start out by saying that while the industry recovered quite a lot in the fourth quarter of last year and the first quarter of this year, that improvement trend has clearly stalled.

Revenue environment that we see out there right now simply stinks.

There is just not enough demand for all the capacity flying around, and as a result, both we and the industry are suffering tremendously.

While our second quarter results are better than the first quarter on an absolute basis, they're clearly unacceptable.

Excluding special items, the company incurred a second quarter operating loss of $485 million and a net loss of $392 million which translates into a loss of $6.99 per basic share, slightly better than the first call consensus of $7.13.

I should remind you that as required by GAAP and periods of loss our EPS calculations based on the 57 million shares of common stock outstanding, and excludes the 59 million common equivalent ESOP preferred shares.

Those ESOP shares -- if they were included in the calculation, the per share loss would have been roughly half.

Turning to expenses, overall expenses declined 14 percent year-over-year excluding our fuel subsidiary.

ASMs decreased 16 percent resulting in a unit cost increase for the quarter of 2 percent.

Salaries and related costs decreased 5 percent.

Manpower for the quarter decreased 18 percent year-over-year with the resulting increase in productivity of 3 percent for the quarter.

Offsetting that the salary rate per full-time equivalent employee increased 17 percent.

Now, approximately 60 percent of this increase is attributable to an increase in the fringe rate.

The fringe rate increase which is entirely non-cash in the short term was caused by a revaluation of our pension and post retirement benefits stemming from the 2 IAM contracts that we implemented in the quarter.

The remaining variance is due to contractual salary increases for pilots, flight attendants as well as the IAM, and then to a lesser extent the furlough effect of reducing junior employees.

Fuel expense is down 33 percent, consumption was down 20, while the price is down 15 percent to 74.7 cents per gallon.

Commissions were down 61 percent, with a decrease in both passenger revenue and rate.

Passenger revenue decreased 21 percent year-over-year while the rate was down due to the commission actions taken last August as well as this March and then to a lesser extent there was an out of period adjustment that some of you may remember in the prior year.

Purchase services were down 21 percent due to lower volume-driven fees, mainly credit card and crs fees as well as lower communications and utilities expense.

Aircraft maintenance is down 25 percent due to the retirement of the 727 and 737-200 fleets as well as 39 percent lower volume of engine maintenance.

Other operating expenses were down 12 percent due to several factors.

First, our operating performance which was one of the bright spots in our second quarter results.

Thanks to the efforts of all of our employees, we have had record setting performance in on-time arrivals and departure completion, which when we finish adding it all up we think will rank us second or third among the major airlines.

This performance has helped keep down expenses, particularly crew layover expenses, interrupted trip expense and lost baggage expense.

But beyond that, we saw volume-driven food and beverage costs were down a little bit more than the 15 percent traffic reduction.

And then our fuel subsidiary costs, which I know some of you track, were down 18 percent, or $47 million.

Offsetting these reductions were an increase in whole and liability insurance that we have been experiencing all year.

Now let me turn it over to Rono to discuss the revenue environment as well as the strategic plans.

Thanks, Jake.

And good morning, everyone.

I will be giving you an overview of the passenger revenue performance for the second quarter.

Along with some additional information on how the individual markets performed.

And conclude with some comments on our outlook for the third quarter.

The revenue environment is clearly disappointing.

While we are doing a good job of filling the seats, [yields] are quite depressed.

Second quarter passenger revenue was down 21 percent from last year, compared to a 28 percent decline in the first quarter.

Load factor for the second quarter was 74 percent. 1 point higher than last year.

Yield, however, was down 7 percent.

The fact is that business traffic continues to be depressed and many of those who are traveling are buying down to lower fares.

Overall, passenger unit revenue declined by 6 percent year over year, and this compares to an 11 percent decline in the first quarter.

Unit revenue for April was down 7 percent from last year, May was down 6 percent -- I'm sorry, May was down 4 percent, and June was down 6 percent.

As you can see from the numbers, the rapid revenue improvement that we saw in the period January to May now seems to have plateaued in June.

And demand remains weak and the industry continues to be overburdened with excess capacity.

During the first quarter, our year-over-year system unit revenue changed -- [INAUDIBLE] by 1 point.

However in April and May our unit revenue change was 2 to 3 points better than the industry average.

June results from the ATA are not out yet so we cannot comment on that specifically.

Now let's look at how the individual markets performed during the second quarter.

Second quarter domestic passenger unit revenue was 10 percent lower than last, driven by a 10 percent decline in yield.

International passenger unit revenue was 4 percent higher than last year.

As a 4-point load factor increase was somewhat offset by a 2 percent decline in yield.

The Pacific continues to be our best-performing international market.

Year-over-year, Pacific unit revenue increased by 8 percent and the 3 percent decline in yield was more than offset by the 8-point load factor increase.

Both Japan and Asia markets to the U.S. had significant year over year unit revenue increases.

