聯合航空 (UAL) 2006 Q2 法說會逐字稿

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  • Operator

  • Good morning, and welcome to the UAL Corporation's earnings conference call for the second quarter of 2006.

  • My name is Michele and I'll 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 re-recorded, transcribed, or rebroadcasted without UAL's permission.

  • Your participation implies consent to our recording of this call.

  • If you do not agree with 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 Sahadevan.

  • Please go ahead, sir.

  • Robert Sahadevan - IR

  • Thank you, operator.

  • Welcome to UAL's second quarter earnings conference call.

  • The earnings announcement was released earlier this morning.

  • Should you need a copy of the release, please go to our website at www.United.com/IR.

  • After our prepared remarks, we will open the line to questions from analysts and in investors.

  • At noon Eastern, we will host a separate call with members of the media.

  • Let me point out that 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 would like to turn the call over to Glenn Tilton, UAL's Chairman, President and CEO.

  • Glenn Tilton - Chairman, President & CEO

  • Thanks very much, Robert.

  • And good morning, and welcome everybody on the call.

  • Joining me today and participating on the call are Jake Brace, our Chief Financial Officer;

  • John Tague, our Chief Revenue Officer; and Pete McDonald, our Chief Operating Officer.

  • As you all know, we announced our second quarter results earlier today, which are consistent with the preliminary results that we put out a week ago.

  • As some of you have noted in your analysis and your commentary this week, the underlying strength of the results support the Company's turnaround.

  • Total revenues were up 16% to $5.1 billion, and our unit revenue improved by 12%.

  • Our costs came in better than we had expected during our first quarter call, and in line with what I said they would be at the Merrill Lynch conference.

  • With main line CASM excluding fuel, special items, and a 1-time severance charge, up 1.5%.

  • Generated nearly $700 million in operating cash flow, bringing our cash and short-term investment position to $5.1 billion.

  • Operating margin was 5.5%, up from 1.5% from the second quarter of last year, again, excluding the severance expense and special items.

  • And excluding those items, earnings per diluted share was $1.09.

  • Operating profit was $282 million, and net profit was $141 million, despite an increase in fuel expense of $344 million.

  • We realized that today's call is somewhat anticlimactic, given our release of preliminary results last Monday.

  • We also know issuing preliminary results and not being able to have the discussion until today, caused a busy and somewhat unusual week for all of you.

  • And we appreciate your efforts in reporting and analyzing the results as you have.

  • We'll take the time on the call this morning to provide more context around the numbers, which as you saw, were better than expected.

  • When Jake and I were at the Merrill Lynch conference some weeks ago, we talked about the work we're doing to realize the benefits of the reorganization.

  • And we outlined our performance agenda, reducing our costs, optimizing our revenue and improving the customer experience for all of our customers at United.

  • Today's results demonstrate the progress we're making against that very agenda, and the work we outlined for you last quarter.

  • The result of strong revenue growth and a healthy revenue environment, improved cost management by the management of the Company and the employees of the Company, and a very strong cash position.

  • While we are encouraged by the trend and the momentum within the Company, we are by no means satisfied.

  • We'll continue to focus on strengthening the core business at United, implementing the principles and techniques of continuous improvement as a means to standardize the work, and reach higher levels of performance all across our Company.

  • Our employees are fully participating with the management team in this work.

  • They have simultaneously improved safety, revenue, and the customer experience through process improvement that also drives down cost.

  • The work is taking place throughout United, including our back office and our corporate functions.

  • Said simply, we are eliminating work that is unnecessary, focusing on doing the right work more efficiently and more effectively.

  • As we said on our last call, doing so would enable us to reduce salaried and management head count by 1,000 positions by year end, and today we stand halfway toward that goal.

  • We also said we would accelerate our cost reduction efforts.

  • Pete will talk more about our ongoing actions to lower cost and will detail, as some of you have already noted, that our cost results are materializing more quickly than anticipated, and some of our reductions are, in fact, ahead of schedule.

  • We're turning our aircraft more quickly, having piloted the standard process work in a number of stations, that we'll roll out system-wide.

  • While these new processes had some short-term impact on our operational performance, they will enable us to reduce our costs, while adding capacity.

  • Our employees continue to improve their efforts in the face of record load factors, and the operational changes and challenges that we are asking of them.

  • In a few moments, John Tague will talk to the call about what we are doing to get more than our fair share in this improved revenue environment, including optimizing our network even further by selling unprofitable routes, and redeploying our assets to build on United's strength, and leveraging products, like Economy Plus, to deliver more revenue to the Company.

  • Before we get to John and to Pete, I'll now turn the call over to Jake, who will take us through the numbers in greater detail.

  • Jake, over to you.

  • Jake Brace - CFO & EVP

  • Thanks, Glenn, and good morning, everyone.

  • As Glenn discussed, we're pleased to have produced a net profit of $119 million for the second quarter.

  • Not only did we report a profit for the first full quarter since we emerged from bankruptcy, but this is also the first time in 6 years we have achieved a net profit in the second quarter.

  • Basic earnings per share for the quarter were $1.01 and fully diluted earnings per share was $0.93.

  • For purposes of those calculations, basic shares were 115 million and fully diluted shares were 130 million.

  • Excluding the 1-time severance charge of $22 million that Glenn mentioned, basic earnings per share was $1.20 and diluted was $1.09.

  • These results are identical to the preliminary results we issued last week in conjunction with the announcement about our -- the issuance of the employee convertible note.

  • In the second quarter, excluding the 1-time severance expense, we produced an operating profit of $282 million, despite a $344 million increase in fuel expense.

