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Operator
Good morning and welcome to the UAL Corp. earnings conference call for the first quarter of 2006.
My name is Bill and I will be your conference facilitator today.
UAL's Earnings release can be found on the Company's Website at www.united.com.
Following opening remarks from UAL's management there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).
This call is being recorded and is copyrighted.
Please note that it cannot be recorded, transcribed or rebroadcast without UAL's permission.
Your participation implies consent to our recording of this call.
If you do not agree to these terms simply drop off the line.
I would now like to turn the presentation over to your host for today's call, Mr. Robert (indiscernible).
Please go ahead, sir.
Unidentified Company Representative
Welcome to the UAL first-quarter earnings conference call.
The earnings announcement was released early this morning.
Our prepared remarks should run about 25 minutes.
After that we will open the lines to questions from analysts and investors for about 35 minutes.
At 11:30 Eastern Time we'll have a call with the members of the media for roughly 30 minutes.
Let me point out that the statements in the press release and those made during this conference call may contain various forward-looking statements which represent the Company's expectations or beliefs concerning future events.
All forward-looking statements are based upon information currently available to the Company.
A number of factors could cause actual results to differ materially from our current expectations.
Please refer to our press release, Form 10-K and other reports for a more thorough description of these factors.
And now I'd like to turn the call over to Glenn Tilton, UAL's Chairman, President and CEO.
Glenn Tilton - Chairman, CEO
Thank you, Robert.
Good morning and welcome, everyone.
Joining me this morning and participating on the call will be Jake Brace, our Chief Financial Officer;
John Tague, our Chief Revenue Officer; and Pete McDonald, our COO.
We appreciate all of you joining us today for the Company's first conference call post emergence from Chapter 11 which marks an important milestone for our investors, our customers and our employees.
As you all know, we emerged from bankruptcy three months ago as a much stronger and a more competitive company.
And while the extraordinary gain that we reported today is not an indicator of our post reorganization financial performance, it is a reflection of the magnitude and the effectiveness of that restructuring.
That work required focus and discipline and we are going to now apply that across the organization as we take United forward into the next level.
The Company is ready to put the distractions of restructuring behind us and focus our full attention on margin improvement and reducing cost, realizing our revenue potential and unlocking the full value of the significant assets that all of you know we have in this portfolio.
In the first quarter we've had to manage the complexity of fresh start accounting.
As a result we have structured our call today in two parts.
First, we will focus on the results of the ongoing business and Jake, John and Pete will each speak to their area of personal responsibility.
Then Jake will review the key items related to the complexity of fresh start accounting before we take your questions.
The Company today is on solid financial footing, ending the quarter with a strong total cash balance of $4.5 billion, boosted by over $400 million of positive operating cash flow.
Despite a 33% increase in fuel prices to record high levels, our operating results improved by $79 million driven by a 14% increase in total revenue.
That said, our controllable costs for the quarter do not yet reflect United operating at our most efficient level.
And Pete will address the opportunities we have to further reduce costs including the targets we've set for ourselves into 2007.
So now I'll hand the call over to Jake to take us through the financial results.
Jake, over to you.
Jake Brace - EVP, CFO
Thanks, Glenn.
Good morning, everyone.
As I review our first-quarter performance, let me remind you, as Glenn alluded to, that because of United's emergence from Chapter 11 we implemented Fresh Start accounting and, as a result, have a new reporting entity affective February 1.
Assets and liabilities were restated to fair value and retained earnings were reset to zero, therefore results for the quarter are divided into predecessor company January results and successor company for February and March results.
Accordingly our financial information shown for periods prior to February 1, 2006 is not comparable to consolidated financial statements presented after February 1.
To provide some basis for comparison, however, we are presenting combined financial results of our predecessor and successor company for the first quarter of 2006.
It is these results we will refer to throughout the call.
I will, as Glenn mentioned, discuss Fresh Start accounting further at the end of the call.
Our exit from Chapter 11 resulted in a net gain of $23 billion for the quarter primarily consisting of non-cash reorganization items related to the discharge of liabilities and the revaluation of assets and liabilities to their estimated fair value, as I mentioned.
You will recall that we expected these gains during the quarter in which we emerged from Chapter 11.
Excluding those reorganization items, UAL reported a net loss for the quarter of $306 million, essentially the same as last year's.
Operating results for the first quarter improved by $79 million despite fuel driving $314 million in higher costs.
So while we were pleased with the improvement in operating earnings, the improvement was all on the revenue side of the equation.
We are dissatisfied with our controllable cost performance and, as Glenn mentioned and he will talk more about, we are implementing a plan to address this.
Our focus is on unit earnings measured by RASM minus CASM excluding fuel.
On that basis our mainline unit earnings for the quarter increased to $2.67 from $1.97 a year ago.
Mainline RASM increased 11% in the quarter; mainline CASM ex fuel increased 3% compared to the first three months of 2005.
The increase in nonfuel CASM was partially driven by Fresh Start accounting and non-cash charge for stock-based compensation expense, but clearly we can do better and are committed to do so.
One area we saw a significant operating improvement was in our regional affiliates contribution which increased by $94 million despite $52 million higher in fuel costs.
This resulted from strong revenue performance, unit revenue was up 13%, and improved nonfuel cost performance resulting from the restructuring implemented in the third quarter of 2005.
On the expense side, total operating expenses rose 11% or $471 million; fuel expense for both mainline and regionals, which accounts for the largest portion of the increase in costs, rose $314 million, as I mentioned, to $1.3 billion.
