聯合航空 (UAL) 2006 Q3 法說會逐字稿

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  • Operator

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

  • My name is Tony, and I will be your conference coordinator today.

  • 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 attendance implies consent to our recording of this call.

  • And 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 proceed, sir.

  • - IR

  • Thank you, Tony.

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

  • The earnings announcement was released earlier this morning and is available on our website at www.united.com/IR.

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

  • Following the end of the investor Q&A, at approximately 11:30 Eastern time, we will take questions from 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 filed with the SEC for a more thorough description of these factors.

  • Lastly, during the course of our call, we will be discussing several non-GAAP financial measures.

  • For a reconciliation of these non-GAAP numbers to GAAP financial measures, please refer to our earnings release.

  • And now I would like to turn the call over to Glenn Tilton, UAL's Chairman, President and CEO.

  • - Chairman, President & CEO

  • Thanks very much, Robert.

  • And good morning, and welcome to everyone on the call.

  • Joining me and participating on the call this morning are Jake Brace, our Chief Financial Officer, and John Tague, our Chief Revenue Officer.

  • Peter McDonald, our Chief Operating Officer, is also in the room with us this morning, and will be available to take your questions.

  • As all of you know, we announced our third quarter results this morning, which we believe demonstrate progress and momentum on our core agenda, I think we have shared with you, of continuous improvement, controlling our costs, optimizing our revenue, and improving United customer experiences.

  • As I told our employees this morning on my early morning call to them, we had a solid quarter, and we believe that the results tell the story.

  • Our operating margin, excluding special items, improved to 5.9%.

  • With these results, we have now generated 2 successive quarters of margin improvement.

  • We reported after-tax net income of $190 million.

  • Excluding reorganization and special items, we had a year-over-year improvement of some $95 million.

  • On an operating basis, we reported a profit of $335 million, which was $175 million improvement.

  • We reported diluted earnings per share of $1.30.

  • And as many of you have noted already, adjusting for the $0.43 impact to record income tax expense not accounted for in many of your models, we well exceeded the First Call consensus estimate.

  • Our revenue was up 11% to $5.2 billion.

  • Passenger unit revenue improved by 10%, and consolidated unit revenue improved by 8% from a year-ago quarter.

  • This demonstrates progress toward our goal of achieving industry-leading revenue performance.

  • Our costs are competitive.

  • Excluding fuel and special items, CASM was in line with guidance provided last quarter.

  • Employee productivity is up.

  • Aircraft utilization is at an all time high.

  • As I've frequently said, we're putting the customer at the center of our decision making here at United.

  • The reason for that to us is clear.

  • Our customer-driven strategy will drive margin leadership.

  • Delivering on the basics and being as efficient as possible ensures that we are providing consistent service in the market place.

  • Building on that base, we can deliver an experience that enables us to capture better than our fair share of premium customers.

  • Our continuous improvement efforts and our network optimization are paying off.

  • We are turning planes more quickly and adding flights, while reducing costs.

  • This work has enabled us to add new service out of Dulles to Rome, Kuwait, and Tokyo Narita without the acquisition of more aircraft.

  • John will discuss the benefits we've derived from our resource optimization efforts to date, and describe this quarter's solid progress toward achieving our revenue expectations.

  • In our second quarter call, we noted tighter turns had challenged our operational performance.

  • I'm pleased to note today that on time arrival 14 performance was higher than the first 2 quarters of the year.

  • And among the 6 network carriers, we rank number 4 in July, and second in August.

  • We believe this is a testament to the hard work of our management team and our employees during a period of high load factor, and as you all know, heightened security measures.

  • Opportunities, however, for further improvement remain.

  • We're on track with our current savings initiative, but we also face inflationary pressure.

  • We must make the most of thousands of smaller opportunities to mitigate these pressures.

  • We'll continue to execute on the numerous projects already underway to reduce costs and continue to identify more opportunities for us to further reduce costs.

  • Jake will discuss the success we're having in our cost reduction programs, and give all of us on the call a preview of our expectations for 2007.

  • As we press ahead, we're ensuring that employees and leadership are completely aligned to deliver value to customers, and to you our shareholders.

  • And we today have the right management team in place throughout the organization to lead these efforts.

  • With that, I'll hand the call over to Jake, and he will take you through more detail contained within the numbers.

  • - EVP & CFO

  • Thanking Glenn, and good morning, everyone.

  • As Glenn discussed, we maintained the momentum that we built in the second quarter by producing a net profit of $190 million for the third quarter, a year-over-year increase of $95 million, excluding reorganization and special items from last year.

  • For the quarter, basic earnings per share was $1.62, and diluted earnings per share was $1.30.

  • As Glenn noted, we began to record income tax expense in the quarter, which was not anticipated in most of the First Call estimates out there.

  • Income tax expense reduced the quarter's basic earnings per share by $0.52, and diluted earnings per share by $0.43.

  • Without the income tax expense, diluted earnings per share would have been $1.73.

  • For purposes of EPS calculations, basic shares were 115.6 million, filly diluted shares were 151.1 million, and the add back to income for interest expense on a convertible securities was $9 million after-tax.

  • In the third quarter, we produced an operating profit of $335 million, despite a $293 million increase in consolidated fuel expense.

  • That compares to an operating profit of $165 million in the third quarter of 2005.

  • Our operating margin improved to 6.5%, or 5.9% excluding the special item.

  • This was up 3.5% from the same quarter of last year.

  • I would like to discuss a few notable items that affected our results in the quarter.

  • Execution against our plan has led the Company to accrue $19 million in the third quarter towards year-end incentive payouts to employees.

  • As noted, the Company accrued $60 million for income tax expense in the quarter and for the 8 months ended September 30th, but we still do not expect to pay any material amount of cash taxes for quite some time.

  • Our operating expenses for the quarter included a net benefit from the ongoing resolution of several litigation matters which were still pending upon our exit from bankruptcy, the largest of which was a special gain of $30 million related to a reduction in the estimated liability in one of United's leaseholds at the San Francisco International Airport.

  • The Company entered into and exercised fuel hedges for our operations that were classified as economic hedges.

  • We recognized a gain on the hedges settled in the third quarter of $8 million, and we also recognized a mark-to-market loss of $26 million for hedges that will settle in the fourth quarter of 2006 and beyond.

  • Any realized gains or losses from these fourth quarter and beyond positions will be adjusted by the unrealized mark-to-market loss that we booked in the third quarter.

  • Finally, I'll note that all of the realized and mark-to-market gains and losses are booked in the fuel expense line.

  • For the second quarter in a row, our regional affiliates contributed fully allocated profit to our operating income.

  • Regional affiliates contributed $60 million to operating income, an improvement of $120 million over the third quarter of 2005, as a result of restructured agreements, John's network optimization efforts, and the robust revenue environment.