  • That compares to an operating profit of $66 million, excluding special charges in the second quarter of 2005.

  • Our operating margin, again, excluding the severance and special charges, jumped to 5.5% from 1.5% in the same quarter of 2005.

  • Notably, for the first time since we began reporting regional affiliate revenues and expenses, our regional affiliates contributed a fully allocated profit to our operating income.

  • In the second quarter, regional affiliates contributed $46 million to operating income, up $100 million versus the second quarter of 2005.

  • This improvement is a result of restructured regional carrier agreement, our network optimization effort, and the strong revenue environment.

  • Glenn mentioned our cash generation was very strong in the quarter, resulting in a positive operating cash flow of nearly $700 million, which was 22% higher than the same quarter of 2005.

  • We ended the quarter with unrestricted cash and short-term investments of $4.2 billion and restricted cash of $0.9 billion, for a total cash balance of $5.1 billion.

  • This is up $500 million from the end of the first quarter of 2006.

  • During the second quarter, we spent $79 million on capital and $120 million for debt payments.

  • Once again, our revenue performance was strong in the second quarter.

  • Total revenue increased 16% from the second quarter of 2005, while main line RASM increased 12%.

  • John will be discussing the drivers of the revenue growth in more detail in a moment.

  • On the expense side, we continue to work hard to control our costs, although total second quarter operating expenses rose 11% year-over-year, the large majority of this increase was due to a 31% increase in our fuel costs.

  • Average main line jet fuel price, including taxes for the quarter, was $2.16 per gallon compared with $1.71 in the same quarter last year.

  • Main line cost per ASM increased 9% in the quarter, while main line cost per ASM excluding fuel, severance expense and special items in last year's numbers, increased 1.5% compared with second quarter of 2005.

  • This was smaller than the 3% to 4% increase we initially estimated on our first quarter conference call, mainly because of lower marketing expenses as a result of the implementation of our $400 million cost of production program, and 1-time cash credits from settlements, and quarter-end accounting true-ups.

  • As I mentioned on our last call, unit earnings, RASM minus CASM, is a key measure of our financial performance.

  • Our main line unit earnings for the quarter increased to $0.0060 from $0.0029 a year ago.

  • And main line unit earnings, excluding fuel for the quarter increased 35% from $0.03 to just over $0.04.

  • Important thing I need to stress is that our reported earnings include a number of non-cash fresh start and exit-related charges, which can be somewhat confusing, especially since they obscure some fundamental improvements.

  • So I want to spend a few minutes discussing those non-cash charges, which are detailed in the Form 8-K we filed on May 8th.

  • These charges primarily consist of an increase in the amortization of intangibles, higher non-cash interest expense, a change in the way we account for our Mileage Plus miles sales, and 123R expense.

  • In order to offer more meaningful comparisons, today's earnings release includes tables that show the effect in our P&L of these items through year end.

  • Let me go into a little more detail on this issue to illustrate my point.

  • A good example of the non-cash exit-related expenses added at exit is amortization of the Mileage Plus database, which is a very valuable list of our frequent flyers, including their travel patterns and preferences.

  • Pre-exit, this list was on our books at a value of zero, and as a result had no effect on our income statement.

  • At exit per the accounting rules, the database was put on our books at an appraised fair market value of $521 million, resulting in amortization charges of $77 million for 2006.

  • There was no change in the fundamentals, but our expense will be higher by $77 million this year.

  • We outlined the major changes of this nature in the press release, and excluding these non-cash charges and the $22 million in severance costs, our non-fuel CASM for the second quarter actually dropped 1.6% from the second quarter of 2005.

  • Now, I want to change gears just a little bit.

  • A week ago, the Company filed an 8-K announcing that we had reached agreement with our unions to reset the $46.86 conversion price for the 726 million of convertible notes that the Company was obligated to issue by August 1st.

  • The interest rate on the notes per the plan of reorganization, was to be set, so the notes would trade at par.

  • Since the $46.86 conversion price was so far out of the money, the required interest rate to make the notes trade at par was quite high.

  • Rather than setting and paying a very high interest rate, the conversion price was adjusted to be measured off a more current stock price, enabling the interest rate to be set at a more conventional level.

  • New conversion price was based on 125% of the volume weighted average price for July 24th and July 25th, and as a result, the new conversion price is $34.84.

  • And with the lower conversion right -- price, the interest rate was set at 4.5%.

  • So while resetting the conversion price clearly increased the option component of the value of the notes, we and our financial advisors believe that the significantly lower coupon more than offsets this.

  • The notes have now been sold by the employee trust to certain qualified institutional buyers in a private secondary sale pursuant to 144A.

  • Now, I'll turn the call over to John to discuss our revenue results.

  • John Tague - Chief Revenue Officer

  • Thanks, Jake.

  • The industry continues to enjoy a favorable revenue environment, and we are seeing the results of a number of the steps we have taken to drive our revenue growth higher at United.

  • As a result of both of these factors, our second quarter revenue grew, as Jake mentioned, by 16% year-over-year, and both main line and consolidated RASM grew 12%, on the strength of a 10% increase in main line yields and a 1.5-point improvement in main line load factor.

  • These results are particularly strong, given our capacity growth in the second quarter, particularly so as compared to the industry.

  • Main line traffic increased by 5% on a 3% increase in capacity.

  • All regions posted strong unit revenue increases, leading to a 12% increase in main line passenger revenue per available seat mile, or PRASM.

  • However, domestic PRASM was particularly strong, with domestic main line up 14%, and PRASM for our regional affiliates up 15%, driven by a 9% increase in yield and a 4.3-point increase in load factor.