Atlantic unit revenue was 6 percent higher than last year.

This increase was driven by a 4 percent yield increase and a 2-point higher load factor.

The Atlantic is one of the few markets where we are seeing an actual yield increase.

Latin America unit revenue declined 20 percent year-over-year.

And in this market, both yield and load factors were down from last year.

The weak economic environment in South America continues to depress our results.

Now let's look ahead at how the third quarter is shaping up.

Currently, book to load factors are running behind last year.

However, as we have told you before, there has been a shift in booking patterns to close the end.

And we do expect that actual load factors will be about equal to last year.

Regardless of how the third quarter precisely shapes up, it is clear that this industry is facing a revenue crisis.

As you are probably away, we had put together a strategic team to look at every aspect of our business.

We took a macro look at what was happening to the industry as well as a micro look inside our company.

For every meaningful cost saving and revenue generation idea.

Now, let me share with you some of our key conclusions to date.

And the progress we have made so far.

One key conclusion is that United has some of the best assets in the business.

Our hubs are all in the right places.

Our fleet has been modernized and simplified.

We have a very large and loyal frequent flyer base and our product is definitely at the high-end of the spectrum.

United is faced with one big problem, and that is we are a high-cost carrier.

Now, the industry as we all know currently faces a severe revenue problem and we went to some extent to try and understand the nature and severity of the problem.

What our work shows is that airline revenue recently appears to be more closely related to corporate profits than it is with over all GDP.

And for years we have been assuming that airline revenue is correlated to GDP and that we now feel is not true going forward.

It is corporate profits that will drive our revenue.

And this would indicate that airline revenue is unlikely to recover until corporate profits also recover.

We have reexamined the pricing structure from every possible angle.

But to date, we have been unable to find any alternative that would produce as much revenue for United as the current highly segmented pricing structure.

Our analysis also shows that customer convenience associated and the revenue benefit from the hub and spoke scheduling system dwarfs any hub and spoke-related cost inefficiency.

Particularly in our hub cities, where we have large local markets and can, therefore, support high utilization schedules.

We also looked at major restructuring of the airline such as significantly shrinking the airline to a smaller size or moving down scale into more of a leisure product and ultimately rejected these alternatives as unworkable scenarios, particularly with the cost structure.

Not surprisingly, the conclusion is that as difficult as it is to be a high-cost carrier in the high-end market, it is worse to be a high-cost carrier in the low-end market.

So while we continue to look for positive structural changes, we plan to move forward in parallel with many actions that both reduce the cost and improve our revenues.

I wouldn't characterize any of our initiatives as changing the business model, but the fact is that taken together, they nevertheless add up to a tiny sum of money.

So there are 6 teams we are currently pursuing.

Number one, increase the efficiency of the network.

Number two, reduce cost of sales.

Number three, seize opportunities to improve the management of air traffic and irregular operations.

Number four, examine areas of underperformance, whether by distribution channel or by customer segment.

Number five, review all premium product offerings to ensure that they are cost-effective.

Number six, improve processes and productivity, particularly in airports and maintenance.

Now, let me give you some examples under each one of these.

Number one we said was to increase efficient sift existing network.

And under that initiative, we are looking at opportunities such as co-chairing arrangements with other airlines, deployment of [our jets] to restructure our network, and ratcheting up the level of cooperation with the alliance partners.

Two was reducing cost of sales.

Here we are looking for cost reduction opportunities in credit card fees, GDS fees, travel agencies' fees, as well as corporate volume discounts.

Three was airspace management.

An example of a project there is the deployment of a system that would allow simultaneous approach in San Francisco under poor weather conditions.

This would increase the arrival rate by 6 airplanes per hour at San Francisco.

Four was examining areas of underperformance.

We are looking at the share of business we get by customer segment and by distribution channel.

As you know we have various customer segments, such as the road warrior, the price driven [occasionalist] and et cetera.

There is a rather attractive customer segment that we [vying] to find, that we are not getting our fair share of today.

And we are developing a business plan around attaining our fair share.

Item five was reviewing premium product offerings.

We at United have in place a pretty expensive infrastructure which is designed to enhance the loyalty of a higher-paying customers.

At the same time, we are also forced to meet some of the price offerings of low-cost carriers that do not provide a similar level of service.

Our thinking, then, is that some of the lower fares should not have the same level of service as provided to the higher-paying customer.

We also feel that some of the services provided by us such as the Red Carpet Clubs should be profitable in their own right.

Thus, we are doing a comprehensive overview of all of our service offerings.

Item six was process and productivity improvements.

Examples of process improvements would be tightening up on tariff violations in ticketing, and improving the settlement process between carriers when we put our customers on them.

On the productivity side, one of the success stories has been in reservations where we have gone from 7, 500 people down to less than 5,000 people.

Primarily through the use of technology.

Now, we want to bring technology into improving productivity at airports and maintenance.

Specifically, we think there are a lot of improvement opportunities in ramp.