Average mainline jet fuel prices including taxes for the quarter were $1.95 per gallon compared with $1.47 last year.
I want to point out a few other areas that affected our expense line.
Salaries and related costs increased 5% or $51 million driven by the $69 million of stock-based compensation expense recorded in the quarter.
This expense resulted from the implementation of equity incentive plan provided for in our plan of reorganization.
Purchased services increased 19% or $69 million driven by outsourcing, traffic-related costs and post bankruptcy professional fees.
For the quarter aircraft maintenance materials and outside repairs increased 18% or $40 million due to engine-related maintenance.
Pete will discuss these operating expense increases in more detail and describe our plans to improve our overall cost performance.
Cost of sales increased $50 million in the quarter or 35% primarily due to increased costs at the Company's fuel trading subsidiary.
These costs were offset dollar for dollar by higher revenues.
Turning to below the line, non-operating expenses increased $88 million primarily due to higher interest related and higher debt balance.
Year-over-year results also suffered because of a gain on fuel hedges of $42 million we recorded in 2005.
Now to discuss our revenue performance and future plans, here's John Tague.
John Tague - EVP, CRO
Thanks, Jake.
While we are encouraged we are certainly not satisfied with our revenue results for the first quarter.
Industry capacity restraint and strong underlying passenger demand have created a relatively favorable pricing environment.
This combined with our improving revenue execution and the benefits of our differentiated customer strategy led to a 12% year-over-year improvement in consolidated passenger unit revenue.
Recall that in 2005 United introduced capacity discipline to the domestic market when we restructured our overall network, shifting weaker domestic mainline capacity to international markets while backfilling with Express operations to maintain domestic coverage.
In the first quarter of 2006 the rest of the industry began taking the same steps.
Industry combined domestic capacity declined 6%.
This has resulted in a pretty healthy domestic revenue environment.
United took advantage of this by increasing consolidated domestic capacity by about 4%, all of which came from aircraft utilization improvements.
Year-over-year utilization of mainline aircraft increased 3% to nearly 11 hours per day while United Express utilization improved by 7%.
Overall system capacity including Express increased by less than 2%.
Consolidated system demand was strong during the first quarter as traffic was up 4% year-over-year despite the fact that the Easter holiday moved out of the quarter and into April this year.
Consolidated first-quarter load factor was 1.5 points better than last year and yield improved by 10% over the same period a year ago.
United continues to improve on our revenue execution across the organization.
In revenue management we have taken an active roll in capitalizing on the favorable supply and demand environment.
United has initiated 16 major domestic fare increases in this quarter alone of which six have been matched by our competitors in addition to dozens of international and smaller tactical initiatives that were undertaken during the quarter.
We have introduced multiple fare initiatives to lift arbitrary caps as recently as this weekend and to restore important fare rules such as minimum stays.
Though only partially matched by our competitors, we continue to believe these initiatives are revenue positive for United and the industry.
Our selling organization continues to drive more discipline and fiscal responsibility into our relationships with corporate customers and travel agencies.
While providing value to them we are increasing the return for United.
The team is better aligning discount practices with the strong market environment and we have taken the step of removing non performing accounts from our corporate portfolio.
Mileage Plus celebrates its 25th anniversary this month and we're doing so by reinventing the program.
Recently we made changes to the core Mileage Plus program that preserved key customer benefits, but also added cost saving discipline to the program.
We're also very excited about our May 1 launch of the new Mileage Plus VISA program called Choices.
This will make our branded credit card the best travel-related credit card in the market and we will offer our customers new and more flexible redemption options.
This initiative should be popular with our customers and will drive new revenue for United through the increased sale of miles.
Looking forward, the revenue environment continues to be strong and our capacity plan is modest.
These factors taken together have led us to the conclusion that we can reduce the amount we spend on demand generation.
We plan to reduce expenditures on advertising, marketing promotions, sales and discount expense aimed at simulating new demand.
We believe that focusing on the consistent delivery of quality service to our customers is, in the end, the best strategy to keep demand strong as we increase our customers' loyalty.
Separately, we are also taking steps to reduce our overall cost of sales.
Most significantly, we recently signed several GDS and a large online travel agency deal that will provide substantial savings for the Company, particularly in the domestic marketplace.
We are also transforming our call center operations, lowering costs, improving quality and generating new streams of revenue.
United has demonstrated an ability to drive unit revenue growth by executing on the fundamentals and striving to bring more commercial discipline to the marketplace in the form of capacity restraints and compensatory pricing practices.
Furthermore we strongly believe that our strategy to differentiate our products and services for our best customers will further separate United from the pack.
To this end we continue to build on our successful products and brands such as Economy Plus, TED, [XPlus] and PS.
We have recently announced a significant investment to substantially upgrade our international first and business class onboard product, a very key decision that will benefit our most valuable customers.
In addition, we recently announced a newly created organization responsible for the customer experience enterprise wide at United.
This group will be held accountable for defining our customers' experience in a way that sets United apart, improving our ability to attract and retain high-value customers.
They will also coordinate the delivery of this experience across the entire airline.
Our success with this newly created organization will be measured by our ability to drive greater customer satisfaction, loyalty and ultimately a greater share of higher paying customers.
We are pleased with the revenue progress we have made during the first quarter, but we have a significant work plan to complete and we will only be satisfied once we are posting unit revenue results that are significantly better than the rest of the industry.
Now over to you, Pete.
Pete McDonald - EVP, COO
Thanks, John.
In the first quarter, as fuel prices continued to climb higher, we also saw our nonfuel expenses increase versus 2005.