  • I think these results are particularly encouraging when viewed in light of our domestic capacity growth year-over-year, which was 5%.

  • While we are pleased with our revenue performance relative to our competitors, we are certainly not satisfied.

  • We continue to work hard to strengthen our revenue performance going forward.

  • We are committed to providing the superior customer experience that Glenn spoke about, and believe that that will set us apart from the rest of the industry, and enable us to generate a revenue premium.

  • Several of our recent initiatives are designed to achieve both of those goals.

  • In May, United launched Choices, an enhancement to our Mileage Plus credit card program, that we believe makes the United affinity card the best in the industry.

  • Customer reaction has been positive, and 2 months after launching Choices, we are encouraged by early results in cardholder acquisition, cardholder retention, and card spend.

  • United recently announced plans for a new international premium product.

  • First aircraft reconfigured with this product will come to market in 2007, resulting in what we believe will be an industry leading and worldwide competitive First Class and Business Class product, while allowing United to increase its total aircraft seating capacity.

  • In the years ahead, we also expect to generate moderate additional capacity through our initiative that Glenn mentioned at Merrill Lynch, removing some of our domestic galleys with the success of Buy on Board, and increasing cabin density.

  • At the same time, we will continue to grow the economic benefit from our unique premium Coach product, Economy Plus.

  • This provides a superior Coach cabin experience to our high value frequent flyers, and is expected to generate more than $50 million annually from upsells at the time of passenger booking or passenger check-in.

  • Going forward, we have the plans in place and the work identified to grow upsell revenue to a run rate of over $100 million in 2007.

  • In addition to looking at our products, we continue to optimize our route structure.

  • Improving economic performance while broadening our customer offering, particularly in our key areas of strength, our 5 domestic hubs.

  • We are implementing a plan to strengthen our Pacific operation.

  • We recently, as a matter of fact on Friday, announced plans to replace our current JFK-Tokyo service with new service from Washington to Tokyo, eliminating a route that was highly unprofitable for United, while offering new service to our Washington customers.

  • We also sold our New York-London route authority to Delta, which we announce on Friday.

  • These 2 actions will enable us to eliminate significant losses in the New York operation, while reintroducing service to Taipei from our San Francisco gateway.

  • In addition, as we previously announced, United will be the first U.S. carrier to serve Kuwait, with operations beginning in October from Washington, DC.

  • Our Dulles hub continues to perform quite strong, and these international operations will only strengthen our customer proposition in Washington.

  • We are pleased with the revenue progress we have made in the second quarter, but we know we can do better.

  • And we know the work that will get us there, and that is the plan we are executing against.

  • And now I'll turn it over to Pete.

  • Pete McDonald - COO

  • Thanks, John.

  • As you know, we are intensely focused on reducing costs and improving operational execution throughout the organization.

  • We've implemented a broad range of initiatives designed to achieve significant cost savings, while enhancing customer service.

  • And I will give you an update of our progress in a few minutes.

  • But first I want to provide some additional details on the items that drove the increase in costs in our second quarter results.

  • Purchased services increased 17% in the quarter, or approximately $64 million over 2005.

  • Outsourcing initiatives contributed $35 million to the increase.

  • Post bankruptcy professional fees added 10, and credit card fees increased 6 million due to higher revenue.

  • I would like to point out that the offsetting labor savings are not apparent in the salaries and related costs expense line item, due to $40 million in non-cash stock-based compensation expense and $22 million in 1-time severance expenses reported in the quarter.

  • Adjusting for these items, the underlying improvements in salary expense are evident.

  • Second, aircraft maintenance expenses increased $30 million over the quarter of 2005.

  • As we described last quarter, we began outsourcing a portion of the repair of our PW4000 engines.

  • Transition costs of approximately $14 million for the PW4000 outsourcing continued in the second quarter, $4 million below the guidance we gave last quarter of $18 million in transition costs.

  • The transition portion of the costs is now complete.

  • As we described in the first quarter call, the remaining increase in this area is driven by a rate increase in the power by the hour contract for our Airbus B2500 engines.

  • We have previously committed to an additional $400 million in cost savings, starting in 2007, over and above what is in the business plan.

  • To generate these additional cost savings, we are making fundamental improvements to our core business.

  • We are reducing purchase service costs by $200 million, reducing general and administrative costs by $100 million, have cut advertising and marketing costs by $60 million, and will secure $40 million savings from operational efficiency improvements.

  • Because of improvement initiatives we've already implemented, we expect that we will achieve a portion of these additional savings ahead of schedule in 2006.

  • As an example, the Company has announced that it will eliminate 1,000 full-time salaried and management positions by the end of 2006.

  • To date, approximately 500 of those positions have been eliminated.

  • We continue to look at our cost of sales, and announced this month to our travel agency partners, that we are adding a $3.50 per segment charge on bookings made through non-preferred distribution channels.

  • Bookings made through low cost channels, including Sabre's efficient access solution, as well as optional programs introduced by Worldspan and Galileo, would not be subject to the fee.

  • We expect to reduce our distribution costs as a result.

  • We pay $265 million in GDS fees annually, and United is committed to driving bookings to channels that deliver the most value.

  • In the second quarter, we built on the resource optimization success of the first quarter by, among other things, expanding our process for tightening turn times to Denver and Los Angeles.

  • We reduced turn times by 4 minutes.

  • We've also reduced our taxi time by a minute, as a result of the new processes.