  • As we've been saying for some time, unit earnings, revenue per ASM minus cost per ASM, is the key measure of our financial performance.

  • Our mainline unit earning for the quarter, excluding fuel expense and the special operating item, was up 18% to $0.0434 from $0.0367 a year ago.

  • Once again, our revenue performance improved in the third quarter.

  • Total revenue increased 11% from the third quarter of 2005, while mainline unit revenue, excluding our fuel subsidiary, increased 8% in the third quarter.

  • In a few moments, John will discuss the drivers of this quarter's healthy revenue growth.

  • Our costs are competitive, but we remain focused on finding ways to reduce expenses.

  • While total third quarter operating expense rose 8% year-over-year, the large majority of this increase was due to a 23% increase in our consolidated fuel expense.

  • Average mainline jet fuel price, including taxes for the quarter, was $2.30 per gallon compared with $1.90 in the third quarter of last year.

  • Please note that our fuel price is set approximately 3 to 4 weeks prior to consumption, which means there's a natural delay in lower fuel prices being reflected in our P&L.

  • Turning to other areas where expenses increased, purchase services was up 14% in the quarter over 2005, or approximately $51 million.

  • This is primarily driven by the effects of continued outsourcing, and is a similar year-over-year increase to the one we saw in the second quarter.

  • The flip side of this, is that employee productivity improved 6% over the third quarter of last year, driven by a 3% increase in capacity, and a 3% decrease in employee equivalents.

  • Aircraft maintenance expenses increased $53 million, or 27% over the third quarter of 2005.

  • Virtually all of the increase was engine-related, and was driven by more engine visits, more flight hours, and an increase in the year-over-year cost per flying hour built into the V2500 maintenance contract.

  • Additionally, we expect our maintenance costs to increase as our cycle times come under pressure from enlarged maintenance work scope requirements.

  • Work requirements are increasing due to airworthiness directives, and initiatives to proactively identify and improve aircraft cabin condition and to increase aircraft dispatch reliability.

  • We are working hard to mitigate this trend, but expect this unfavorable trend to continue into 2007.

  • Mainline CASM increased 7% in the quarter from the third quarter of 2005, while mainline CASM, excluding fuel and special items, increased 2.5% at the top end of the guidance we provided last quarter.

  • Included in the quarter's 2.5% increase in X-fuel CASM are a number of items that were not factored into into the guidance we gave you.

  • The first was the $19 million accrual for year-end incentive programs I mentioned earlier.

  • We also got the benefit of of a $13 million rent credit, originally expected in the fourth quarter, was actually received if the third quarter.

  • While not large -- while not a large number, we estimate that the change in security rules caused by the London terrorism plot increased the quarter's expenses by about $4 million.

  • And finally, maintenance expenses were higher than expected.

  • Fortunately, execution against our cost savings initiatives moderated the higher expenses.

  • The Company is on track to capture $300 million in benefits targeted for 2006, as well as the additional $400 million in 2007 initiatives we've previously discussed.

  • We have succeeded in bringing approximately $135 million of the $400 million into 2006.

  • As a Company, we remain intensely focused on reducing costs and improving operational execution throughout the organization.

  • As we've said previously, these cost savings are necessary to mitigate the effects of 2007 inflationary pressures.

  • In addition to maintenance expense, which I mentioned earlier, other areas exerting upward pressure on 2007 expenses are airport rents and landing fees, medical and dental expenses, and a modest salary increase averaging 1.5%.

  • Despite all of this, 2007 cost per ASM, excluding the effects of fuel and employee incentive programs, is expected to be close to flat, while capacity is expected to increase about 1%.

  • As we did last quarter, we would like to point out that our reported earnings included a number of non-cash, fresh start, and exit-related charges which can be somewhat confusing, especially since they obscure some fundamental improvements.

  • These charges are the same ones that we highlighted in the second quarter, with 1 exception that relates to a primarily below the line change to the accounting for advanced purchase of miles.

  • For the period of February through June, 2006, United recorded imputed interest expense on the average balance of amounts paid to the Company by our Mileage Plus partner, but for miles not yet allocated to customers' accounts.

  • This initial accounting was applied because the advance purchases were considered similar to debt.

  • In the third quarter of 2006, we determined that the debt treatment was not applicable.

  • Therefore, the net impact of the initial accounting application was reversed in the third quarter of 2006, which led to a $30 million decrease in interest expense, and a $6 million decrease in other revenue, both one-time adjustments.

  • Excluding the non-cash, fresh start, and exit-related charges and the benefit from the special item, our non-fuel mainline CASM for the third quarter actually dropped 0.4% from the third quarter of 2005.

  • We continue to do well on the cash side.

  • Cash flow from operations was $131 million, which was an increase of $147 million year-over-year.

  • During the third quarter we spent $93 million on capital expenditures, and $103 million for debt repayments.

  • We ended the quarter with unrestricted and short term investments of $4.1 billion, and a restricted cash balance of $860 million, for a total cash position of $4.9 billion.

  • Total balance sheet debt, including capital leases, ended the quarter at $10.5 billion.

  • We are currently analyzing our long-term cash plan and considering the best use of our substantial cash balance.

  • We clearly have more cash than is optimal, but the London terrorist incident reminds us of why we do.

  • When we determine how much excess cash we have, our first priority will be to reduce debt levels, and the first meaningful opportunity to do so is in the first quarter, when we can refinance and resize our $3 billion exit facility without penalty.

  • As we execute against our plan to improve core operations, the second quarter of margin improvement is proof of the Company's progress.

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

  • - Chief Revenue Officer

  • Thanks, Jake.

  • We continue to produce improved revenue results, benefiting from the actions we have taken to position United in the marketplace, as well as a generally positive environment.

  • As Jake noted, passenger revenue per available seat mile increased by 10% in the third quarter, which contributed to total revenue growing 11% year-over-year.

  • This is primarily attributed to a mainline yield increase of 10% over last year, a mainline traffic increase of 2% was on a 3% increase in capacity, leading to a three-tenths of a point decline in mainline load factor.

  • Both consolidated RASM and mainline RASM, excluding UAFC, grew by 8%.

  • United posted particularly good unit revenue results internationally.

  • Our strongest year-over-year performance continues to be in the Pacific, our largest international entity.

  • Strong demand and yield performance led to a 14% increase in PRASM in the Pacific year-over-year.

  • Our performance was quite good across the region.

  • In the Atlantic region, PRASM rose 11% for the quarter.

  • Although we have the second largest presence in Heathrow amongst U.S. carriers, we generated solid results compared to the industry.

  • Clearly our performance was negatively impacted by the London plot, but in our view not by a material amount.

  • Latin America is a relatively small region for United, and third quarter PRASM for this region grew 7% over the third quarter of 2005.

  • We continue to add new Ted service to leisure destinations in Latin America and the Caribbean, allowing United to build a broader range of products for our core customers.