Now, I'm sure the question on your minds is, so how much are all these initiatives worth taken together?

I can only tell you at this time that they are worth a significant amount in total and as we form up our numbers -- firm up our numbers, we will share them with you.

To summarize, the revenue outlook is pessimistic.

The industry continues to be burdened with excess capacity.

And we at United are still looking for significant workable ways to change the business model.

But in the meantime, we are aggressively implementing the opportunities that we have already identified so far.

Now with that, let me turn it back over to Jake.

Thanks, Rono.

Let me resume by talking about our cash position.

As all of you have heard me say before, cash burn is very seasonal.

It's usually much better for us in the second and third quarters than it is in the first and fourth quarters.

So as you would expect, we saw an improvement in our cash burn for the second quarter it was reduced to under a million dollars per day.

Now, even though this is a positive sign, I want to remind you of two things.

First, because the revenue environment looks so weak for the summer as Rono was discussing a little bit, the third quarter cash burn will be worse than the second quarter cash burn.

And second, cash burn will further deteriorate in the fourth quarter due to the seasonal trends we usually see.

Now, during the second quarter we are fortunate that we didn't have any large debt repayments or other big drains on cash.

We did have to pay off $133 million commercial paper program because the banks that supported it, refused to renew it.

But we also received about $80 million from the third [INAUDIBLE] of the governmental grant.

Our cash balance at the end of the second quarter was down about $200 million from the third quarter to 2.7 billion.

This cash balance includes $270 million in restricted cash.

Excluding the restricted cash, our cash balance was roughly $2.4 billion.

Now, unfortunately, this cash drain holiday doesn't look like it will continue.

As I mentioned, previously, both the third and fourth quarter cash burn will increase.

Additionally, we have about $200 million in non-aircraft capital spending slated for the second half of the year as well as a $70 million payment on the IAM retro scheduled for December.

Now, more importantly than that, we have roughly $900 million in debt maturities coming due in the fourth quarter and frankly, we're concerned that we won't be able to refinance them.

Now let me give you an update on our recovery plan.

As I have mentioned in previous quarters, United began to implement a four-part recovery plan to help get us back on the road to financial stability.

We have made some progress in most of the areas of the recovery plan but it wasn't until recently that we made any headway on a vital part of the recovery program, our labor cost reductions.

In late June, we announced that we had reached an agreement with our pilots on wage cuts and we have outlined a salary reduction plan for salaried and management employees including the company's officers.

However, we haven't had as much success in our discussions with the IAM and the AFA.

Both unions have rejected our initial proposals.

We are clearly disappointed that we have yet to reach an agreement, but we'll continue to work with them in an effort to seek the full and equitable participation of all the employee groups.

Which brings me to the next topic I'd like to discuss which is the ATSB loan guarantee program.

As I'm sure you know, on June 24, we announced our filing for federal loan guarantees at the ATSB.

We are seeking loans of $2 billion with 1.8 billion of that guaranteed by the government.

It is our belief that our situation is exactly the situation for which the loan program was designed.

We were dealt an incredible financial blow by the events of September 11th.

We have significant cash needs on the horizon.

And we do not have the access to the capital markets that we need.

The ATSB loan program is clearly the right path for us.

Finally, before we turn to your questions, let me give you some information on the third and fourth quarters.

Capacity for the third quarter is expected to be down 8 percent year over year.

I can also tell that you currently, it looks like our capacity will be up 6 percent year-over-year in the fourth quarter, however we're constantly reviewing our schedule and that number obviously could change.

On the cost side for the third quarter, we expect unit costs excluding our fuel subsidiary to be up 2 percent year-over-year.

Third quarter fuel price is projected to be down 7 percent year-over-year to 80.4 cents per gallon.

As a result of the poor revenue trends, we expect to report a significant third quarter and full-year loss.

With that, Operator, I'd like to open it up to questions.

Thank you.

And at this time, if you would like to ask a question, please press star followed by 1 on your touch-tone phone.

You will be announced by your name prior to asking your question.

Once again, to ask a question, please press star 1.

Your first question comes from Brian Harris, and please state your company name.

Brian Harris from Salomon Smith Barney.

It's one question for Jake and one question for Rono.

Jake, do you have anytime frame here regarding the ongoing negotiation particularly with the IAM and the ATSB?

When will we have some resolution on these issues?

Brian, we're in the relatively early stages with the ATSB.

We filed our application.

Our application was, you know, 4 or 6" thick.

There is obviously a lot of detail that we need to go through with the ATSB and the staff members of the board members.

And have had a few meetings with them already, have more meetings scheduled.

We have not nailed down with them -- not nailed down with them a precise timetable.

We want to make sure they get all the information that they need, that they understand our situation fully, and so as we sit here right now, we have not attempted to establish a firm timetable with them.

Okay.

I'm just -- a question here, if you have no firm timetable, where's the impetus for labor to reach a resolution, as well?

The, uhm...

