聯合航空 (UAL) 2006 Q4 法說會逐字稿

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

My name is Katina and I will be your conference facilitator 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 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.

Thank you, operator.

Welcome to UAL's fourth 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 a.m.

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'd like to turn the call over to Glenn Tilton, UAL's Chairman, President, and CEO.

Thanks, Robert.

And good morning and welcome to everybody on the call.

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

Pete McDonald, our Chief Operating Officer;

John Tague, Chief Revenue Officer; and Graham Atkinson, who has joined us, our EVP of the Customer Experience.

They're all here and available to take questions as the call proceeds.

Our fourth quarter and full year 2006 results show continued improvement in United's core business and reinforce the trend that has been evident throughout the year.

We are delivering against our performance agenda of continuous improvement, controlling our costs, optimizing revenue and improving our customers' experience.

Our fourth quarter financial results reinforce the work that we are doing.

Our financial performance is steadily improving, and these results would have been better absent the significant storms in our two largest hubs, which both Jake and Peter will discuss in later detail throughout the call.

Now I'd like to share some of the highlights of the quarter with you.

Our operating margin improved by 4.6 points, year-over-year to 0.5%.

This was up from a negative 4.1% in the same quarter a year ago, and it marks the third consecutive quarter that we have shown margin improvement at United.

In the fourth quarter, on a consolidated capacity increase of 3%, our consolidated revenues were up 5% to some $4.6 billion, a $200 million increase from the year-ago quarter, while our total operating expense was essentially flat.

For the 11 months following exit from Chapter 11 we reported net income of some $25 million.

As everyone on the call knows, this has been an evolving year for the airline industry, and a defining year for us at United.

We began the year with our emergence from a restructuring that created the platform, the foundation, for the work that we have been doing this year.

We have said from the beginning of the restructuring we would focus our energies on two distinct tracks: Running the Airline and successfully restructuring the Company.

With the work of the Bankruptcy Court behind us, we are able to sharpen our focus on our performance and our customers.

During the year we created a position of Chief Customer Officer and appointed Graham to drive the work of delivering a consistent experience for all of our customers, and an improved experience for our most frequent business travelers.

As we discussed with many of you during Investor Day, we believe the focus will lead to an increased share of our premium customers' overall travel spend.

We are also seeing results from our strategy of delivering the right product to the right customer at the right time.

We are pleased with the performance of products, such as Ted, Explus, and PS, and customers continue to take advantage of the opportunity that we provide them to purchase an upgrade to Economy Plus.

Earlier this year, we announced a significant upgrade to our international premium class product, which we will begin to roll out in late 2007.

This product will be installed on all 97 of our international aircraft by the end of 2009.

This industry-leading product is just one of the initiatives we are focusing on as we continue to find ways to better serve our customers with products and services they value and they are willing to pay for.

We have improved our network, exiting unprofitable routes, and we are flying to more destinations than we did prior to our restructuring.

We recently added service to Kuwait, and we will start soon to add service to Rome, Frankfurt, Hong Kong, and Taipei.

Starting in March, we will begin connecting the capitals of the United States and China with our Beijing-Dulles route.

This combination of targeted products and unmatched network and an improving customer experience is enabling United to win significant and profitable corporate accounts away from our largest competitors.

And we have several that are starting to fly with United this month.

We have a strong and focused management team that is focused on the need for cost control and continuous improvement.

Our work on resource and network optimization have enabled us to add the flights I just mentioned, without having to purchase additional airplanes.

And we are improving our on-time performance.

We're pleased with our improving performance in 2006 and we're optimistic about 2007.

Industry fundamentals and, importantly, United's fundamentals are very solid.

While we're seeking a -- while we're seeing a deceleration in revenue growth, demand is solid and we are hopeful that industry supply will remain in balance with demand.

At United, the management team is driving the work that continues to make our Company more competitive, whether implementing resource optimization initiatives or winning the hotly contested China route.

Our operating margins continue to improve.

We face limited debt maturities and we're in the process of reducing our exit facility by some $1 billion.

We have limited capital expenditures planned and no aircraft capital spending.

With our financial structure, we are poised to potentially generate a high level of free cash flow.

In closing, we accomplished much this year.