While our options for influencing fuel prices are limited, we are attacking our nonfuel cost with a comprehensive set of strategies designed to create cost savings.
We know we can do more to reduce our CASM and, as Glenn said, we are attacking these costs with these same rigor and discipline we used in the restructuring.
Before I describe these cost savings initiatives, let me go into more detail on two items Jake mentioned.
First, purchased services increased 19% in the quarter or some $69 million.
Because of our higher passenger loads, traffic-related costs increased $16 million.
Various outsourcing initiatives contributed $24 million to the increase, the largest being our agreement to outsource our IT support to EDS.
Second, aircraft maintenance materials and outside repairs increased 18% or $40 million primarily related to our engine maintenance program.
We began outsourcing a portion of the repair of our PW4000 engines which resulted in higher costs for the quarter. $14 million of that expense is related to the transition of the work which will continue into the second quarter as well.
We also experienced a rate increase in the Power by the Hour contract of our Airbus B2500 engines.
These are clearly ongoing expenses for which we'll have to find offsets.
However, our strategy of outsourcing maintenance work we are not competitive in while bringing in maintenance work we can do efficiently is the right one and it will contribute to our unit earnings.
We see inflationary pressures in many areas that will affect our nonfuel expenses.
We will be aggressive in identifying and executing on opportunities for significant cost savings and the foundation for achieving these cost savings was laid during our restructuring.
Our top priority during the restructuring was to capture the savings that were enabled by the court.
However, we simultaneously initiated a number of continuous improvement programs designed to reduce cost and improve our operations.
We are now able to apply these principles on a larger scale and will do so across the enterprise.
The benefits of these actions will begin to accrue this year and increase in 2007 and beyond.
Our cost savings initiatives will drive consistency and standardization to our operations.
For 2006 United's business plan includes $300 million in benefits over 2005 related to these efforts.
The Company is committed to an additional $400 million in cost savings starting in 2007 over and above what is in the business plan.
Let me briefly describe or you some of these initiatives starting with those now underway that will contribute to the 2006 target.
Our resource optimization program allows us to tighten aircraft turns and our goal is to safely reduce average turn times by eight minutes system wide.
The first phase was successfully initiated during the first quarter in San Francisco and in all TED markets.
In May 2006 we are applying our tighter turns to L.A. and Denver and Dulles and O’Hare will follow.
Resource optimization also allowed us to depeak three hubs -- O’Hare in 2004, Los Angeles in 2005 and San Francisco in 2006.
Resource optimization efforts resulted in a first-quarter increase in mainline fleet utilization of nearly 3%.
With elimination of remote terminals in Los Angeles, San Francisco and Washington Dulles, we got rid of the cost of running buses between remote terminals and associated lease costs while improving the customer experience.
Last week we announced as part of the Company's ongoing continuous improvement efforts the consolidation of airport and cargo operations into one organization.
There are many efficiencies we can create by bringing these two organizations together, further streamlining operations and producing additional cost savings.
In the first three months of 2006 productivity improved 6% compared with 2005 as we reduced full-time equivalent employees by 5% and increased mainline capacity by 1%.
Both the continuous improvement efforts across the operations and the outsourcing of certain noncore functions contributed to the productivity improvement.
In 2007 we see more opportunities for savings.
We are rigorously examining the work across the organization to streamline functions, improve processes and eliminate unnecessary work.
As a result we will achieve a significant reduction in our general and administrative costs.
As John mentioned, we will reduce our spending on advertising, marketing and promotions.
We are also instituting a new vendor management process that will improve the value we receive and reduce our overall costs.
We expect these items to yield cost savings of approximately $400 million in '07.
Continuous improvement will fundamentally change the way we work.
Before I close I want to turn to our operational performance.
In the most recent data available from the U.S.
Department of Transportation United was ranked second for the last 12 months ending March 2006 in on-time arrival 14 performance and ranked second in the least mishandled baggage per 1000 claimants among the six major network carriers.
Our on-time performance in the first quarter of '06 was not as strong.
This decrease was due in part to the record rainfall that hit California where we have two hubs and were disproportionately affected.
There was another factor at work as well.
He operational changes we have begun to implement will lead to more efficient and cost-effective processes over time, but we saw some short-term effects on our on-time performance as employees adjusted to the changes we have been rolling out.
We are focused on returning this metric to its high 2005 levels and our stronger April performance indicates that we are regaining our footing.
Now I'd like to turn the call back to Jake.
Jake Brace - EVP, CFO
Thanks, Pete.
Upon emergence from Chapter 11 the Company both issued and reinstated various securities as contemplated by our planned reorganization.
The Company also adopted Fresh Start reporting in accordance with SOP 90-7.
Under Fresh Start the Company's assets and liabilities, as I mentioned, were remeasured using fair value.
And also as part of Fresh Start we adopted several new accounting policies.
As a result there are many changes to the run rates of various revenue and expense lines.
I'd note that these changes are predominantly non-cash in nature, but do affect the comparability of the results.
Because the charges are quite extensive and complicated we will be filing an 8-K later today explaining them in some detail.
In summary, however, the Fresh Start accounting changes plus the expenses related to stock-based compensation reduced our first-quarter operating earnings by approximately $120 million with 100 of that being on the expense side.
It reduced our net earnings by about $160 million for the quarter, again predominantly all non-cash.
Now let me give you a few more details.
We ended the quarter with an unrestricted cash balance of $3.6 billion, a restricted cash balance of about $900 million for a total cash balance of $4.5 billion.