Obviously, those two things go together.

The ATSB wants to know where we are with labor.

In the process.

And so... you know, we -- we are, uhm, attempting to schedule meetings with labor, attempting to work with labor to -- to bring that to resolution.

The ATSB does not want to get much ahead of labor.

We have, obviously, a -- you know, 2.4 billion in unrestricted cash at the end of the quarter which gives us some time to work through the issues.

But this is not a situation that we really want to drag on.

We will be establishing a timetable before too long with both labor and the ATSB.

Okay.

Thanks.

And question for Rono, AMR in their conference call mentioned they were [de-peaking] their operations in O'Hare and they also said that they're gaining market share and I think all -- in I think all their hubs, including O'Hare.

So any comments regarding your market share position in O'Hare and whether you think there is merit in similar experiment de-peaking in your hubs?

Well, Brian, very predictably, the share moves along with the capacity.

And as you know, United has pulled down more capacity than everyone else.

In I would say in an environment where there is excess capacity to begin with.

So we think we did the right thing.

As we pull down capacity, clearly we have lost share and speaking to O'Hare in particular, as we added back capacity, we have gained the share back.

So let me give you some specifics.

We started the year with a 10 percent share gap between us and American at O'Hare.

In April, when American added capacity into O'Hare and went back close to the pre-September 11th levels, our share gap declined to 5 points advantage for us.

Clearly we didn't like what was happening in terms of the share gap in O'Hare so in June we added back capacity as well and in June we are back to a 10 point advantage.

So we started with a 10 point advantage, declined to a 5 point advantage and are back to a 10 point advantage.

So that's the share moving along with capacity in an excess capacity environment.

Second question was American's move about de-peaking.

American started, as you know, with very poor utilization, very low utilization of gates and resources at O'Hare.

They are roughly the same number of gates as we do and a significantly lower schedule.

I assume in order to improve the gate utilization they went more to an hourly banking pattern.

We were always at an hourly banking pattern.

So our gate utilization is high.

We are at an hourly banking pattern and what they have given up in getting to that is increased connectivity time for the customers.

We don't need to do that.

We have tight connections for the customers.

We have good utilization.

And we have an hourly pattern already.

So we don't plan to make any changes at this time, Brian.

Okay.

Thank you.

Thank you.

Your next question comes from Jamie Baker, and please state your company name.

Good morning.

It's Jamie Baker at J.P. Morgan.

Rono, as part of the strategic plan you highlight a number of things, including the continued use of regional jets and realigning premium product offerings to ensure that they are cost-effective.

It seems that these might be somewhat at odds with one another since after all, RJ's are somewhat of a premium product in terms of their seat model costs and they don't seem to lend themselves to a leisure-based environment the way an all-coach A-320 would.

Could you comment on this and whether RJ economics are sustainable in a low-yield market?

RJ's we think are quite a breakthrough in a positive way.

Structural change to the industry.

As you know, Jamie, our biggest issue is how to get short haul seat into a long haul market.

We don't necessarily want to participate in the short haul leisure traffic, and that's what the A-320 does.

What the RJ allows to you do is to retain the connecting traffic and not participate in the local traffic and therefore strengthen your long haul.

We think it's very positive.

We like the RJ's.

We aggressively are adding RJ's and as long as the labor costs on the RJ side remain in line, we think it's very much sustainable.

What's strange about the RJ's is they are a very small airplane that have very low unit costs.

And the large part of that is -- -- -- the labor of United express units and as long as those costs remain controlled, we think it's very much sustainable.

Okay.

That's helpful.

Thank you, Rono.

Thank you, Jamie.

Thank you.

Your next question comes from Kevin Murphy.

And please state your company name.

Kevin Murphy, Morgan Stanley.

Hi, Jake.

Hi, Rono.

Hey, Kevin.

I asked one of the other carriers this question but I think it's particularly relevant for you guys, and that is you did mention the application was 4 to 6" to the government.

How do you account for any further terrorist risks or even an invasion of Iraq?

No doubt, you know, one of those two will impact bookings in just a casual reading of the press would suggest that the odds are mounting on one of those two if not, you know, both over the next 12 months.

Is there enough of a cushion at United Airlines that if traffic were to take another step down, you can handle things?

And is that risk addressed in your government application?

Let me -- that's a good question, Kevin.

Let me answer it this way.

When the application that we put forward included a number of sensitivities... and while we certainly in the application didn't attribute any of the sensitivities to a specific invasion of Iraq or anything like that, we do look at how our business plan behaves when, you know, traffic or yield changes in, you know, any particular way.

So you know, obviously the government has a much better idea whether we are going to do any of those things that you mentioned.

But our application has in it the sensitivities that would enable anyone who -- who wanted to, to say, okay, you know, if traffic falls off by x percent, then what happens to the ability to repay the loan and what does the business plan look like?

So we didn't attribute it to any specific events but we gave the government all the information that they need to sort of do that calculation if traffic falls off.