  • We expect to capture the remaining benefits of turn time, block time and taxi time in the second half of the year, as we implement another round of tighter turns at Dulles and O'Hare.

  • We are meeting our resource optimization goals in large part because of the tremendous work and dedication of our management team and our front line employees.

  • The substantial operational changes we are making at the airline through resource optimization and other initiatives, are having what we believe will only be a temporary transitional impact on our operational performance as reported by the U.S.

  • Department of Transportation.

  • While our customer service performance was roughly equivalent to the first quarter of '06, it was generally below where it was last year, and where we think it should be.

  • On time arrival for our team was up only slightly from the first quarter of '06, while mishandled baggage performance did improve nicely over the first quarter, and is on par with last year.

  • As our system absorbs these operational changes, we expect our performance to improve in all of these areas.

  • I am pleased to report that employee productivity, that is, available seat miles divided by employee equivalents, improved 7% compared with the second quarter of 2005, driven by a decrease in full-time equivalent employees of 4%, and a main line capacity increase of 3%.

  • Both the continuous improvement efforts across the operations, and the outsourcing of certain non-core functions, contributed to the productivity improvement, which represented 22 consecutive quarters of productivity improvements at United.

  • Aircraft productivity, as measured by fleet utilization, improved 3% during the quarter to 11 hours and 16 minutes per day.

  • Back to you, Jake.

  • Jake Brace - CFO & EVP

  • Thanks, Pete.

  • Before we take questions, I would like to discuss our guidance for the third quarter and the remainder of 2006.

  • For the third quarter, we expect main line capacity to increase approximately 2.5% to 3%, and United Express capacity to be up 6% to 7%, which would lead to expected consolidated capacity growth of 3% to 3.5% for the third quarter.

  • For the full year, we expect main line capacity to grow 2% to 2.5%, United Express capacity to grow 9% to 10%, and consolidated capacity to increase 2.5% to 3%.

  • These numbers are slightly lower than the capacity guidance we provided last quarter.

  • These capacity increases are driven, as Pete mentioned, by higher aircraft utilization as a result of the resource optimization program.

  • We estimate that main line CASM excluding fuel and special charges, will be 1.5% to 2.5% higher year-over-year in the third quarter, and for the full year excluding fuel, severance and special charges, 1.5% to 2% higher.

  • As I mentioned earlier in the call, however, that increase is driven by the effects of non-cash exit-related items.

  • Excluding these non-cash items, special charges and severance costs, our CASM, excluding fuel, is expected to decrease 0.9% to 1.5% for the full year of 2006.

  • As we announced last Monday, as of July 24th, we had 28% of our main line fuel consumption hedged for the third quarter, at an average price of $69.84 per gallon, excluding taxes, and we used crude oil swaps to hedge that fuel.

  • Now, Michele, we're ready to take any questions.

  • Operator

  • [OPERATOR INSTRUCTIONS] Mike Linenberg, Merrill Lynch.

  • Mike Linenberg - Analyst

  • I guess just 2 quick ones.

  • When you highlight your cost reduction initiatives for 2007, the 400, there's a $200 million there for reducing purchased services.

  • Is that predominantly lower GDS fees, for these restructured agreements?

  • Pete McDonald - COO

  • No, Mike, actually it includes a lot of our stations operations costs for vendors that we used to provide wheelchair service, cabin cleaning, janitorial, telecommunications.

  • So it's in areas other than GDS.

  • Mike Linenberg - Analyst

  • Is there-- I mean is the GDS piece in there, though?

  • Pete McDonald - COO

  • Yes.

  • Mike Linenberg - Analyst

  • Okay.

  • Okay.

  • How do we-- is that just -- is it 20%, 30%?

  • I mean can you give us rough numbers, or is that not available?

  • Jake Brace - CFO & EVP

  • Mike this, is Jake.

  • GDS is in purchased services.

  • We haven't broken out.

  • Mike Linenberg - Analyst

  • Okay.

  • Jake Brace - CFO & EVP

  • But what amount the GDS savings are going to contribute to the [inaudible].

  • Mike Linenberg - Analyst

  • Okay, okay, and then just my second question.

  • I know at the end of June, you got a little bit of press where the Company had to cancel some flights.

  • Was that a function of maybe overscheduling the airline or bad weather?

  • Is that now been rectified as we move through the peak summer period?

  • Any additional color on those cancellations, and maybe what the financial impact was, would be great.

  • Pete McDonald - COO

  • So, Mike, this is Pete.

  • I would characterize it this way.

  • We are driving very high productivity at United.

  • And we're trying to reach the sweet spot with regard to our pilot staffing.

  • And clearly at the end of June with some significant weather irregularities, we ran out of crew time and did have some cancellations as a result of this tight pilot staffing that we currently have.

  • We have announced additional recalls of pilots.

  • We are also -- we have some technological improvements that we can make to improve our scheduling.

  • So we believe that we're going to be on track here, and I don't see this as a continuing issue for us for the long-term.

  • Mike Linenberg - Analyst

  • Okay, great.

  • Nice, nice progress this quarter.

  • Operator

  • Gary Chase, Lehman Brothers.

  • Gary Chase - Analyst

  • Just a couple quick ones.

  • I wanted to make sure, in the press release you provided some disclosure about what the regional ASMs were last year.

  • This is just a little bit of a nit, but it looks as though the regional activity really is expected to pick up in the third and fourth quarter pretty dramatically.

  • Am I reading that right?

  • Or is that just a function of the way your -- do you have some ASMs you're including in your capacity guidance that are not in the disclosures you made in terms of RPMs and ASMs for the affiliate?