  • Given the domestic capacity increase of 4%, domestic mainline PRASM growth of 8% was quite solid.

  • With aircraft utilization at all-time highs, the growth ASMs were provided from our resource optimization efforts, where we tend to get the capacity from off peak flight additions.

  • As such, the revenue generated is typically of a lower quality than our core system.

  • Softness in our large Hawaii operation, where other carriers have added significant capacity recently, also contributed to dampening domestic results.

  • Considering these factors, I think you can appreciate why we are encouraged by our competitive performance.

  • PRASM for our regional affiliates rose 9%, driven by a 6% increase in yields, and a 2 point increase in load factor compared to the third quarter of 2005.

  • Overall, we are seeing a slowdown in year-over-year unit revenue growth compared to the robust summer period.

  • But we are continuing to identify ways to improve both our revenue performance and our customer experience.

  • We expect the work underway will achieve both of these goals.

  • Our network optimization plans call for greater service from our Dulles hub.

  • Recently, we began flights from Dulles to Kuwait City and Narita, where early performance indication in both routes are quite encouraging.

  • Service to Rome will start next year.

  • We have also applied for authorization for the first ever capital to capital service from Washington D.C. to Beijing.

  • Given the rapidly growing economic and political ties between our 2 nations, we think this route is vitally important for the country and the economy.

  • We have been able to grow as a result of our continuous improvement efforts.

  • As I mentioned, aircraft productivity as measured by fleet utilization, improved 3% year-over-year, or approximately 19 minutes, for a total of 11 hours and 25 minutes.

  • A new record high for the Company.

  • This result was made possible by our researched optimization efforts, where Pete's team has been focused on successfully executing shorter turn times across the system.

  • We implemented at Dulles in September, and are beginning today to implement shorter turn times in our O'Hare operation.

  • That completes the system rollout.

  • As you may recall from our last briefing, Denver and Los Angeles were successfully implemented in May, Ted markets were implemented in February, and San Francisco in January.

  • The turn time reductions at O'Hare will free up capacity that we will be redeploying to Dulles.

  • In fact, the modest capacity increases we are forecasting for 2007 are simply the results of annualizing the benefits of utilization improvements created by resource optimization in 2006.

  • All in all, a a very solid performance, but with many opportunities for further improvement, and that is the area we are focused on.

  • Now, I'll turn the call back to Jake.

  • - EVP & CFO

  • Thanks, John.

  • Just a few more items before we get to questions-and-answers.

  • Guidance for the fourth quarter.

  • Fourth quarter and full year 2006 mainline capacity growth is unchanged from what we told you last time.

  • Full year Express capacity growth is up 0.5% from what we told you last quarter.

  • You can find all the details in our press release.

  • For 2007, as I mentioned earlier, we expect mainline capacity to increase about 1%.

  • We expect United Express capacity to grow about 3%, leading to a consolidated capacity increase, again, roughly of 1%.

  • These capacity increases are strictly driven by the annualization of higher aircraft utilization as a result of the 2006 resource optimization efforts John described.

  • We have no plans to acquire any aircraft.

  • We estimate that main line CASM, excluding fuel and special charges, will be 0.5% to 1.5% higher in the fourth quarter, which is slightly higher than the guidance we provided you in the second quarter, due to the timing of the rent credit I mentioned earlier.

  • For the full year, CASM, excluding fuels, specials, and severance, will be up 1.9% to 2.1%, driven by effects of non-cash exit-related items.

  • Excluding these non-cash exit-related items, our unit cost excluding fuel is expected to decrease by 0.9% to 1.9% in the fourth quarter, and 0.8% to 1.1% for the full year of 2006.

  • As of yesterday, United had hedged 34% of forecasted fuel consumption in the fourth quarter of 2006, through crude oil collars and swaps, On a weighted average basis, hedge protection begins if crude exceeds $69 per barrel.

  • Conversely, payment obligations begin if crude, on a weighted average basis, drops below the same $69 per barrel level.

  • For the first quarter of 2007, United had hedged, again, as of yesterday, 25% of forecasted fuel consumption, predominantly through crude oil 3-way collars, with upside protection on a weighted average basis beginning at $65 per barrel and ending at $74 per barrel.

  • Payment obligations on a weighted average basis, begin if crude drops below $59 per barrel.

  • And now, operator, we're ready to take any questions.

  • Operator

  • Thank you.

  • First we will take questions from our analyst community, then we will take questions from the media. [OPERATOR INSTRUCTIONS] Dave Strine, Bear, Stearns.

  • - Analyst

  • It was great to hear that the '07 CASM X-fuel will be close to flat.

  • But given that we all have slightly different perceptions of what close is, I was wondering if I could press you a little bit more on that.

  • Is that within the 0 to 1% increase range?

  • Is that fair?

  • - EVP & CFO

  • You can certainly press us, Dave.

  • But we are going through the -- our budget process.

  • So we are intentionally being a little bit vague there, because we don't have -- we haven't completed the process yet, and we obviously want to go through that.

  • But we're targeting flat, is what we're shooting for internally.

  • So it's close to hopefully at flat.

  • But we can't give you that formal guidance, as it were, yet.

  • - Analyst

  • Great.

  • Thank you.

  • And, John, I think you mentioned in your prepared remarks that you were seeing a slow down in RASM versus the robust summer.

  • And just wanted to clarify that you were just referring to the year-over-year growth rates due to the obviously comps in the industry, as opposed to any shift in the normal sequential trend we would see moving through the fourth quarter?

  • - Chief Revenue Officer

  • I think our comment there is certainly relative to a slowing year-over-year, which frankly, we anticipated, to some extent, prior to recent events.

  • Clearly, recent events have contributed to that compression.

  • - Analyst

  • Okay.

  • And then last, I guess perhaps for Glenn, a broader question about cash.

  • I knew you would be disappointed if I didn't ask.

  • - Chairman, President & CEO

  • We were so certain that you would, we had Jake speak to it in his prepared remarks.

  • - Analyst

  • And I wanted to follow-up on that.

  • You referenced 3 billion -- the potential to work on the $3 billion exit facility in the first quarter.

  • As it relates to that, number 1, how big of a slug do you think you could contend with in the first quarter?

  • And then, number 2, and maybe there isn't a perfect answer yet, but do you have a sense, given the size of the Company now, what the -- what level of cash you really want to carry?

  • - Chairman, President & CEO

  • Well, I'll say from the back end of your question, David, we're working on that issue along with the budgeting and planning process we'll be discussing with our Board toward the end of the year.

  • So it's a part of the entire planning process, and we certainly don't yet have a number selected.

  • But it is part of the work in progress.

  • I'll let Jake speak to the opportunity with respect to the exit facility.

  • - EVP & CFO

  • And the other thing is, obviously, we need to get a little more clarity on just what is going to happen to fuel over the long-term.

  • The short-term trend is obviously very good, but the situation, the market remains very volatile.