And are you comfortable that you can operate in that environment?

Well, you know, it's hard to -- it's really hard to say, Kevin.

I mean, you know, what is the world look like if you know we're invading Iraq and who knows where all that goes?

Nobody expected, you know, September 11th.

Nobody expected the -- the huge -- the huge reduction in revenue and demand immediately after September 11th.

Yet the industry, you know, continued to operate after September 11th and we have been climbing our way out of the hole.

So, you know, if something like that happens, you know, how big a hole is it relative to September 11th?

No.

Indeed, but there was no foreshadowing of September 11th.

I mean, these are front page items.

So... to prepare for some contingency --

The point I was trying to make, Kevin, is that we don't know what the reaction -- we know it will be negative.

We don't know what the reaction would be, you know, how deep it would go relative to September 11th.

But we have put the sensitivities in there to say, if you think that an invasion of Iraq or whatever would result in, you know, traffic or revenue going down by a certain amount, that's what it looks like, I don't think anyone can sit here and say, you know, how much it would go down if one of those things happened.

A question for Rono on the six points.

You know, you mentioned one of the problems with the carriers is high cost, no doubt.

And the six points is really no addressing unionized labor.

Can you foresee the day that there will be a breakthrough with unionized labor?

You mentioned, you know, one of the productivity initiatives has been in reservations.

But I think you probably need something a little bit more compelling than that.

Clearly, Kevin, a lot of our labor costs are buried in a contract.

There is no denying that.

And so what we are looking at is, yes, we should talk to the union about that and you know of all the discussions we are having and at the same time say, okay, setting the contract aside, what else can management do?

So do the two parallel actions, if you will.

And again, I'd say the gains we have made in reservations are tremendous.

The question is, can we do the same thing in airports both upstairs with customer service and downstairs in ramp?

And the fact is we look at the ramp and we recognize that we haven't brought a lot of technology to bear and our early work shows that there are significant gains that can be made there.

So we should need to put both parts in parallel, not just focus on one.

Best of luck, fellas.

Thank you.

Thanks, Kevin

Thank you, your next question comes from Helene Becker.

And please state your company name.

Thank you very much, Operator.

Hi.

Jake and Rono.

Uhm, just a question with respect to pilot, uhm, agreement that you worked out or two questions, actually.

One, are the wages and the productivity changes permanent or is there a snapback?

And, two, with respect to the pilots, I'm sure they were incented to go along with your plan because of your very rich pension.

Your other employees don't really have that.

So what happens in the event you don't get this loan guarantee and you can't refinance the $900 million.

Do the pilots -- does the pilot pay revert back?

There are two or three questions in there.

I noticed that. [ Laughter ]

Let me try and get all of them in and you'll tell me if I missed one.

First of all, the pilot agreement is a reduction from their contract.

And so they have a contract that calls for, you know, a certain level of wages.

This year and next year and the year after and so forth.

And what we did in there was we reduced the wage rate from what it would have been otherwise.

So we reduced it 10 percent in the first year, and then we slowly grow it back -- we grow it back to where it would have been otherwise over the three-year period with them.

You know, whether the pilots were motivated by their pension programs or not is, you know, something that's really better a dressed by them.

They were clearly motivated.

They clearly took a leadership role in working with the company to get, you know, that piece of the recovery plan in place.

Now, the pilot -- the agreement with the pilots also has in it a couple of pieces which go beyond wages and go beyond the 3-year period in concept.

Those are the co-chair piece which is, you know, is part of the program.

And you know, hopefully we are going to get that done with them and put it in place and that's something that doesn't automatically revert at the end of a three-year period or something like that.

And the other piece is the regional jet.

The regional jet relief that they would give to us allow to us fly more regional jets than we would have been able to fly otherwise.

So both of those are permanent.

Or more permanent than the wage reductions.

Now, the entire recovery plan with the pilots is contingent on a number of things, getting the loan guarantees, getting, you know, substantial and equitable participation by other employee groups.

So you know, the wage reductions and so forth would not be -- it's not that they would go away.

It's that they wouldn't go into place if we didn't get the actual participation of other employee groups.

So...

I think -- hopefully I got all your questions in there.

Okay!

So if I understand this correctly, the wages over three years go back to where they would have been.

They go back to where their contract would have been.

There is a slight little swizzle in there because we would actually -- we are actually extending the contract by a year so the contract would have expired in September of 2004.

We extend it to September of 2005.

So we have it ramped back to where we sort of deem it would have been in September of 2005.

Okay.

And then with respect to that altogether, is there any way to unwind the ESOP?

Is there any way to unwind the ESOP?

The ESOP, you know, was put in place in '94 and it has an automatic unwind to it to the governance -- to some of the governance aspects of the ESOP when what's called sunset occurs.

And sunset occurs when the employee ownership level falls below 20 percent of the entire -- you know, of the entire shares outstanding.

And that's sort of the natural unwind to it.