  • John Tague - Chief Revenue Officer

  • Gary, this is John Tague. 2 major impacts. 1 is, we were building the 70-seat fleet throughout late last year, into this year.

  • So you've got some carry-over there.

  • And we are also implementing resource optimization on the Express fleet, which is increasing aircraft utilization.

  • Gary Chase - Analyst

  • Okay.

  • So we should get a decent size pickup in the activity there in the back half?

  • John Tague - Chief Revenue Officer

  • Yes, as we indicated.

  • Gary Chase - Analyst

  • Okay.

  • And, John, actually a follow-up for you.

  • When you were talking about the ability to do better, you said you know you can do better.

  • I'm curious - I'm obviously speaking about on the revenue side - I'm curious for your thoughts on what you think will drive that.

  • Do you think the consumer isn't fully aware of your offerings, in terms of PS and some of the other premium things you're doing?

  • Is it about sort of network optimization, like the pulldown of Heathrow?

  • I mean what is it that will drive that better revenue performance beyond industry factors?

  • John Tague - Chief Revenue Officer

  • Well, I think when you look at each one of these initiatives that gets some visibility independently, we're getting very strong validation.

  • I mean PS is performing extremely well, and far in excess of our business case or expectations there in the transcon.

  • Clearly, this route optimization that we recently announced, and more work that we intend to do expanding our partnership with ANA to make that relationship look more and more over time like our relationship with Lufthansa looks like in Frankfurt, poses a tremendous amount of upside for the Company going forward.

  • We're also beginning to get traction in the corporate marketplace.

  • I mean as you know, given our history, we had a damaging experience with our corporate marketplace over the last several years.

  • And I think we are beginning to see the upswing from what we characterize as the long road back in that marketplace, and you know those purchase cycles are 1 to 3 years in terms of the re-up.

  • So we're gaining traction there, clearly.

  • We're getting strong adoption from Economy Plus, with the confidence to raise it to 100 million.

  • So I think we are getting adequate validation in the current results, but we recognize that it is not remotely near a level of optimization, and that's what we're pursuing.

  • Gary Chase - Analyst

  • John, and just one last one for you, is there any impact from what you're doing in New York?

  • It looks like you've pretty much taken down all your non-hub flying out of New York.

  • Any impact on the corporates there, or is it just offset by the savings you're going have from not flying those routes any longer?

  • John Tague - Chief Revenue Officer

  • Well, I think it's sort of widely acknowledged that a company like United, looking at that New York presence as it diminished over time, is sort of held prisoner to the fear that you mentioned about what happens to the value proposition we have for New York fly-ins.

  • And obviously, this move puts that -- some negative cast on that.

  • But at the same time, we need to be equally concerned about how can we enhance our competitiveness against our core client proposition in areas like Washington and San Francisco.

  • And we came to the conclusion that the benefits associated with this change far outweighed any marketplace reaction to the reductions.

  • So it -- the issue you raise is a valid one.

  • But we think it's swamped by the economic and marketplace benefits of where we are moving to.

  • Gary Chase - Analyst

  • Okay, guys.

  • Thanks.

  • Operator

  • David Strine, Bear, Stearns.

  • David Strine - Analyst

  • A follow-up actually for you, John, sort of related to what Gary was asking.

  • But I want to ask it in a slightly different way.

  • With respect to the moves you're making on a revenue standpoint, you mentioned another 100 million in '07.

  • If you step back and look at it, what inning would you say you are in now, in terms of making progress, or getting traction on that front?

  • I mean, because if we look at the RASM growth rate again in 2Q, it was pretty much the same as AMR's, all in.

  • John Tague - Chief Revenue Officer

  • I obviously, can't accurately estimate what AMR's might look like on a going-forward basis.

  • I can tell you that we have a very robust book of work over the next several years.

  • And we think we are very early on in putting out the offer that will cause this strategy to be demonstrated over time.

  • So customer experience, for example, we have a long ways to go, and we know that there's significant progress to be made.

  • We're very confident that our international premium product initiative is going to be not only economically and density efficient, but it's going to be market leading.

  • So this is a multiyear effort, but it's filled with some pretty significant book of work in terms of robust improvements.

  • So, we're pleased with the progress to date.

  • We can look at the numbers on a more discreet basis, and in that context, we know we're doing the right thing for this set of assets.

  • David Strine - Analyst

  • Okay.

  • And second question for Glenn, a broader question with respect to how you're viewing the business.

  • If we look at your balance sheet and the amount of cash you're carrying, as well as the amount of cash that you're generating, I would like to just get your perspective on what you think is the best use of cash at this point, in order to maximize the value of the Company?

  • Glenn Tilton - Chairman, President & CEO

  • You know, David, we said at Mike's conference in a discussion after the presentation, that given the volatility of the business and the unpredictability of the business, we were going to focus on a very strong balance sheet.

  • That we were going to continue to exercise capital discipline and spending discipline.

  • We have obviously adhered to that for this quarter.

  • We don't see any reason to change that going forward.

  • We're mindful that there are perspectives out there that suggest that we should be thinking about the proper use of our cash as we go forward.

  • And we're not, not discussing that here.

  • But at the end of the day, we very much like the position we're in.

  • And as Jake said to the employees this morning, Dave, this is the most significant cash position the Company has been in historically, and we intend to enjoy it for a while.

  • David Strine - Analyst

  • So maintain-- the answer, maintain that cash balance, as opposed to using it to either pay down debt or return to shareholders?

  • Glenn Tilton - Chairman, President & CEO

  • Well, never say never, David.