We have set the stage for the work our management team and our employees will do in 2007 and beyond.

As we press ahead, we have got the right management team and the right employee group in place to lead these efforts.

Now I'd like to hand the call over to Jake to take us through more detail of the numbers.

Jake, over to you.

Thanks, Glenn.

Good morning, everyone.

As Glenn said, we have continued to maintain momentum we built throughout the year.

We reported a net loss of $61 million in the fourth quarter, and net income of $25 million for the 11 months since we emerged from bankruptcy.

The fourth quarter results represent a year-over-year improvement of $234 million, excluding reorganization and special items.

For the quarter, both basic and diluted loss per share were $0.55.

For purposes of EPS calculations, basic and diluted shares for the fourth quarter were 116 million.

For the full year of 2006, basic shares were 115.5 million, and fully diluted shares were 116.2 million.

We were pleased to record an operating profit rather than the small operating loss we had forecasted a couple weeks ago.

Yield for the end of December came in better than we expected, and costs were also a bit lower.

That flipped us from a small operating loss to an operating profit of $23 million.

This compares to an operating loss of $182 million in the fourth quarter 2005, an improvement of more than $200 million year-over-year.

As Glenn mentioned, our operating margin improved by 4.6 points year-over-year to 0.5%.

Our fourth quarter pretax loss was benefited by a noncash income tax benefit of $39 million.

In total, for the 11 months since emergence, the new UAL booked income tax expense of $21 million, an effective tax rate of 48%.

I'd like to emphasize that our tax computations are for the new UAL, and are based on net income since emergence, not the entire 12-month period.

The tax rate is higher than the guidance I provided on the third quarter call primarily because the effect of permanent differences are amplified when pretax income is near the break-even level.

As I have mentioned in the past, income tax expense should be viewed as a noncash item.

We do not currently anticipate paying any material cash taxes in the near future due to our large NOL balance.

Let me mention a couple of items that affected the results in the quarter.

First, as Glenn mentioned, three major winter storms in December resulted in significant flight cancellations.

At the beginning of December, O'Hare was hit by the first major storm resulting in the cancellation of 900 flights.

Just before Christmas, the extraordinary closure of our second largest hub at Denver International Airport for over two days resulted in the cancellation of 2,800 flights.

And then Denver was hit by a second blizzard just prior to the end of the year that resulted in the cancellation of an additional 200 flights.

These storms reduced mainline and consolidated capacity by six-tenths of a percent.

We estimate the storms reduced revenue by $40 million.

Second item I want to touch on, in the fourth quarter the Company entered into an exercised fuel hedges that were classified as economic hedges.

We recognized a loss on the hedges that settled in the fourth quarter of $13 million, and also recognized an unrealized mark-to-market loss of $2 million for hedges that will settle in 2007.

Any realized gains or losses from the 2007 positions will be adjusted by the unrealized mark-to-market loss that we booked in the fourth quarter.

As I mentioned last quarter, all of the realized and mark-to-market gains and losses are booked in the fuel expense line.

As we have mentioned, unit earnings, RASM minus CASM, is a key measure of our financial performance.

Our mainline unit earnings for the quarter increased to 0.07 cents from a negative 0.28 cents a year ago, while our mainline unit earnings excluding fuel expense were up 8% to 3.29 cents.

Our regional affiliate operations essentially broke even in the quarter, which was an $81 million improvement from the fourth quarter 2005.

Despite a seasonally weak period and tougher year-over-year comparisons, we continue to improve our revenue results, a direct result of the actions we have taken to position United in the marketplace, as well as a generally positive fare environment.

As many of you are aware, United's absolute revenue performance historically outperforms the industry in the second and third quarters of the year, and underperforms it in the fourth and first quarters.

This performance pattern is primarily due to structural network differences, as United has strong east-west traffic flows that benefit it during the spring and summer months, and relatively smaller north-south traffic that benefit the fourth and first quarter of some of our competitors.

This is why we typically provide rolling 12-month comparisons to remove seasonality when we show competitive comparisons.

United posted strong revenue results for the full year 2006 compared to 2005, with mainline PRASM increasing 9.1%.

Fourth quarter consolidated PRASM increased by 3.7%.