Okay.

Does that answer that?

Does that get rid of what you were talking about?

Yeah, exactly.

Yeah, so that's -- the 20 percent is in place, you know, sunset process is in place and will -- nothing that -- that we're doing right now directly affects that.

Okay.

All right.

Thanks very much for explaining that.

Okay.

Thank you.

Your next question comes from Glen Engle and please state your company name.

Glen Engle, Goldman Sachs.

Good morning.

Hey, Glen.

Question on economy plus.

Again, we have an environment where getting your costs down is great, can you just talk about how economy plus is doing and whether that should be reversed?

Yes.

Glen, if there is one distinguishing feature for United, it is that we have the highest loyalty amongst all the airlines.

When customers get off an airplane, we ask you why were you on this plane, was it because of schedule, price, service or the loyalty program?

And United consistently rates the highest on the loyalty side.

So everything we do, Glen, from extending the Los Angeles hub to building A Star airlines to putting in economy class is really designed as that loyalty issue.

And we are very encouraged by how Economy Plus has actually increased the loyalty amongst the best passengers.

It rated very high.

So at this time, we are not looking to dismantling Economy Plus.

I would also add that we have said consistently that this industry has excess capacity.

Adding more seats into the market at the very marginal fares we are getting doesn't seem to make sense at this time.

Secondly, for Jake, can you again go over a little more in detail just the $200 million labor cost increase from the first to second quarter?

And should we expect that the third quarter to look similar to the second?

Sure.

So there's -- there's, uhm, a few things going on there.

First, our manpower was down 18 percent year over year.

And so, you know, normally would you expect to get, you know, salaries down 18 percent along with the manpower.

But offsetting that and as I mentioned on my earlier is that the 18 percent actually we had a productivity improvement of some 3 percent in there.

So that's fairly good news.

The bad news is that offsetting the reduction in manpower were an increase in the fringe rate.

The fringe rate went up because, you know, as you are required to do when we put in a new contract, especially with the IAM, and the IAM is somewhat of an unusual situation in the way that their pension programs work, is their pension is a certain dollar amount per month of service -- I mean, a certain dollar amount per year of service.

And that dollar amount doesn't change until you do a new contract.

And so while the actuaries will typically, for other -- for other more standard pension programs, would be able to project that over time, you'll get a certain amount of salary increases baked in, and therefore, you sort of incur that expense as you go.

Under the way that the IAM contract is accounted for, you cannot assume any salary increases -- any increase in their pension benefits beyond the contract.

And so when we adjust it -- and we did it in -- it was a fairly big adjustment here because it hadn't been adjusted since 1994, so it went up, you know, 30-plus percent in terms of the benefit that they get per year of service, when you do that, that causes us to revalue the pension plan and for them.

And, uhm, it is relatively large amount.

And so you know, that drove the biggest change, some 60 percent of the increase in the average salary rate that we talked about.

Now, beyond that, the pilots got a 4.7 percent increase that went into effect May 1st.

The flight attendants got 2 increases year-over-year.

They got a 2 percent increase and then pursuant to their contract and the arbitration that was held related to the application of their contract, they got another increase of 5.8 percent.

Built into their contract.

And all of that happened in the second quarter.

And then the last piece which as I mentioned was the smallest, was when we went and furloughed all the employees, and also retired two fleet types, the 727 and the 737-200s.

Two effects happened.

First, we got rid of more junior employees which effectively increases the average salary rate.

And then the 727s and the 737s were two of our lesser-paid fleet types in terms of pilots.

And so when we got rid of those, the average salary for pilots, particularly, went up both because we have less junior people on the payroll and because we have higher than -- higher average aircraft types in the fleet.

One more question, please.

How did Heathrow do relative to the rest of Europe?

And when you said June was worse than May, was that true in all regions?

I'm sorry, can you repeat the question?

How did Heathrow do relative to the rest of Europe in the Atlantic and when you said June was worse than May, was that true in all regions or just --

First of all, on the Heathrow question, we are finding -- Atlantic is one of our strongest performing markets as we just said and it's true for both Heathrow and Continental Europe.

Both have recovered pretty nicely.

As to the June versus May issue, unfortunately, it's true across the system.

From everywhere, just talking to our salespeople, people are satisfying a slowdown worldwide in air travel.

Thank you.

Thank you.

Your next question comes from Jim Higgins and please state your company name.

Thanks.

Credit Suisse First Boston.

Rono, question for you.

Could you speak to some of the regional revenue differences you are seeing within the U.S.?

Is there much to talk about on that?

Well, uhm, Jim, one of the clear trends is that long haul is doing better than short haul.

Short haul markets are performing weak both in load factors and yields.

And this is a pretty significant trend, I would say.

And somewhat predictably, then, along with that trend, our best-performing markets are the Pacific, the Atlantic and transcon.

Again, long haul markets, that's what's doing well.

Even within the hubs, we find that the short haul markets out of the hubs are doing worse.