  • If it stays at the levels that we see, we think that there's a significant opportunity to do some debt reduction.

  • And an obvious candidate for that is what happens in the first quarter.

  • Our exit facility will have been out there for a year, and the call protection that exists for that first year will be gone, which will allow us the opportunity to refinance it to get a lower rate in the current environment, and also to shrink it.

  • So that's what we're focused on, is that we've done a little bit, David, of similar activities, very modest amounts.

  • But we have passed on using the pick feature on a couple of our exit-related securities.

  • We've done some other things related to the vesting of shares and things like that.

  • So we're turning our attention to utilizing cash.

  • Our first priority is going to be to improve our credit metrics.

  • But we're also very mindful of improving things for shareholders, as well.

  • So we've got to balance the 2.

  • But the first priority will be debt.

  • - Analyst

  • Good to hear.

  • Thank you very much.

  • Operator

  • Mike Linenberg, Merrill Lynch.

  • - Analyst

  • I guess, first question to Jake.

  • Tax rate -- the book tax rate that we should use for 2007.

  • I know you used 41% for the 8 months of '06.

  • Is that 41%, is that a good run rate through next year?

  • - EVP & CFO

  • I -- we haven't done all that work yet, but I know you have to put your models out there.

  • I -- maybe would be a couple of percentage points below that.

  • But in that general zip code.

  • - Analyst

  • Okay.

  • And then just another sort of accounting nit here, Jake.

  • The interest expense obviously, down a lot, benefiting from that close to 30 million good guy coming from the Mileage Plus piece.

  • As we look out going forward, though, the run rate is going to be back up, call it in the high 190s, maybe 200 million, right?

  • Is that -- do deal with the exit facility?

  • - EVP & CFO

  • Assuming for a second that we don't do anything with the exit facility, you can simply add to your models about $30 million to the fourth quarter, and then the run rate beyond that.

  • We obviously have some amount of variable debt, which causes the interest rate to go up, and an increasing interest rate environment, as we have been in recently, although it seems to have flattened, to come down, and -- but most of our debt is fixed.

  • So our run rate is pretty constant when you adjust for this change in accounting related to our prepaid Mileage balances.

  • - Analyst

  • Perfect.

  • And then just a quick last one on revenue.

  • In agreement with -- to David's question, John, about the -- seeing the slowdown in RASM growth.

  • What are we seeing at present, and even going forward.

  • Could you characterize it as stabilization?

  • I mean given that we did see some recent attempts by the industry, including yourself, to take fares up, I think 2 attempts in the last couple of weeks.

  • And yet we -- you could argue that that wasn't because oil prices were going up.

  • We've seen oil prices come down.

  • Are there pockets of strength out there?

  • What are we seeing in November-December?

  • - Chief Revenue Officer

  • I think in general, we expect to have flat, comparable load factors year-over-year.

  • I would say that we are more encouraged by leisure demand trends than some of the business demand trends, which I think as many folks have noted, may be being exacerbated by perceptions, and historically the reality around some of the TSA procedures and perceived friction around -- of that.

  • So I think we are moderately encouraged on the volume side, to the extent we see a slowing year-over-year.

  • We think that will likely be in the yield component.

  • - Analyst

  • Okay.

  • Very good.

  • Nice quarter.

  • Thank you.

  • Operator

  • Gary Chase, Lehman Brothers.

  • - Analyst

  • Actually had a question for John, Jake, and Glenn.

  • - Chairman, President & CEO

  • There you go.

  • - Analyst

  • Trying to be equitable.

  • On the other revenue side, was just curious, if you look at non-UAFC other revenue, looks like it took a little bit of a decline, certainly versus the run rate where you were in the second quarter.

  • Was just curious if there was anything if there.

  • I know there's like a $6 million thing for the mileage plan, but we're talking about a bigger change than that.

  • Is there anything major there we should aware of?

  • - EVP & CFO

  • Yes, there are like 4 things going on there, Gary.

  • The first is the UAFC, which you identified.

  • That was down $10 million, as I recall.

  • The second is our maintenance revenue is down a little bit softer than what we had originally intended, and had seen in previous periods, as we get out of some low maintenance, high -- low margin, high risk business that we didn't find very attractive.

  • So it's down from that.

  • But there's also a benefit on in the cost side, because, again, it was very low revenue, low margin business.

  • Then we also are seeing some softness, if you will, some -- in the Mileage Plus area, we're seeing 1 things. 1 is accounting year-over-year.

  • We had some changes that affected our Mileage Plus accounting that hurt it.

  • We had the $6 million change, that you mentioned, that hurt it.

  • But we do have a little bit -- coming in a little bit soft on the actual miles sold, versus what we expected.

  • And then the last thing, and I apologize for the list being so long, is we sold a subsidiary called MyPoints, that contributed about $10 million a quarter in revenue.

  • - Analyst

  • Okay.

  • Great.

  • Thanks for that.

  • Jake, also wanted to ask you, the way you pointed towards the hedge position, where you said as of yesterday, it kind of implied there's like a rolling strategy associated with hedging.

  • Just curious if you could -- if that's the case, if you could articulate for us what that strategy is?

  • - EVP & CFO

  • I articulated it as of yesterday, because we had put on some hedges between the end of the quarter and yesterday.

  • We're currently out of the market, and not doing any hedging activity right now.

  • We may look at it again and decide to get in, but we are currently out of the market.

  • And strategy-wise, in an ideal world, you would want to be putting on your -- locking in your fuel prices as you locked in your revenue.

  • Unfortunately, you have a situation here where the fuel market is in pretty steep [contango], and if you locked in the prices as people pay the tickets, I'm not convinced that the prices are actually reflective of the contango market, so going out 6 months or something, when somebody is buying a ticket 6 months in advance, I don't think the current prices are actually reflecting that kind of fuel level.

  • So we're struggling a little bit with that, which is why we are staying out of the market right now to really see where fuel is stabilizing.

  • And also to see just what happens on the revenue side of the equation, to some of the earlier questions.

  • - Analyst

  • So, no systemic program?

  • - EVP & CFO

  • No systemic program, no.

  • - Analyst

  • And Glenn, if I could just ask, one of the things you referenced, and certainly is consistent with the way we think about it.

  • You referenced that there were, I think you used the term " thousands of opportunities" at United on the cost side.

  • Just wondering if you could give us a little bit of sense of how you're driving the organization to achieve those?

  • Obviously, you and even the combined management team, you're not capable of doing thousands of things at once.

  • Not to underestimate you, but its something that has to be sort of driven through the culture -- .

  • - Chairman, President & CEO

  • Gary, if you think of the last 3 years, actually, we were doing more than thousands of things at once.

  • So it actually isn't that different in the current environment.

  • But one of the things that we get to do, post exit, Gary, is we get to involve all of our employees in activity that is much more relevant to them, in identifying and realizing cost saving initiative, than perhaps we were able to do during the distracting period of our restructuring.