  • But we like where we are now, and we're not -- I'm not predicting going forward how we will see the opportunities that we create with the cash position for the Company.

  • But right now, we're very pleased simply to have been correct in our assessment of where we would be.

  • David Strine - Analyst

  • Okay.

  • And last question for Jake.

  • What do you expect the tax situation to be in '07 with respect to the NOL carry-forwards?

  • Jake Brace - CFO & EVP

  • We won't be paying any cash taxes in 2007.

  • The issue that we're going to face at some point, if we continue to be profitable in future quarters, is when we actually start recording a tax provision.

  • So, despite having NOLs, we can be in a situation where we actually have to record a tax provision.

  • Obviously in this quarter we didn't do that and we need to get a few quarters under our belt before we do that.

  • But as far as cash taxes, we won't be paying any in 2007.

  • David Strine - Analyst

  • But do you feel that you'll be making a provision in 2007?

  • Jake Brace - CFO & EVP

  • Well, that all depends on how the rest of the year plays out in profitability.

  • So you have to have 2 or 3 quarters of consistent profitability under your belt before you start making a provision.

  • And so I can't tell you whether we'll have 2 or 3 quarters without giving you some earnings guidance, which I'm not prepared to do.

  • David Strine - Analyst

  • Okay.

  • Thanks a lot.

  • Operator

  • Ray Neidl, Calyon Securities.

  • Ray Neidl - Analyst

  • Just a clarification on the sale of the New York-London route.

  • It's logical for you to concentrate your resources at Dulles, which is your hub, but Delta ended up only getting Gatwick, not Heathrow.

  • I guess you wanted those rights -- to move those rights down to Washington.

  • What was the use of even doing a transaction of that nature?

  • And secondly, if you're pulling out of London-New York, will that effect your New York-JFK transcon flights?

  • John Tague - Chief Revenue Officer

  • Ray, John here.

  • Actually, if you look at the bilaterals between the UK and the U.S., we could not have transferred or annointed Delta as a Heathrow carrier, as that is limited to 2 designations.

  • However, this underlying route authority was necessary for them to start their Gatwick service, and I think as been reported, we moved the slot off in a separate transaction.

  • I think that clearly, this could have a moderate negative impact on our transcon service.

  • That having been said, we have, frankly, a lot of unmet demand for PS, so it didn't turn out to be a significant consideration.

  • Ray Neidl - Analyst

  • Okay.

  • Glenn Tilton - Chairman, President & CEO

  • And, Ray, if I could, it's Glenn.

  • To follow-on John's question and maybe to connect a couple of dots, all of us here spend a lot of time visiting with our corporate customers.

  • Whenever we visit a hub city, we try to breakfast with our corporate clients.

  • And to a prior question about whether or not PS was getting a sort of customer traction, I meant to say then, and should say now on the occasion of this question, the most frequently asked corporate question for us when we are in the 2 West Coast destinations, is when we might increase frequencies, and whether or not there might be another point of embarkation on the East Coast.

  • So clearly for that product, there's tremendous transparency and real adhesion in the marketplace.

  • Ray Neidl - Analyst

  • Okay, great.

  • One thing about -- you guys experimenting quite a bit with pricing, to your credit, which other airlines should be doing in this environment.

  • I'm just wondering, your partners up north, AC, Air Canada, they are being really aggressive with some of the new pricing that they are trying.

  • Are you looking at that, and maybe thinking about adopting that to some of your system?

  • John Tague - Chief Revenue Officer

  • Ray, John here.

  • No, I think while the Canadian marketplace is unique relative to the U.S., clearly a number of things they have done are things that are very interesting, and we are watching.

  • We launch a new dot-com platform in the next several months that will sort of increase the flexibility we have around some of these questions.

  • So we firmly believe that there are ancillary revenues to be gained in the future, and that there are unique approaches to pricing that could yield a better outcome.

  • And we have every incentive to, as you suggest, test that theory.

  • And you could expect us to do more in the future.

  • Having said that, there's improvements in the base opportunity, as well.

  • We're still dealing with the damaging remnants of Delta SimpliFares.

  • While many components have been eliminated, deemed revenue negative, we still have these eliminations of minimum stays, that particularly in the business markets, are enormously damaging.

  • So there are opportunities for improvement within the traditional structure, and there's opportunities to experiment to a better outcome as well.

  • Ray Neidl - Analyst

  • Okay, great.

  • And I think Jake said that the regionals made an operating income of $46 million.

  • I couldn't track that in the statements.

  • I'm just wondering if there's any way we can figure it out, or -- ?

  • Jake Brace - CFO & EVP

  • Yes, all you do is subtract regional expenses from regional revenues on the statement, and that's the number I was referring to.

  • It's right on the face of the statement.

  • Ray Neidl - Analyst

  • Okay, great.

  • Just finally, you're being pretty aggressive in laying-off a lot of employees, and I guess is, are all the severance charges out of the way in the past quarter?

  • And number 2, do you think you might be cutting too deep?

  • Jake Brace - CFO & EVP

  • Well, let me start with the first part of that, Ray.

  • I -- we think that we have gotten the severance charge right.

  • It is for the full 1,000 employees that we intend to reduce by this year.

  • Obviously, we haven't reduced all of them, as Pete said.

  • So we'll have to see what the actual severance charges are.

  • But our expectation is that we got the number right and it's $22 million.

  • As to cutting too deep, my view is we have opportunity out there, and that this 1,000 is about right for now.

  • But when we get there, we'll take another look at it, and if we cut too deep in some areas, we'll have to add back.

  • And if we didn't cut deep enough, we'll have to do that.