So that's a significant trend.

And that's why again, regional jets make so much sense for us at this time, Jim.

Sure.

Are there any notable differences among the geographic regions?

As you know, it started off with the west coast being very weak.

Sure.

We talked about that two, three quarters ago.

Now it seems to have evened out more.

There are no sharp differences that we see at this time.

Right.

Thank you very much.

Thank you, Jim.

Thank you.

Your next question comes from Sam Butrick.

And please state your company name.

UBS Warburg.

Sam, we can't hear you.

I'm sorry, there appear to be widely diverging views on carriers' ability to access the capital markets.

Primarily for secured equipment financing either in a public or private transaction.

What is your current view of your access to capital in that sense?

Well, Sam, I have heard some of the comments that other carriers have on their own access and also the comments on our access.

I think that we strongly disagree with their view on our access.

I won't comment on, you know, their own access.

But, you know, we have been working, you know, this year and, you know, scouring the market and have been able to do some -- some private market transactions.

We have worked with our advisors and have not been able to do a public market transaction.

We have been able to do several private market transactions at various sizes.

Lack of access to the public market has caused to us go to the non-traditional sources to go to financing with some of our strategic partners.

And those are the sources that we have been tapping this year.

But that's not -- you know, that's not an unlimited supply.

And quite frankly, you know, we think we're, you know, there may be a few more pockets out there but... not a lot.

Unless we get access to the public capital markets, we're concerned about our ability to refinance the debt coming due in the fourth quarter.

Is it a function of you just don't like the price or there is nothing there?

No.

It's absolutely not a function of us not liking the price.

It's simply a function of access.

You know, we have some unencumbered -- we have unencumbered aircraft.

We have $3.4 billion.

So it's not a situation where they say that they want us to pay [whyever]-plus too much, and we say no that's too high a price.

It's just that public capital markets are just not -- are not where we need them to be for us.

Now, they may be there for other people but for whatever reason they are not there for us.

Why do you think the markets would be treating United differently?

Uhm, that's something that I spend a lot of time thinking about.

The markets obviously speak.

They don't always tell you their reasons.

And, uhm, you know, I don't know.

A lot of people have speculation.

All I know is that, you know, in work -- we are working with our advisors in our own research and scouring the markets, that we don't have the kind of access that we need.

Rono, you said that revenues appear to be more correlated to corporate profits or that's your assumption moving forward.

If you look out a couple of years in a rebounding corporate profit environment, does that mean it's your expectation that business mix as a percentage of total industry revenue will be about where it was the last time corporate profits were good?

Well, Sam, I think I have to give you some numbers to answer that question.

You know, if you look at total domestic industry revenue in 2000 it was $68 billion.

In 2002, it was -- we estimate will be about $52 billion.

Now, the question, why was there such a sharp drop-off?

Because if you look at nominal GDP, which is what we use to correlate to, in 2001, it was plus 3.4, in 2002 it is plus 3.8.

So you would say, gee, under the GDP model, the revenue in 2002 should really be $70.6 billion.

So the question, what explains the difference?

And our -- our work says that if you correlate to corporate profitability, 2002 revenue should be 55 billion.

So that explains most of it.

But there is still a gap between the 55 billion and 52 billion.

And that 3 billion we are calling disinclination to fly.

So whether it's hassle factors, fear factors we don't know.

But there is something in there that explains that.

And the question, how quickly does that recover?

Now, to the corporate profitability side which will drive most of the rebound, the fact is corporate profitability was at one time expected to rebound sharply in 2002 and that's not happening.

And that's why I think airline revenues were expected to rebound sharply and that's not happening, either.

And right now, the data that we get says that corporate profits dropped 16 percent in 2001 and is expected to drop a further 2 percent in 2002.

And that's what's making us pessimistic about the industry revenue in a very explainable sense that, hey, corporate profits are weak and that's what's causing airline revenues to be weak.

But how quickly that disinclination factor improves, Sam, is anybody's guess.

It could get worse if there is more threats and more terrorism.

Or it might gradually recover.

That's all interesting.

But really, what I'm after is in the future, do you think the business mix will be about the same, more or less than it was over the past 10 years?

There is again a portion of it that I think is not coming back.

And that's the portion that is attributable to people are just used to flying low cost carriers, there is Internet transparency issue.

But the other portion of it will come back.

Now, if you ask me, what is the difference between the cyclical piece and the structural piece, as best as we can tell, the structural piece is about 20, 15 to 20 percent.

And that's the part that may or may not come back.

We don't know.

It's too early to tell.

Okay.

Thank you.

Thank you.

Your final question today comes from Jim [alchul] and please state your company name.

Good morning.

Aviation Advisory Service.

Couple of questions, please.

First of all, relating back to your answer to one of the other questions, I understand that the agreement -- the part of the agreement with the pilots covering the wage reduction is contingent on your reaching agreement with the other labor groups.

Is that correct?