  • And we now, as I said on the call this morning to our employees, I said on my 800 call to them, much of the work today engages them and involves them.

  • A good example would be airport operations, and beyond resource optimization that John chose to outline, Gary, in his prepared remarks.

  • Peter is here with us, and he can speak to the work that they are doing in continuous improvement across airport operations, with Scott Dolan responsible for that work.

  • It actually ties back to the work that we're now doing in the customer experience.

  • And the intersection between the 2 and improving the customer experience, say, in San Francisco, where we have chosen to begin, not only improves the customer experience, but, Gary, it also improves efficiency.

  • So it has the serendipitous benefit of driving down cost, while it simultaneously improves customer experience.

  • And that intersection is a very powerful one for our employees, because as we said this morning in our call with them, it is something that they can identify with.

  • We also said to our employees this morning, this is business of pennies, which you guys through your models, certainly know to be true.

  • So the to the extent that they realize that their seemingly smallish savings, that you characterized as a thousand initiatives, really do drive the ultimate result.

  • Then we get the third element of benefit, Gary, which is employee engagement.

  • And if we can improve the customer experience, improve employee engagement, and simultaneously reduce our cost, I think we're going to wring the potential out of this Company that has always been here for the management team to realize.

  • Peter, would you like to add any color to that?

  • - COO

  • Well, I know the focus largely is on CASM X-fuel, but to just add another example, this fuel efficiency team that we have in the Company that is focused on reducing block time, reducing weight on aircraft, and unnecessary contingency fuel, not just on the mainline, but also at Express, is another example of where it's not just us here, but throughout the Company, are very involved in reducing costs throughout the Company.

  • - EVP & CFO

  • Gary, let me chip if here, too.

  • We're doing -- you're absolutely right.

  • We -- the people in this room can't handle all those thousands of initiatives, notwithstanding what Glenn said.

  • And so we're doing everything that you would expect us to do.

  • We're going out there setting goals, identifying opportunities, reviewing budgets.

  • We have charged up the management team.

  • We had a leadership conference in the last month with our top 400 managers, where we painted a picture for them, and showed them what the opportunity was, and told them what was expected of them.

  • And we got great response and enthusiasm.

  • So we're doing everything that you would expect us to do to get at those costs, because, as I said, the people in this room can't do it.

  • We're going to rely on the 60,000 United employees to get at those savings, one dime at a time.

  • - Analyst

  • Okay, guys.

  • Appreciate the time, thanks.

  • Operator

  • Jamie Baker, JPMorgan.

  • - Analyst

  • Just to follow-up on David Strine's question on 2007 unit costs, the flattish guidance you gave, Jake, was against a $0.076-type figure this year; is that correct?

  • I guess I'm just a little bit surprised, given that this year's first half costs were not that impressive, that flattish is the best you're guiding for.

  • - EVP & CFO

  • We obviously had some challenges early in the year, and are going to face some challenges next year in the areas that I identified, maintenance.

  • We see a big increase year-over-year in rents and landing fees at -- airport rents and landing fees.

  • And then healthcare costs, and the modest salary increase.

  • So we do see some significant inflationary pressures moving against us there, and think we can -- trying to get it too flat.

  • But that's our current assessment of what the opportunity is against the inflationary pressures that we see.

  • - Analyst

  • Okay.

  • Just wanted to make sure I wasn't looking at my CASM on an apples to oranges basis.

  • John, a question on international fuel surcharges.

  • Are there any crude price levels that we should be focussed on, as to whether any significant roll-offs of those surcharges start to occur?

  • And in fact, are crude prices a specific input into your internal RASM model?

  • - Chief Revenue Officer

  • Well, fuel prices are not directly linked to our future adjustments, relative to fuel surcharges in the region.

  • Although as you've seen, some carriers have gone out in that regard.

  • So, I think that the -- when we talk about the connectivity between fuel price and RASM, I continue to drop people's focus back to -- without capacity discipline, that connection is weak.

  • So, we're focused on capacity discipline.

  • - Analyst

  • Okay.

  • And then finally, just a quick question for Glenn.

  • I'm curious if, given the continued industry recovery and sharply higher equity values, if the window on consolidation has now closed?

  • - Chairman, President & CEO

  • I'll say that I continue to take the position that the opportunity for the industry to move beyond the improvements that we have as individual carriers realized, is to improve the competitive landscape for the next iteration of cycles.

  • So I think that from my perspective, it is something that strategically would be of benefit to the industry, and I suspect that those of you on the call know that as well as I do.

  • Whether or not opportunistically we reached a point in which the will is not there, is really only for time to tell.

  • - Analyst

  • Okay.

  • All right.

  • Thank you for all the color, gentlemen.

  • Appreciate it.

  • Operator

  • Ray Neidl, Calyon Securities.

  • - Analyst

  • Yes, Jake, I just want to clarify the tax rate.

  • Looks like it was 24% this quarter, and I think you alluded next year it's going to be about 38%?

  • It's non-cash.

  • But is that a correct assumption?

  • And for the year for 2006, or the fourth quarter in 2006, is it going to some kind of a mix of a tax rate of about 25%?

  • - EVP & CFO

  • I don't know that I have those numbers handy, Ray.

  • We had to obviously book in the quarter.

  • We didn't book anything in the first or second quarters, and so our situation is a little bit confusing.

  • Also because we only book taxes as relates to the post-exit period.

  • So it's only for beginning in February.

  • But we had to book them on a year date-basis, and so when we provided the guidance earlier, we were thinking of the tax rate as something in the high 30s for next year.

  • - Analyst

  • Okay.

  • Fine.

  • - EVP & CFO

  • And that would apply for the fourth quarter, as well, because we are caught up year-to-date.

  • So the fourth quarter would be a similar rate.

  • - Analyst

  • 38%.

  • Okay.

  • Great.

  • And just a clarification on the regionals.

  • The expenses were always higher than the revenues for the regional operation into the second quarter, and then it did a reversal.

  • Was this just an accounting change, or did you really wring out your partners and reverse the contracts?

  • Is this something real -- ?

  • - EVP & CFO

  • This is a fundamental change.

  • - Analyst

  • Fundamental.

  • - EVP & CFO

  • We renegotiated our regional contracts and lowered our costs.

  • We restructured the network.

  • We added 70-seat regional jets to the network, and we obviously, are enjoying a robust revenue environment.

  • But I would like to add that that turnaround in performance in the third quarter, also we pay higher fuel costs in the regional line, we pay those guys fuel bill.

  • So that we overcame higher fuel costs in the regional line, as well.

  • But that's a fundamental performance -- .

  • - Analyst

  • Okay.

  • Great.

  • That's pretty good then.

  • And Glenn, I guess this is just more of a general question.

  • I don't know if you can answer it or not.