Unrestricted cash and short-term investments increased 1.8 billion during the quarter mainly due to drawing down our exit financing, although we did generate more than $400 million in operating cash flow in the quarter.
For the quarter the Company had hedged approximately 32% of the first-quarter mainline and regional fuel consumption; we recognized a $9 million gain from the fuel hedges and operating income for the first quarter.
The Company's non aircraft capital spending in the first quarter was about $60 million and for the year we expect non aircraft capital spending to be $400 million.
Turning to the future, we expect mainline fuel prices to average $2.15 per gallon for the second quarter and $2.06 a gallon for the full year, both including taxes.
We do not currently have any fuel hedges in place but plan to continue to hedge future fuel purchases as circumstances in the market permit.
For both the second quarter and the full-year period we expect mainline capacity to increase approximately 2.5 to 3% and United Express capacity to be up 8 to 9%.
This leads to consolidated capacity growth of 3 to 3.5% in each period.
We estimate that mainline CASM excluding fuel will be 3 to 4% higher in the second quarter than it was for the same period a year ago.
And with that now, operator, we're ready to open the call for questions.
Operator
(OPERATOR INSTRUCTIONS).
David Strine, Bear Stearns.
David Strine - Analyst
Jake, I think you just mentioned the CASM guidance for the second quarter of 3 to 4%.
Is that also what you expect for the full year?
Will it be much different from that in terms of year-over-year increase?
Jake Brace - EVP, CFO
We haven't provided any guidance for the full year.
We are implementing this plan that Pete outlined to reduce our costs in 2007 by another $400 million and we haven't nailed down how much of that will occur in 2006.
So right now we're just providing guidance for the second quarter.
David Strine - Analyst
Okay.
And then with respect to the second quarter then, can you express in a little more detail where on a unit basis you're expecting the pressure and then what may be mitigating it?
Jake Brace - EVP, CFO
I'll start and then maybe Pete can add to it.
But the second quarter as we look forward looks a lot like the first quarter in terms of year-over-year pressure.
So we had a stock-based compensation expense of $69 million in the first quarter, the second quarter is going to be less.
We had, including stock-based compensation expense, $100 million of higher expenses related to Fresh Start, so areas like depreciation, amortization -- we had also some revenue effects of Fresh Start.
That goes down a little bit in the second quarter, but the same areas that we saw in the first quarter are pressuring second quarter.
And then purchased services and maintenance materials are continuing to be a challenge.
Pete, I don't you want to add to that.
Pete McDonald - EVP, COO
There are two things in the first and second quarter that don't repeat in the third and fourth quarter and that's our PW4000 transition cost of $14 million in the first and $18 million in the second.
And obviously the programs that we've talked about with regard to reduced advertising and G&A costs are items that we can execute on fairly quickly.
So that gives you a little more color on what's going on beyond the second quarter.
David Strine - Analyst
Okay.
And then one more question for Jake.
With respect to the debt balance at end of the quarter, can you provide that number?
Jake Brace - EVP, CFO
I don't have it here at my fingertips, David, but we're going to be filing our 10-Q tomorrow and it will have all of that in it, but nothing unusual happened in the quarter.
I just don't have the exact number at my fingertips.
David Strine - Analyst
Okay, thanks.
And then last question for Glenn.
Just a broader strategic question in terms of how you're perceiving the business.
My understanding of the business model as you guys were exiting Chapter 11 was that you were going to have more diverse product offering and with that would come slightly higher CASM but also a lot better RASM.
And that your feeling was that you would be able to drive a RASM premium over the industry that was significant.
When we look at the first quarter and your RASM growth was pretty consistent with what we saw elsewhere in the industry and the EBITDAR margin looks to be a little bit shy of what others are doing.
So the question is what do you see going forward, what changes specifically do you think will begin to enhance the RASM premium to the extent where the margin will be as good or even better than competitors?
Glenn Tilton - Chairman, CEO
David, thanks for the question.
John spoke to a number of the initiatives that we have underway to continue to drive specific revenue performance across all of the products that we are going to introduce to the market including those that you speak to that we already have in the market and John mentioned in his preamble.
But we have just begun to move those differentiated products into the market.
I'll just speak to one where the results, as the first quarter shows, are coming through and that's the XPlus product that we have in the Express carrier portfolio.
The market is responding very well to it, but in many instances it's early days for the market to even understand it's there for of them.
A first-class product in a 70 seater is being very, very well received and we think that these products as we put them into the market are really going to generate momentum.
We also have opportunities to increase our revenue across the full portfolio of products that includes Mileage Plus and Choices, as we just announced.
So we have every confidence in the strategy, we just want to make certain that we aren't costing the strategy with costs that are not related to it so that we can improve the margin rather than focusing exclusively on the RASM.
John, do you want to add anything to that?
John Tague - EVP, CRO
I would certainly echo Glenn's comments that it's early days, but we clearly have not yet reached our revenue potential.
Per se the only real investment we have and differentiation right now is the Economy Plus configuration.
And we're actually performing in access of our expectations on that.
You might say PS is another investment and that once again is performing uniquely well.
So we have direct revenue streams that are associated with this capacity differentiation and we're highly confident we're getting a return on those investments.
While more can and will be done, I believe that her absolute RASM comparison, while not the leader in the industry, is extremely competitive.
And obviously as you know, David, our stage length is close to 20% longer than American.
So more to do.
Our performance will, I believe, improve relative to industry, but solid progress so far.
David Strine - Analyst
That's helpful.