  • Ray Neidl - Analyst

  • Great.

  • Thank you, guys.

  • Glenn Tilton - Chairman, President & CEO

  • I would just add, Ray, to Jake's comments that in front line jobs, that's not where these cuts are coming from.

  • And actually as I mentioned earlier, we are adding back some pilots, as we announced, 125 more by the end of the year.

  • So this is general and administrative type costs.

  • Ray Neidl - Analyst

  • Okay.

  • Are you going to be outsourcing some of their functions?

  • Glenn Tilton - Chairman, President & CEO

  • Outsourcing of some functions is part of this, yes.

  • Ray Neidl - Analyst

  • Okay, great.

  • Thank you.

  • Operator

  • Dan Mckenzie, Credit Suisse.

  • Dan Mckenzie - Analyst

  • John, wondering if you could provide any more color on the increased flying to Asia?

  • In particular, do you expect to add more domestic capacity to feed the increased international flying?

  • And if so, is that domestic flying likely to come from elsewhere in United's system?

  • Or would an increase in domestic capacity likely be added,perhaps via increased Express flying?

  • John Tague - Chief Revenue Officer

  • No.

  • We don't expect to have to, in effect, build a bigger pipe to support this flying.

  • We have adequate opportunities, particularly given the quality beyond traffic East Asia operations typically represent.

  • Dan Mckenzie - Analyst

  • Okay, and then Pete, just following-up on Mike's question, with respect to the pilot reserve staffing issues that you folks are working through, I'm wondering if you can provide sort of the the financial impact from that?

  • And I'm not sure if you have that, but if you have it, it would be very helpful just for purposes of modeling as we look forward to quarterly modeling our quarterlies for next year.

  • But then also some color, perhaps, about the total number of flights that were cancelled, and also some color about when the pilot staffing issue could potentially be resolved here?

  • Pete McDonald - COO

  • Well, the financial impact is minimal.

  • I don't have a number.

  • But as we look at it, it's a minimal financial impact.

  • There -- we did have a couple of days at the end of June where we cancelled in the range of 180 flights over a few-day period there.

  • We, as we announced, we are recalling pilots.

  • We actually have pilots in training that are coming out today as we speak.

  • So we do have additional reserve pilots coming out.

  • So as I said to Mike, we don't really expect this to be a major problem going forward.

  • We do -- we are tight, but we don't expect this to be a continuing significant problem going forward.

  • Jake Brace - CFO & EVP

  • Dan, this is Jake.

  • I would characterize the number in the single-digit millions.

  • Dan Mckenzie - Analyst

  • Okay, great.

  • Thanks a lot.

  • Operator

  • [OPERATOR INSTRUCTIONS] Helane Becker, Benchmark Securities.

  • Helane Becker - Analyst

  • Either for John or for Glenn, could you talk-- you didn't talk at all about Ted today, and how maybe that fits into the rest of the United system, especially with the changes that you're making to focus on more of the high yielding traffic and the changes in the international operation.

  • Glenn Tilton - Chairman, President & CEO

  • Helane, I'll open it up and turn it over to John.

  • Ted continues -- and maybe this is the reason, Helane, that we didn't highlight Ted.

  • Ted continues to fly Ted's mission, as Ted has, successfully.

  • Ted, as you know, has a higher density than the comparable Airbus main line product.

  • Ted is a leisure product.

  • Ted still sits at 56 aircraft.

  • Ted, early on, in Ted's experience, taught the main line a good bit about resource optimization and quick turns.

  • And frankly, a lot of that has now been incorporated into best practice within the organization itself.

  • But as I think we said in the first, we're satisfied with Ted's performance.

  • It does not in any way represent a dilution of the effort in a product such as PS, which clearly is a different customer base.

  • And the customer clearly -- the corporate customer understands the distinction between the 2.

  • So that's where we sit with it.

  • No new news.

  • And I'll turn it over to John.

  • John Tague - Chief Revenue Officer

  • I think Ted is accomplishing what we designed it to accomplish, which was to make economically viable these leisure markets that have tended to be under enormous financial pressure for traditional network carriers over a number of years, but our markets that our business travelers actually want as part of the system.

  • And it has clearly accomplished that objective because of its density efficiency, asset utilization, and that's retaining it as a part of the network component.

  • That being said, we fully recognize that there is a -- there is a box that this product fits in, and it does very well within that box.

  • And we don't intend to cross those lines by expanding it beyond the definition I just described.

  • Helane Becker - Analyst

  • Okay, okay.

  • And then can I just ask a question about moving the JFK authority to-- not the London, rather, but the Tokyo route, moving it to IAD?

  • So that was a code share with All Nippon Air in Washington before.

  • And are you moving the codeshare back to New York, or are you competing against one of the Star Alliance carriers?

  • How is that -- how do we think about that?

  • John Tague - Chief Revenue Officer

  • Both operations were United coded, and will continue to be so.

  • It's a practice we have in all of our deep alliance relationships, for example, many markets from the U.S. to Germany.

  • And while we compete with each other, we also enable each other's success.

  • And we have found markets, frankly, that are deep markets for us and our alliance partners to be among the most profitable on the system.

  • Helane Becker - Analyst

  • Okay, and then do you have for us how your international changes -- would these changes in terms of percent of your revenue derived from Pacific versus Atlantic?

  • John Tague - Chief Revenue Officer

  • No, we've not provided any level of guidance.

  • Helane Becker - Analyst

  • Okay.

  • We'll be able to tell that as these changes occur?

  • John Tague - Chief Revenue Officer

  • Yes, you'll see it in our future reports.