  • I know that it's hard to retain good airline management, because it's a very competitive -- people can jump out of the industry and so forth.

  • But with the recent contract changes, I think your pilots are a little upset about that.

  • And their contracts don't become amendable till 2010, but they are making noises like they want to amend their contracts.

  • I was just wondering if you could comment on what they could do, or if they could go back to 2000, where they were disrupting service?

  • - Chairman, President & CEO

  • No, Ray, I think that we worked very hard to put the contracts in place that we have.

  • As you know, we put them in place through consensual negotiations.

  • We view our contracts as solid contracts and assets of the Company.

  • We're going to do exactly what I said we were going to do, relative to all employees, not just pilots.

  • And my previous response, we're going to engage our employees in our success.

  • We're going to make them a part of our success, and as we succeed, they will, too.

  • You will note that we made a booking here for profit sharing considerations this year, and it's that type of focus that we're going to take, rather than amending contracts.

  • - Analyst

  • Okay, great.

  • And just finally, your partner in Canada, Air Canada, is experimenting with pricing, variable pricing, and they've monetized their frequent flyer program.

  • Are you observing what they're doing and maybe -- ?

  • - Chairman, President & CEO

  • Nope, never heard of them.

  • - Analyst

  • -- adopting what they're doing?

  • Or is it something that is just unique to Canada?

  • - Chairman, President & CEO

  • Ray, we're -- we have been very attentive to what our colleagues and our codeshare partners, and our Star Alliance partners have done, both in pricing and in organization, including the organization of their business units and their loyalty program.

  • Much of it, I think, is in fact unique to the Canadian market, and as you know, the relative lack of scale in the Canadian market.

  • But that having been said, they are genuinely innovative.

  • And whenever we get the opportunity to sit down with them and compare notes, we do take note.

  • - Chief Revenue Officer

  • Ray, I might just add, this is John.

  • I think that our success with Economy Plus is indicative of our ambition in this area, which is really enabled through the easy check in units and the e-commerce platforms.

  • As you know, we set a target of $100 million for next year, and we're trending very strongly towards that.

  • And I hope sometime during the year, frankly, to be in a position next year to raise that.

  • Our ambitions have been historically a little bit inhibited by the flexibility of our e-commerce platform.

  • We're making good strides in that regard.

  • We have in customer beta testing right now, a new platform.

  • And I'm hopeful that over the next few years, that's going to allow us to take some of the learnings we have from Economy Plus, possibly along the lines of some of the things you've seen Air Canada execute on, and begin to put our toe in that water, which we think is a pretty meaningful opportunity for the Company long term.

  • - Analyst

  • Great.

  • Thank you very much.

  • Operator

  • Dan McKenzie, Credit Suisse.

  • - Analyst

  • I'm hoping you can provide a little bit more perspective or color about how you folks plan to compete with low cost carriers.

  • Your capacity guidance of up 1% for 2007 of course, is encouraging.

  • But as I look at a couple of markets, Southwest ramping up 7 times in October between Dulles and Chicago, and it looks like for the first quarter, you folks are going be to reducing capacity in that market 4%, and similar with Denver.

  • It looks like capacity might be down 1% between Dulles.

  • And so I'm just just wondering if you can provide a little bit more perspective of how you plan assets around with respect to low cost carriers as we look ahead?

  • - Chief Revenue Officer

  • Well, Dan, this is John here.

  • I think our results are the best indication of how we plan to compete with low cast carriers, and we think we are doing so quite effectively.

  • We don't have a one size fits all model.

  • We clearly are driven by our desire to drive financial performance at the Company.

  • In some cases, that leads to increases in capacity to respond to competition as a responsible decision.

  • In some cases, it leads to a regauging to respond to competition.

  • So, we don't have a formulaic approach to that.

  • Clearly in Denver, you saw us increase substantially this spring as a result of resource optimization.

  • Even following the failure of Independence Air, we've continued to grow our operation in Dulles.

  • So we're very confident about the depth and breadth of our schedule relative to low cost carriers.

  • And I think that frankly, the results are an indication of the strength of our proposition against LCCs rather than any impending concern.

  • - Analyst

  • Sure.

  • And looking ahead to next year, it appears at least from early signs here, that corporate travel budgets are going to be flat.

  • And it appears that corporate travel managers hope to achieve that, despite higher fares and hotel rates via reduced travel, and by the purchase of more nonrefundable fares.

  • And I'm wondering if you can provide some perspective of what you're seeing from your corporate travel customers?

  • Delta, of course, looking to undercut on transcont -- transcon, pardon me, with their business product.

  • And just if you can provide some perspective about achieving a revenue premium in an environment, or context of tight corporate travel budgets?

  • - Chief Revenue Officer

  • Well, I think what drives continued revenue improvement is certainly and partially related to pricing environment, and structure and corporate demand.

  • But it is also related to some of the work we're doing for example, on network optimization.

  • The decisions that we made relative to exiting the New York-Tokyo, New York-London are very good in terms of improving revenue performance over time.

  • Capacity discipline is a big driving component.

  • So we have many levers that are available to us to create improved revenue performance, and we're not purely at the mercy of what the trend line is in corporate spending.

  • I think notionally, we're hearing the same things you are.

  • But I would add that that's somewhat typical to hear in the fourth quarter, as we're all budgeting.

  • It's not too different than Jake's flat guidance to our management team.

  • So I think that remains to be seen as to how it will actual play out next year.

  • But I think it would only be natural, given the significant increases the industry has accomplished this year to compensate for the fuel environment.

  • Corporations are going to be very focused on controlling this line item as a variable expense.

  • And we're going to have to make progress on the levers we have more influence on to overcome that.

  • - Chairman, President & CEO

  • I think the point that John made to triangulate back to John's point on the discretionary up sell opportunity, that of the smaller business passengers that we carry, with respect to Economy Plus, is an example of strategies that mitigate what you might be hearing just from corporate travel managers.

  • There is still a good bit of discretion across our network for small business people to realize in part of our ambition to take full advantage of the revenue opportunity we've got with all of the products that we've got in the marketplace, Dan.

  • - Chief Revenue Officer

  • And I think, Dan, we don't view our performance as a steady-state outcome.

  • We're on a multi-year improvement to position the Company more favorably versus the competition.

  • So we've never viewed that our revenue performance over the next few years will in effect, trade purely on whatever market fundamentals are.

  • - Analyst

  • Okay.

  • Great.

  • Thanks very much.

  • Operator

  • Helane Becker, Benchmark Company

  • - Analyst

  • Jake, I think you said that the impact from -- on the changes in security directives was rather minimal.

  • And I was just kind of wondering, is that because your business mix has changed so much that it's more leisure travel?

  • Or, is there something -- do more people check their bags anyway on your flights?

  • I'm trying to figure out why other airlines were seeing impacts in the $20 million to $50 million range, and yours was small.