Thanks a bunch.
Jake Brace - EVP, CFO
I'll give you a preliminary answer to your question on the debt balances and we haven't quite finalized things as the accountants and the auditors go through all the Fresh Start adjustments they need to go over.
If you look at both the current and long-term piece of debt and capital leases, we're right around $10 billion.
That's just the on balance sheet piece.
And then obviously you'd have to add the off balance sheet to it.
But nothing major changed from what we were looking at in the PR.
David Strine - Analyst
Thank you.
Glenn Tilton - Chairman, CEO
David, it's Glenn again.
I know that we're looking forward to having Jake and Pete with your conference tomorrow to talk further on the questions that you posted.
David Strine - Analyst
We're looking forward to seeing you.
Thanks a bunch.
Operator
Jamie Baker, JPMorgan.
Jamie Baker - Analyst
Good morning, gentlemen.
A question for Jake or Pete.
It isn't clear to me that the entirety of your cost reductions will actually diminish CASM or simply fall under the category of avoid costs in 2007.
If I attribute the full $400 million of savings to the 2007 business plan, at least what I believe to be the last iteration of that, it seems to imply an ex fuel CASM target of below $.075.
Is that the right target that we should be benchmarking it off of?
Jake Brace - EVP, CFO
We're not giving any fresh 2007 guidance as we're not giving guidance for anything beyond the second quarter at this time.
But I think I'll let Pete to speak to the program.
We know we are facing inflationary pressures in the business plan -- obviously incorporated some of those inflationary pressures into it, and this $400 million program that Pete spoke to is designed both to offset in certain areas and in other areas to actually lower the run rate cost going forward.
Pete McDonald - EVP, COO
I would just add, Jake's right, there is some inflation in the business plan.
These savings are incremental to that, but we are facing more inflationary pressure in some areas and we just have to see how much that is going to be, but we're very confident in obtaining the $400 million.
Jamie Baker - Analyst
Okay, got it.
And second question, I guess for John, on XPlus, I see that Delta and Northwest elusive you're going to get into the two class RJ game at some point.
I guess that means an announcement from American can't be far behind.
Just wondering if you've ever quantified the revenue share shift that you think XPlus drives so that we might be able to model some potential loss of that share going forward?
John Tague - EVP, CRO
Well, Jamie, it's only recently that we've really gotten the product to scale, and as a matter of fact only really in the last six weeks that we've been able to have a proposition we can go out and promote.
So I think it's too early to quantify.
I will point out that this product is unique in my mind in terms of its economic applicability to the 70 seaters, and United possesses unique flexibility certainly relative to American currently with the application of the 70 seat product.
So I think that we're ahead of the game here.
We have over 100 aircraft working here, focusing very, very hard on the Chicago marketplace.
So while I would accept that others will follow, I don't know that our principal competitor, at least currently, can match the product.
Jamie Baker - Analyst
Okay.
Just a last question for Glenn, if I may.
Given a somewhat aging fleet of 75's and 76's and given where Boeing is on the 787 it seems that you would at least be locked out until 2012 on any 787's.
Any pressure to make a decision on that aircraft type?
Glenn Tilton - Chairman, CEO
What we've said, Jamie, is what I'll repeat.
When we get to the juncture -- when we're on this call talking to you and we are beating our business plan and beating it by some considerable measure we'll mature the conversations with Boeing to talk about the possibility of the role that the 78 may play in our fleet.
Jamie Baker - Analyst
Okay.
Thanks, everybody.
Appreciate it.
Operator
Gary Chase, Lehman Brothers.
Gary Chase - Analyst
Good morning, guys.
Just a couple quick cleanup questions on the cost side.
You guys referenced the plan a lot in the press release and in your prepared remarks.
Is the plan of reorganization still the document that we ought to be using when we think about that or have we evolved beyond -- has the reality of the business evolved to where we probably shouldn't be paying that much attention to what was filed several months ago on that side?
Jake Brace - EVP, CFO
The answer to that, Gary, is both yes and no.
Clearly the fuel environment we're in is a lot different than what the plan of reorganization included, but the revenue environment is also a lot different.
We went back to look and compared our first-quarter performance on fuel and revenue to what was in business plan, we see that fuel -- that revenue, I'm sorry, outstripped fuel as far as beating the business plan.
So there's clearly that going on.
Other than that, and we've identified a couple of areas here that are deviating from the business plan, both purchased services and aircraft maintenance expense, but other than that the plan of reorganization is the starting point for the cost analysis if you will -- ignoring fuel.
Gary Chase - Analyst
And maybe I could ask -- so when you say $300 million is in the plan that refers to the POR, and when you say $400 million better than planned, we should assume that is relative to the POR, I guess, is what I was trying to say.
Glenn Tilton - Chairman, CEO
That's correct, the POR included $300 million of cost savings in 2006; that is in those numbers.
The POR did not include any of the $400 million we're talking about in 2007.
So you should think about subtracting the 400 from the 2007 numbers, and obviously adjusting for fuel and revenue accordingly.
Gary Chase - Analyst
When we think about the magnitude of opportunity as we look at 2006 on the cost side of the constraint or the gating element, whatever you want to call it, is the rate at which you can spool up that $400 million, right?
Unidentified Company Representative
Yes, that is correct, but there are a couple of areas that we have mentioned today like general and administrative costs and advertising and promotion costs that we believe we can execute on very quickly.
So we are working through that process, but we are definitely going to be able to export some of those savings into '06.