  • We added a table this time, I think -- .

  • Helane Becker - Analyst

  • Yes, I saw that.

  • John Tague - Chief Revenue Officer

  • And we'll do that again next time.

  • Helane Becker - Analyst

  • Great.

  • Thanks for your help.

  • Glenn Tilton - Chairman, President & CEO

  • Helane, conceptually, I would take you back - it's Glenn -- I'd take you back to the comment that John made, which I think is a very valid one.

  • That the team is working hard to establish with ANA as our Pacific partner the same type of relationship that we have with Lufthansa across the Atlantic.

  • Helane Becker - Analyst

  • Okay, okay.

  • That, that's very helpful.

  • Thank you.

  • Operator

  • Susan Donofrio, Cathay Financial.

  • Susan Donofrio - Analyst

  • This question is for Glenn.

  • Just in views of -- Doug Parker was fairly candid with his views recently on consolidation.

  • So I was just wondering if you could weigh in, just with respect to not only your views, but also if you have any views with respect to potential timing, as well.

  • Glenn Tilton - Chairman, President & CEO

  • Well, I have been candid about it for a long time, and my view hasn't changed.

  • I will tell you that from our perspective, since we have no benefits accruing to United from a merger, we are focused on the core business, and we're focused on everything we've been discussing with you this morning.

  • And as I think you can tell from the call, we believe that there is a lot more potential at United by simply doing what we do well, doing it better, and we genuinely believe that that's our first priority.

  • Now, as far as the industry is concerned, not being able to speak for the benefits of the merger to his company, I will say that I think the industry would benefit from consolidation, and I've been consistent with that.

  • Our focus, however, is on the work that we've outlined for you in the release, and the work that we've outlined on the call and that we enjoy talking to you about.

  • That having been said, we wouldn't put ourselves in a position of being disadvantaged were the process to begin more robustly than it has so far.

  • Susan Donofrio - Analyst

  • Great.

  • Well, thank you very much.

  • Robert Sahadevan - IR

  • And Michele, I think we need to make this the last call -- the last question, sorry.

  • Operator

  • Yes, sir.

  • Gary Chase, Lehman Brothers.

  • Gary Chase - Analyst

  • Just a quick follow-up.

  • There have been some changes since you filed the documents associated with your exit plan from bankruptcy.

  • And I was just curious, Pete, you were referencing the savings above and beyond what's in the plan.

  • Is there any way to give us a sense adjusted for some of those non-cash things, and I know you have some equity comp that penalized you more this year than it will next.

  • What's sort of the run rate for what's in the plan, in terms of overall costs or maybe CASM guidance, just so we can get a baseline to start thinking about what the impact of that 400 million might be?

  • Jake Brace - CFO & EVP

  • Gary, why don't I give that a try.

  • It's Jake.

  • I think if you take our plan of reorganization, and you first of all, add what we have provided for disclosure in our stock-based compensation, that was explicitly excluded from the numbers we put in the plan of reorganization.

  • So you would need to add that to it.

  • And then the other thing that I would note that we got wrong in the plan of reorganization was also non-cash, and was our depreciation and amortization, where we were too low there.

  • And I think some of the numbers that we have disclosed could be helpful to you in sort of baselining it.

  • Other than that, those are really the only 2 fundamental changes that I would make to the baseline.

  • And then as we've said previously, the $300 million for 2006 is already baked into those numbers.

  • The $400 million for 2007 would come on top of those numbers.

  • And there would also be a piece of the 400 that would benefit 2006 on top of the numbers that have you have in the plan.

  • Gary Chase - Analyst

  • Okay, and you've not disclosed how much of that 400 million is in the new guidance, only that a portion is.

  • Jake Brace - CFO & EVP

  • We haven't, but I'll tell you, it's a little over $100 million.

  • Gary Chase - Analyst

  • Okay.

  • And, Jake, just the equity-related comp that you were talking about, that tails off pretty significantly.

  • I mean, I want to say that's like 40 million down from 160 or 170 next year, right?

  • Jake Brace - CFO & EVP

  • We haven't provided the '07 guidance.

  • We did provide for the full year -- for the full program.

  • But -- and I don't know the number off the top of my head, Gary.

  • But it does tail off pretty rapidly, and I think we can go find that number and disclose it.

  • But it's-- it does tail off a lot, as you can just see from our quarterly numbers that we put in the press release.

  • Gary Chase - Analyst

  • Sure.

  • Thanks very much, guys.

  • Glenn Tilton - Chairman, President & CEO

  • We appreciate it.

  • Operator

  • Ladies and gentlemen, this does conclude the question-and-answer portion of today's conference call.

  • I would like to turn the presentation over to Mr. Glenn Tilton for closing remarks.

  • Glenn Tilton - Chairman, President & CEO

  • Thanks very much for your questions, and we appreciate the discussion.

  • I think that as you can tell, the team is really encouraged by the improvement across the full range of the fundamentals of the underlying numbers of the performance for the quarter, but we're by no means satisfied.

  • We're focused on realizing the potential of United that we preserved in the reorganization, which I think is one of the headlines of the reorganization.

  • While at the same time, making certain that the improvements that we made to the competitiveness of the Company in the reorganization, we fully leverage as we go forward as well.

  • And that really is the performance agenda of this management team.

  • We think that your questions enabled us to talk a good bit more about it, and give you the context we hoped we could from the pre-release a week ago.

  • So thanks for all of that, and we'll look forward to talking to you next quarter.

  • Operator

  • Thank you, ladies and gentlemen.

  • 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.