  • Or is 20 to 50 million small?

  • - EVP & CFO

  • The number I cited was on cost side only.

  • And so that was driven by the higher bag check rates, and some of the overtime that we had to put on at the airports to handle that, and some of the delays that we saw.

  • We -- Pete and his team did a fabulous job seeing our way through that.

  • We only cancelled 3 flights, which was a lot different than what some other people did.

  • So we think that we operated very strongly through that.

  • John mentioned that we saw some effect on the revenue side, but we didn't classify it as material.

  • As you well know, identifying and isolating what is exactly due to the London terrorist incident versus the normal seasonal pattern, is very, very difficult.

  • We clearly saw some choppiness in post August 10th environment, in terms of the booking environment.

  • We saw a fall off of bookings, as John would add here, but it recovered.

  • And so it's really hard to nail down a number.

  • But I'm convinced that we saw less effect than some of our competitors did.

  • And part of that was we were really solidly booked going into the event.

  • And then Pete and his team did a fabulous job managing our way through it.

  • So we had less customer disruption than perhaps some other people did.

  • - Chief Revenue Officer

  • I would just emphasize Jake's point, we had a very solid profile going into the event.

  • We're very optimistic for the region as we went forward.

  • And I think it's hard, given double-digit RASM increases year-over-year.

  • I mean, could it have been better?

  • Obviously.

  • But difficult to attribute a whole lot to that.

  • Now, I think, as we mentioned, relative to the fourth quarter outlook, clearly this is causing some potential softness in year-over-year comps.

  • But to attack that with preciseness is difficult.

  • - Chairman, President & CEO

  • I think a good example of one of the questions that was posed earlier, on the multiple opportunities that we have across the organization, to realize the best possible outcome.

  • And the combination of our operating people on the ground at Heathrow, and the fact that we were going into the experience and leaning in a robust position, the consequence of work that John and his team had done, was a nice intersection of circumstance that I think led to an outcome where we didn't see the effects that some of our peers have described.

  • - Analyst

  • Okay.

  • And then, with just a follow-up to that, if you don't mind.

  • Just on bookings going forward, John, I think you just said that -- or you said earlier that the load factor was going to be what year-over-year?

  • - Chief Revenue Officer

  • I would say it's flattish.

  • - Analyst

  • Okay.

  • - Chief Revenue Officer

  • Year-over-year.

  • So, I mean, we don't see any significant movement in load factor, year-over-year.

  • - Analyst

  • And the holiday is booking up pretty good, I'm hearing?

  • - Chief Revenue Officer

  • I think we're -- I mean, obviously, when you look at the fourth quarter, load factor is driven quite a bit by those 2 or 3 week periods, and we're not seeing anything that concerns us in that regard.

  • - Analyst

  • Great.

  • Thanks for your help, everybody.

  • Operator

  • Thank you, ladies and gentlemen.

  • This concludes the analyst and investor portion of our call today.

  • Before we take questions from the media, I would now like to turn the call back to Mr. Tilton for closing remarks.

  • - Chairman, President & CEO

  • Thanks very much.

  • And we appreciate all of the questions and the dialogue.

  • We hope that we have provided you with some better understanding of the quarter, and of our views going forward, despite the fact that one of you commented that we now have a press release that's 23 pages long.

  • One of our ambitions, frankly, is to reduce the number of pages in the press release over time, and we think we'll accomplish that, as well.

  • We think that the bottom line here is that we're performing against the core performance agenda that we've set for the Company, realizing the potential of United.

  • We're very much encouraged by these 2 consecutive quarters.

  • But we are by no means satisfied, which I'm sure you have come to realize.

  • But we do think that we have created momentum.

  • We think that that momentum is a function of many of the things that you have queried on the call.

  • Not the least of which is employee engagement and improving our customer experience.

  • And continuous improvement and the application of standard work across United's complex business model.

  • We're making the most of the opportunity that we created in the restructuring and the foundation that we now have no work off of.

  • And we're going to continue to execute against the very agenda we've discussed with you today.

  • So with that, thank you very much for your participation and your questions.

  • And we'll look forward to the next opportunity to engage you.

  • We would now like to turn the question-and-answer session over to the media participants on the call.

  • Operator

  • [OPERATOR INSTRUCTIONS] Ted Reed, TheStreet.com.

  • - Media

  • I've got a couple of things.

  • First of all, Jake, were you talking about operating a fuel subsidiary that has revenues that are Incorporated into your RASM number?

  • - EVP & CFO

  • The reference I made excluded those revenues.

  • We do have a fuel subsidiary, and we outline in the footnotes to our press release exactly what the fuel subsidiaries' revenues are.

  • But when we quote our unit revenue improvement, we exclude the [inaudible] that fuel subsidiary.

  • - Media

  • Also on that, you -- $400 million targeted for cost savings in 2007.

  • That was realized -- that will be realized in 2006?

  • - EVP & CFO

  • We said that there was 135 of the 2007 -- of the $400 million from 2007 realized in 2006.

  • - Media

  • One other thing for Glenn.

  • You've been talking a lot about consolidation, and my impression is that the reaction of the industry has been luke warm to this.

  • Are you disappointed by the reaction within the industry to your talk of consolidation?

  • - Chairman, President & CEO

  • No, I think that the reaction has been personal.

  • It's depends on the circumstances of anybody that would respond to a question about it.

  • I think, Ted, from an industry perspective, it would be of benefit to the industry.

  • I don't think the industry is significantly different from other industries that you might cover, that have benefited from constructive consolidation.

  • But at the end of the day, it's at the discretion of the individual participants in any industry as to whether or not it's an appropriate thing for them to contemplate.

  • And having been through it with a number of industries, I'm accustomed to it.

  • - Media

  • So this is typical of other industries, then, that somebody calls for consolidation, everybody says we don't need to consolidate?

  • - Chairman, President & CEO

  • It's typical of other industries that it is left to the discretion of the owners of those particular companies.

  • - Media

  • Okay.

  • Thank you.

  • Operator

  • Eric Torbenson, Bloomberg News.

  • - Media

  • You made mention of the potential year-over-year slowing in some of the metrics in terms of yield going forward, John.

  • I wanted to ask if you thought that this at all felt as if you had passed the cycle's peak in terms of overall demand?

  • I mean, is that in the rear-view mirror for you now?

  • And if that is the case, do you think for this cycle, could you talk a little about the -- I guess of the complexity of your operations, which obviously gathered a lot of really good revenue this quarter.

  • But going forward, is that going to be the same level of complexity going forward?

  • - Chief Revenue Officer

  • Well, I think, it's important to sort of look at what we would have expected for some time.

  • And I think that our view of the fourth quarter for some time has been that we clearly would see a slowing in year-over-year improvement.

  • It's seasonally a weaker period.

  • Some of the leverage we have around the demand-supply relationship is not what it is in the third quarter.