Gary Chase - Analyst
Is that included in the second-quarter guidance, that you would have savings on those fronts?
Jake Brace - EVP, CFO
Very minimal, if any, in the second quarter.
Obviously, we're sitting here almost halfway through the second quarter.
But what savings programs that we have implemented on top of the $300 million are included in that cost guidance for the second quarter.
The other thing I'd note that I touched on earlier is that if you look at the entire fresh start effect that I mentioned earlier that I cited as $100 million in the first quarter, that goes down a little bit in the second quarter, and then the third quarter is a little bit less than that too.
It is mainly driven by the stock-based compensation which tends to go down each quarter this year.
So that is stuff that is not in the plan or reorganization.
Pete McDonald - EVP, COO
But third and fourth quarter we will be exporting these 2007 savings into 2006, for the third and fourth quarter.
Gary Chase - Analyst
Right.
Okay, guys, I apologize; just a couple other very quick ones.
Pete, do any of the cost goals that you're talking about require increased capacity?
In other words, do you have to add capacity in order to achieve these savings, getting better leverage out of the existing expense base, or are these opportunities to actually remove costs from the structure?
Pete McDonald - EVP, COO
Yes, we're moving from the structure.
It doesn't require any additional capacity, although obviously through resource optimization and we add capacity, that would be incremental to these savings that we're going to be achieving.
Jake Brace - EVP, CFO
Just to be clear, though, the capacity guidance that we gave you includes our expectations for resource optimization this year, but nothing beyond the capacity guidance that we're giving you so far.
Gary Chase - Analyst
Just one last one maybe for Glenn.
Could you just articulate for us -- I mean, I understand it is not guidance, but have you issued anything in terms of an internal goal?
Is the goal at United on the cost side to offset inflation, to do better than that?
How are you thinking about this from an internal perspective as you talk about the need to get costs down?
Glenn Tilton - Chairman, CEO
Two ways, Gary.
Number one, we had a leadership call this morning before we got on the call with you.
And Pete spoke to the $400 million of identifiable new work that we are going to commit to as an organization in 2007.
But as both Jake and Peter have said, we are going to bring as much of that work forward as we possibly can.
We also spoke to continuous improvement on the call this morning with the leadership team and we also spoke to the issue organizational -- leaning out the organization.
A lot of renacular for it here with respect to overhead or G&A.
But at the end of the day a good example that we spoke on the call this morning was the collapse of an organization, and taking cargo and combining it together with airport operations.
We believe -- as a matter-of-fact we know, that we are going to discover opportunity for improvement in efficiency and productivity that are not yet articulated in any one particular objective that's included in the $400 million.
It's just a different way of working across those two organizations with the total elimination of a structure.
That structure is gone and a senior vice president is gone.
Where we had two senior vice presidents we now have one.
And I don't think that's the last, Gary, that you're going to see of our leaning out the organization including the executive staff.
As a matter-of-fact, I shouldn't say that I think, I should tell you that I know.
Gary Chase - Analyst
Okay, great.
Thanks.
Operator
Mike Linenberg, Merrill Lynch.
Mike Linenberg - Analyst
Hi, good morning.
Just some clarification with respect to the 300 and $400 million.
How far along are you in achieving the $300 million for the year?
If you could give us some sort of percentage sense.
And I'm asking this only because I think Pete, very quickly, indicated that you were going to bring some of the $400 million of targeted '07 savings into 2006.
Any clarification on that would be great.
Jake Brace - EVP, CFO
The way I would characterize it is that -- and I'll use resource optimization as an example of where this is in our plan for 2006 and we started in San Francisco and we're moving to L.A. and Denver and Chicago and Dulles will be later in the year.
So we are on track for tightening those turns, depeaking the schedule and reducing actual block.
So we are on schedule and all of those savings that we get in '06 with this program we will get the full benefit in '07 because we're ramping up in '06.
So that gives you a feel for the $300 million that's in our plan and we are on track to obtain those savings.
For the $400 million, which are different programs than we have in the 300, we will begin executing on those initiatives -- like we said today, advertising promotion, general and administrative and our new flight planning system that will begin to see benefits sort of incremental to the 300 in the third and fourth quarter.
Mike Linenberg - Analyst
Just based on everything that's been said we should anticipate much better non -- maybe instead of saying much better -- we should see better nonfuel costs in the latter half of the year.
Is that correct?
Jake Brace - EVP, CFO
I think that's the trend.
As I said, there's both the -- as we ramp up the $300 million throughout the year and get some of the $400 million in 2006 because some of it will hit 2006, and we see somewhat of a lessening of the negative affect of all the Fresh Start items that I've mentioned, all of those will go to improve.
Now at the same time, obviously there are month-to-month inflationary pressures and we're not going to do the math for you as to exactly how those offset each other, but our expectation is that they will tend to reduce our nonfuel our controllable costs, if you will, going forward.
Mike Linenberg - Analyst
Okay, thanks.
And then just my second to John.
When we look at -- I know you did spend some time on the revenue diversification or the different product offerings, when we look at TED and PS going forward, should we anticipate that they stay relatively constant with respect to fleet size or could we see you rolling out new PS markets later this year or a bump up in the size of TED?
Any comment would be great.
Glenn Tilton - Chairman, CEO
Our current perspective, and it's certainly subject to change in the future, is that those products are relatively stable right now.
TED grew significantly throughout last year.
I might well point out it's actually configuration very dense and it is doing extremely well in the leisure market.
PS, we added a modest amount of frequency in the existing city pairs, but I don't think we have anything of significant ahead of us, but we're continuing to watch of the space.