The pilot agreement is contingent on the equitable participation by other employee groups.

Does that also apply to the provisions of this agreement with the pilots covering co-chairing and regional jets .

The -- that has not been fully worked out yet.

So the -- that hasn't been resolved yet.

Okay.

Since you have not reached agreement on the regional jet piece, have you developed or are you about to implement any plans to increase the number of regional jets feeding your system beyond your existing growth plan?

We -- we have -- you know, we had a regional jet fleet plan that was in place prior to September 11th.

We have by and large continued to follow that plan ever since September 11th.

And we continue to follow that plan today even though we don't have that piece of the agreement in place as of yet.

Could we expect to get it in place?

I see.

Oh, okay.

So, in other words, you have not, uhm, therefore, you have not changed the existing regional jet growth plan --

It's the same growth plan, more or less, that was in place on September 11th.

And we continue to follow it.

We think we are going to get things worked out with the pilots as it relates to regional jet.

We think we are going to get it worked out as it relates to co-chair so we have been, you know, marching down both of those paths and while on a parallel basis working with the pilots.

If you are successful in reaching agreement with the pilots, do you think you might revise your regional jet plan and further increase the number of regional jets in the system beyond what you had previously planned?

The regional jet delivery lead times are pretty long.

So we always had a plan to get up to about close to 250 regional jets by 2005.

And we are sticking to that plan.

And that's what we are working towards.

And we are not ordering anything above that original commitment.

Okay.

One other question, completely different subject.

And relating back to the types of financing alternatives.

Did you -- have you looked into following Midwest Express's lead?

Granted, different order of magnitude, in attempts to raise additional equity either publicly or privately?

I think there's been -- mean, Continental did an equity -- common equity.

Our situation, you know, if we -- it kind of difficult to imagine a world where we have a difficult time accessing the markets on a secured transaction that we could actually get an equity transaction done.

Okay.

Thank you both very much.

Thank you.

Thank you.

We do have one final question from Gary Chase.

And please state your company name.

Hey, guys.

It's Gary Chase from Lehman Brothers.

Hey, Gary.

Quick question, Jake.

The pilot agreement, the co-chairing authorization, is that specific, U.S.

Airways or is it a blanket authorization.

We are working it -- the one we are working on is specific to U.S. Airways.

Okay.

And I assume that that part of the agreement, the whole agreement is contingent upon the equitable participation?

We're working with the pilots on sort of finalizing all the details of the co-chairing piece of the authorization.

And because of the situation with U.S.

Airways we are hoping to get that into place actually potentially ahead of the rest of the agreement because you know, there's obviously a lot of benefits to us and to U.S.

Airways in getting that agreement up and running because there is some lead time to building up, you know, building up the -- the, you know -- getting the schedules aligned and systems aligned.

There are lead times so we hope to actually get that in place perhaps ahead of the rest of the agreement.

Do you have reason to believe that the pilots would be willing perhaps to separate that just in terms of the provision that everybody has to participate equitably?

We are working with them on that because I think that they understand the need to get that piece of the recovery plan rolling because as I said, there is a long lead time to it.

There is a lot of benefits to it.

And it's something that we, you know, that we think, you know, works, you know, works for us and the pilots because, you know, the East Coast is simply a market that we really can't access ourselves and so we think that, you know, we're sort of natural partners with U.S.

Airways and are working with the pilots, as I said, to get that up and running ahead of the rest of the agreement.

Because we need to deal with the lead-time issues.

Jake, just a technical point.

On the 3.4 billion that you referenced in unencumbered aircraft, can us just give us the portion that's section 1110 eligible?

A little less than half.

And just one question for Rono.

I mean, you know, I was listening with interest when you went through the numbers following -- you know, on Sam's question about corporate profitability.

Can you maybe elaborate a little bit on what gives you confidence?

We all know that the -- you know, historical correlation has been with GDP.

You know, from the way you described it, I guess what gives you confidence that it's not an $18 billion disinclination to fly as opposed to a $3 billion disinclination?

Well, first of all, what's interesting is that corporate profitability and GDP were closely correlated for the last 15 years so one interesting question is what caused corporate profitability to break away from GDP?

And remember, we got into the situation of airline revenues weakening before 9/11 so it was back in the early part of 2001 that we were struggling with why is airline revenues down in the face of a pretty strong GDP growth?

That's when we did [INAUDIBLE] with various potentials drivers and we saw it correlated so closely to corporate profitability.

So it's the experience before 9/11 that causes us to think that that's the real key driver.

But as Sam pointed out, I mean, we are not stating for a minute that if corporate profitability recovers, that airline revenues will recover fully with that in sync.

There will still be a structural portion that is damaged beyond the corporate profitability piece but the important thing is that is the key driver in our mind.

Thank you.

And thank everybody for joining us today in the call.

And we look forward to talking to you again next quarter.

Thanks very much.

Thank you.

This concludes the second quarter conference call.

We thank you for your participation.