  • So I don't think it would be appropriate to attribute all of the slowing year-over-year to recent events.

  • However, they clearly have contributed.

  • We believe some of that effect is temporary.

  • Airports are actually much easier to get through than customers' perceptions, and that is getting better each and every day.

  • So I think to the extent we're experiencing a drag based upon the perception of inconvenience, that's either gone away, or is really in the process of being mitigated.

  • We really don't see the complexity per se, relatively-speaking, in the business model that many people attribute to it.

  • I mean, our model is very similar to peer companies within the industry.

  • Our customers vote every day with their dollars that they value that model.

  • So I think that we remain very, very confident in the Company's strategic positioning with its customers.

  • And clearly I see in the undertone here, we're not calling a secular change in our positive outlook around the basic demand for the industry, and particularly for United's products.

  • - Media

  • And just real quickly, in terms of the issue of fleet, with the margins you're generating now and your cash position, there's just a lot more of the typical rumors floating around about potential of replacement aircraft for what you're doing.

  • I know you don't want to show your cards on it, but can you talk just in real general terms about the process where you think about some sort of fleet [inaudible]?

  • - Chief Revenue Officer

  • Yes, I thought I was fairly clear on the call on that.

  • We have no plans to acquire any aircraft.

  • - Media

  • No, you were clear.

  • I'm just saying that -- you were very clear about no aircraft.

  • But I mean, at some point in time, your competitors, especially in a global environment, are going to be coming on with some different metals, more efficient aircraft, in some markets.

  • Is it something that you've been looking at to start a process to think about new planes, as your sales clearly are really improving, and perhaps justify such a move?

  • - Chief Revenue Officer

  • We have the benefit of having one of the younger fleets in the industry for network carriers.

  • And having said that, obviously it's getting a year older every year, as we don't replace planes.

  • The oldest planes in our fleet are our 737s, which are kind of 17 or 18 years old now, and you would typically fly those well into their 20s.

  • So we have a lot of time before we actually need to take any replacement action.

  • Having said all of that, there are some attractive aircraft types out there.

  • They aren't available for many -- for several years at least.

  • The 787 is an attractive aircraft.

  • The A350 may or may not be an attractive aircraft, we'll just have to wait and see.

  • And those may be something that sometime we're interested in.

  • We don't plan to begin any of those processes until we've have had a consistent track record of meeting and beating our business plan.

  • And we have got basically 2 quarters under our belt right now, and we would like to see at least another 2 quarters under our belt, preferably 4 quarters under our belt, before we start thinking about that sort of thing.

  • - EVP & CFO

  • Eric, the only thing I would add is that's not the only lever we can pull to improve the customer experience, relative to our equipment.

  • We've announced a multi-$100 million project to improve our premium cabins that we will begin to put in the marketplace next year.

  • We believe that is market leading.

  • We will reveal it to the market probably in the first quarter of next year.

  • So we're making significant investment in making our current fleet even more competitive from a customer perspective.

  • - Chairman, President & CEO

  • I think the other thing, Eric, that both John and Jake spoke to, and certainly Greg and Pete would agree, is the role that the 70-seat aircraft has played in our customer's current experience, which is an integral part of the new United that pre-restructuring didn't exist.

  • - Media

  • Got you.

  • Thanks very much all of your for your help.

  • Operator

  • Mary [Wisinski], Chicago Sun-Times.

  • - Media

  • Jake, I just had a question regarding you had talked about a modest 1.5% salary increase.

  • I wonder to which group of employees that applies.

  • - EVP & CFO

  • What I was referring to was on average, it would be a 1.5% increase.

  • We have -- all of the employees have slightly different increases.

  • So the pilots get a 1.5% increase in May, the flight attendants get a 2% increase in May.

  • The IAM gets a 1.5% increase in May.

  • The AMFA, our mechanics union, gets a 1.5% increase in January.

  • And then we'll likely do something with our salaried and management group, as we did this this year.

  • So when you sort of go through all of that math, it averages out to about 1.5% for the year.

  • - Media

  • Does that include what executives receive?

  • Or is that on a different -- done with a different measure?

  • - EVP & CFO

  • That includes what executives receive.

  • - Media

  • Okay.

  • Thanks.

  • Operator

  • Kelly Yamanouchi, Denver Post.

  • - Media

  • I'm wondering what were the changes to your regional contracts that reduced your costs there?

  • - Chief Revenue Officer

  • [inaudible] I think principally it was the replacement of Air Wisconsin year-over-year.

  • But a big lever that Jake mentioned, too, was the enormous efficiency of the 70-seat jet that has a tremendous unit cost advantage, as well as a significant attractiveness to our customers.

  • - Media

  • Okay.

  • Operator

  • Steve Lott, Aviation Daily

  • - Media

  • I wanted to ask the performance specific to the Ted operation and PS.

  • How is that operation doing?

  • And seems you haven't been too interested in expanding it.

  • Obviously Ted expanded a lot last year.

  • Is that on hold for a while?

  • - Chief Revenue Officer

  • Well, I think, our expansion view with Ted shouldn't be per se any indication of our satisfaction with the initiative.

  • We size the operation currently much higher than our original intentions were, based upon the success that we had.

  • So the fleet complement we have today is larger than we outlined initially.

  • It's doing exactly the job we set it out to do, which is to improve financial performance in highly competitive leisure markets.

  • So we are selectively growing that, particularly in the Caribbean and Mexico, and are very satisfied with the brand and the product line.

  • PS is improving daily, and is well in excess of our initial business case.

  • And we do have an eye towards potential of expanding that operation in the future.

  • Nothing to announce at this point in time.

  • But it clearly -- it's performance justifies serious consideration of more product, and we'll continue to evaluate that.

  • - Media

  • Okay.

  • And in terms of international and specific Transatlantic expansion out of Dulles, you announced Rome for next year.

  • Anything beyond that, or do you not -- do you not have the aircraft to add any more flights?

  • - Chief Revenue Officer

  • We're in the process of finalizing our schedules for the summer of '07, and I think you'll possibly see some additional modest increases relevant to our Transatlantic schedule.

  • - Media

  • And are you able to follow any of -- some of the other carriers are that are using -- or are you interested in using 757s flying Transatlantic.

  • - Chief Revenue Officer

  • The 757 for United is a little bit of a different of animal, frankly, simply given the relative range out of Dulles, as compared compared to Newark.

  • So that opportunity, which has been very successfully implemented by some of our competitors, would appear to be much more limited, given our route structure.

  • - Media

  • Got you.

  • Okay.

  • Thanks very much.

  • - Chairman, President & CEO

  • I think that the indication here is that's the last question.

  • We appreciate the participation very much.

  • And with that, we'll conclude the call.

  • Thank you.

  • Operator

  • Thank you for your attendance in today's conference.

  • This concludes your presentation.

  • You may now disconnect.

  • Good day.