So I wouldn't look for any step change there.
Mike Linenberg - Analyst
Okay, very good.
Thank you.
Operator
Ray Neidl, Calyon Securities.
Ray Neidl - Analyst
Just some of the line items that you're talking about in the cost area.
Did you say that purchased services, we can expect to see that line permanently higher going out the remainder of this year and next year as well as aircraft maintenance?
Jake Brace - EVP, CFO
Not quite.
Again I'll let Pete add to this.
But purchased services we have seen an increase and our expectation of that increase will likely continue because of all the outsourcing efforts that result in costs showing up in that line as opposed to the salary line.
The aircraft maintenance line Pete mentioned we had a $14 million transition cost in the first quarter, in the second quarter the equivalent number is about $18 million, but then it goes away in the third and fourth quarter.
So a slightly different pattern on those two line items.
Ray Neidl - Analyst
Okay.
And it looks like with the guidance that you've given going forward that you're increasing your use of regionals.
Is that a good assumption to make?
John Tague - EVP, CRO
I think the fleet is relatively stable, although we've not provided guidance on that.
Much of this is certainly year-over-year carryover growth that you're seeing.
So no significant changes from what we laid out on the POR relative to that I don't believe.
Jake Brace - EVP, CFO
I think we have 300 regionals and it's I think flat for the rest of this year and then beyond that actually it goes down a little bit in terms of the number of jets.
Ray Neidl - Analyst
Okay.
Did you give us any specific RASM guidance going forward later on this year?
You said that unit revenues appear to be very strong.
Did you give us any guidance for modeling?
Jake Brace - EVP, CFO
No, Ray, you didn't miss anything.
Ray Neidl - Analyst
Okay.
I tried anyway.
My last thing is one of the areas that you said you're going to reduce the cost is G&A and advertising.
Couldn't G&A have been reduced while you were in bankruptcy?
And then as far as advertising goes, you've probably got the best ads in the industry, I'm just wondering do you now feel that they are just fluff entertaining and they're not really producing any revenues for you, is that why you're reducing your advertising expenses?
Glenn Tilton - Chairman, CEO
No, I think that we're very pleased with the performance of the advertising.
We certainly appreciate your comment that reinforces our view.
But in large measure, a good bit of our advertising that we launched during our Chapter 11 experience has done its work and it has created really the customer awareness of the continuum of the products that we wanted.
And it's largely tactical advertising that we are now referring to that we think given the current state of the market and the revenue environment we can forego during a period of time where we're really focused over the horizon, and we're not focused on the front end of this discussion on continuous improved cost reduction.
So John and the team have done a wonderful job with the advertising and, frankly, we can harvest it for a little while.
That's where that is.
But you should not think that that advertising campaign -- I'll let John add to this -- that advertising campaign doesn't get legs and it isn't going to continue because it will.
John Tague - EVP, CRO
Our creative -- we're very committed to it.
It's been very successful.
So our strategic approach to customer communications will stay very much where it has been.
That being said, Ray, I'm hopeful I'm not going to have to put much money in my fare sale advertising budget for the rest of the year.
Pete McDonald - EVP, COO
Just a little more on the G&A.
Over the past several years while we were in restructuring our G&A CASM has been coming down steadily and we see more opportunity in '06 and '07 to continue to improve that.
So it's a multi-year program to continue to improve this particular item like all the items we've talked about this morning.
Glenn Tilton - Chairman, CEO
I think that, Ray, it really is going to be a continuum of work and the organization, as it improves its structure and, candidly, it's tools -- as we improve, for example, our IT performance, a good bit of the G&A that was Legacy G&A is going to fall away, no longer be necessary structure that we might have perceived previously to be necessary is no longer going to be necessary.
So we're going to learn our way out of a good bit of structure that we've had at the headquarter level.
And we'll take some dramatic steps in the years to come to continuously focus on that which is necessary at the G&A level.
Ray Neidl - Analyst
Great, thank you, guys.
Operator
Helane Becker, Benchmark Co.
Helane Becker - Analyst
It's Helane Becker.
A questions about the December -- or the March rather weather-related issues.
Jake, is there a way to quantify the cost of the flight cancellations and the delays on your business?
Because I presume that those added to expense in some number but won't be there going forward?
Jake Brace - EVP, CFO
Helane, let me start and again have Pete talk.
We haven't provided a number for that.
There are challenges in every quarter related to the operations and what we saw in the first quarter really affected us negatively in terms of our operating performance, but we haven't really made -- we don't take the view that that's sort of a freebie for us and we have to figure out ways to offset it.
So we haven't said it's ex million dollars and you should take it out of your models.
Because I think the fact is the industry is getting more -- there are just more flights around.
We're more challenged in terms of all of us running an efficient operation.
Pete McDonald - EVP, COO
Clearly delays, particularly San Francisco, when we get into these delay programs they can run lengthy and delays do cost money as do cancellations.
But as Jake said, these things tend to sort of smooth out and we're seeing a nice improvement now in April and May.
But clearly there were costs in March that were higher than we expected particularly in delay minutes and cancellations.
Helane Becker - Analyst
Okay.
And then just on the revenue side, I don't think anybody has asked this question.
Your unit revenue looks like it's still lower than the industry average.
I think somebody said that there were something like 16 fare increases taken, did you mean this year or this month?
I missed that comment.
So I was wondering if you could just talk about how you get your unit revenue to kind of grow faster than the industry average.
John Tague - EVP, CRO
I mentioned 16 fare initiatives of which six stuck in the first quarter.
We're relatively pleased with our absolute unit revenue as compared to the most meaningful comparables.
I will point out that while we're not going to share our own adjustments that are non-GAAP, I think when you look at the stage length differential that you can do, and I'm sure will, you'll come to a different conclusion about the relative competitive performance of the revenues.
Helane Becker - Analyst
Okay, great.
Thanks for your help.
Operator
(OPERATOR INSTRUCTIONS).
Glenn Engel, Goldman Sachs.
Glenn Engel - Analyst
Good morning.
A couple questions, one on the other revenue.
If I stripped out the fuel trading it looks like the revenue was up only maybe 2% and I think you're looking for 7% this year and double-digits next year in the plan.
What's going to cause the acceleration?
Jake Brace - EVP, CFO
There are several things that are going on there.
When you see our 8-K later on today you'll need that one of the changes was to other revenue in the way we record our frequent-flier revenue and it had the effect of reducing it by about $20 million year-over-year in the quarter.
And then John talked about the Choices program and obviously that's something that we're doing to drive our frequent-flier revenue beyond what was in the POR.
And our United Services activity which has been performing quite well and is on a very good growth profile is the other thing that is going to drive that.
What's probably not going to drive it, Glenn, is cargo.
We see increases in cargo, we saw increases in the cargo line item this year, as you can see, but we don't have a lot of capacity that we can add to there, so we're really dealing with that with somewhat higher yields so we're not going to see a lot of growth in cargo.
John Tague - EVP, CRO
We are seeing a little bit both in the yields and volume particularly out of Asia as we maximize the loading of our manual bit.
We're able to add some incremental volume onto these flights that we haven't utilized before.
So we're getting a little bit of capacity and a little bit -- because our capacity is essentially flat we're not going to see huge increases in cargo.
But as Jake said, our maintenance insourcing revenue we're actually quite pleased with.
Glenn Tilton - Chairman, CEO
Cargo is a good example of a piece of business that, to an earlier question, we did dramatically improve because we focused on it rather exclusive to the rest of the airline and its improvement is now a challenge for us to actually continue to improve in a significant way without changing the business model.
But it's a good example of a piece of business that actually focused on dramatic improvement during the restructuring.
Unidentified Company Representative
Yes.
And the example is obviously with the outsourcing of the cargo res and cargo warehousing significant cost reduction while simultaneously improving the service of boarding as booked and being ready for pickup as customers expect have significantly increased the profitability of cargo for us.
Glenn Engel - Analyst
The $20 million that you mentioned, Jake, about the loss of revenues from the accounting change, was that an outright loss or was that a switch to passenger revenues?
Jake Brace - EVP, CFO
There's some switch to -- I'm sorry, the change relates to the adoption of a new accounting policy and that results in an outright loss to total revenue.
Glenn Engel - Analyst
And the $120 million from Fresh Start accounting expense increases, was that $120 million not included in your plan?
Jake Brace - EVP, CFO
The 120 was 20 revenue, 100 cost.
First of all, some of it was included in our plan, but the -- for example, the revenue, we didn't anticipate any revenue in our plan -- any change to revenue in our plan.
And the Fresh Start impacts on our depreciation and amortization and our aircraft rent turned out to be greater negative than we had anticipated in our plan.
Glenn Engel - Analyst
So when you look at the plan and look at the stock compensation and the other Fresh Start accounting, how much of that is what's causing the cost inflation to be higher?
Jake Brace - EVP, CFO
A lot.
So the stock compensation was not in the plan, so there's $69 million of the stock compensation expense and that's part of the $100 million that I cited to you.
But that was totally not in the plan, we explicitly excluded it from the plan.
And then the depreciation and amortization aircraft rent piece adds as well do that.
A lot of the $100 million was not in the plan.
Glenn Engel - Analyst
Thank you.
Operator
Thank you very much, sir.
That concludes our question-and-answer session for today.
I'd like to turn the call back over to Mr. Tilton for his closing remarks.
Please proceed, sir.
Glenn Tilton - Chairman, CEO
Thanks very much, Bill, we appreciate it.
And thanks to all of you on the call for your questions and for the discussion.
As we said at the outset, United today is a significantly stronger company than we were three years ago when we entered reorganization.
We've built a solid financial footing for the Company, certainly the cash position that Jake alluded to at the beginning of the call gives us the opportunity to now focus on the things that we have discussed on the call, many of which were highlighted by your questions.
That includes the differentiated product strategy that we discussed which we think is not only working but is going to accelerate and generate momentum as we go forward as we put the products into the market for a longer period of time.
We think simultaneously we're deploying our assets much more intelligently than we have historically.
We think the workforce is now coming to understand what's expected of them post Chapter 11.
As one of my colleagues said, Chapter 11 in our performance and reorganization took a tremendous amount of discipline, rigor and perseverance and we're going to take those same skill sets and apply them to the suite of assets that we have available to us here at United to build a far more competitive company.
So thanks for your time and your questions and with that, Robert, anything further for housekeeping.
Unidentified Company Representative
No.
This ends the analyst and investor part of our call and, operator, and those of you from the media, if you would call into the number that was provided we will turn to that part now.
Glenn Tilton - Chairman, CEO
Thanks very much for joining us.
Operator
Thank you, ladies and gentlemen, for your participation in today's conference call.
This concludes the analyst and investor portion of our call today.
Members of the media are reminded that they should now dial into the media call using the number they were provided.
You may disconnect your lines at this time.
Have a good day.