Mainline PRASM grew by 3.4%, with a year-over-year increase in mainline yield of 3.6% and a mainline traffic increase of 1.3% on a 1.5% increase in capacity.

Mainline RASM, excluding revenue from UAFC, our fuel trading subsidiary, grew by 3.3%.

Given our capacity growth, the hit we took to bad weather, and a fresh-start related accounting effect that I will describe later in the call, we think our revenue performance is quite competitive.

Unit revenue performance was particularly strong in our international markets, continuing the trend that we reported in the second and third quarter.

Pacific PRASM was up 6%, the Atlantic had a 7% increase, and Latin America had a 13% increase over the year-ago quarter.

Demand and yield growth continues to be strong in the Pacific and the Latin markets, and stable in the Atlantic.

Domestic mainline capacity increased 1.5% during the quarter.

Despite the capacity growth, the effect of tougher year-over-year comps, and the effect of the three winter storms, which mainly affected domestic revenue, domestic mainline PRASM grew 1.1%.

Regional capacity in the fourth quarter grew by 14% as compared to the year ago quarter.

Despite an Express passenger length of haul increase of 9%, regional PRASM growth was flat, driven by a 1.7% decrease in yield and a 1.3-point increase in load factor compared with fourth quarter of 2005.

Primarily driven -- primarily due to a decline in other revenue, driven by lower revenue from UAFC, mainline RASM increased only 1.5%.

Turning to expenses, which were a major management focus in 2006, and will continue to be in 2007 and beyond, total fourth quarter operating expenses were essentially flat year-over-year.

This was the first quarter in several years with lower year-over-year fuel expense.

Including the cost of hedging, average mainline jet fuel price, including taxes, was $2.01 per gallon for the quarter, compared with $2.09 last year.

Let me walk through some of the other line items with significant changes.

Salaries and related was the cost category showing the largest increase.

Most of the increase was in fringe expense, which was up about $85 million.

The factors driving that were mainly noncash true-ups with last year's true-ups to pensions and Workers' Comp being favorable to 2005 results.

And this year's to retiree medical being unfavorable.

We are seeing continued increases in medical and dental expenses, which also contributed to the year-over-year change.

On the salary side, the cost increases were driven by FAS 123R expense and our profit sharing programs.

We did not see much growth at all in average salaries.

Purchased services were up $21 million, or 5% for the quarter.

This was a similar year-over-year increase to those in the second and third quarters, and was caused by increase outsourcing.

The offset to this is that our employee productivity trend continued on its upward trajectory, with a 4.4% improvement year-over-year.

Aircraft maintenance and outside repairs increased by $5 million over the fourth quarter of 2005.

Relative to the first three quarters of 2006, this quarter we experienced a lower year-over-year growth rate in this line.

This relatively low increase was largely driven by unusually high maintenance expenses in the fourth quarter of 2005 due to certain transition costs we incurred from switching over to a power-by-the-hour contract for our PW4000 engines.

In the first quarter 2007 we expect maintenance expenses to be 5% to 7% higher than 2006, driven by engine aging, growth in airframe volumes, and increasing materials expense.

Other operating expenses decreased by 20% this quarter, primarily driven by lower advertising and marketing expenses, and two favorable insurance settlements.

Mainline CASM decreased 1.7% from the fourth quarter of 2005, while mainline CASM excluding fuel and special items increased 1.7%, slightly outside the guidance we gave you on the third quarter call.

However, if you adjust for the impact of the reduced capacity and the extra nonfuel expense that resulted from the December storms, mainline CASM excluding fuel and special items was up only 1.1%, right in the middle of the guidance range.

Just to be clear, the effect of the storms reduced costs in total, but the biggest reduction was in fuel expense.

Excluding fuel, the storms increased our costs.

The Company captured $300 million in benefits that we targeted for the year, as well as an additional $135 million from accelerating initiatives planned for 2007.

We are also on track to achieve the additional $265 million of cost savings to fulfill the $400 million cost program announced in the second quarter of 2006.

We remain intensely focused on reducing costs and improving operational execution throughout the organization.

As I stated before, these cost savings somewhat mitigate the effects of 2007 inflationary pressures.

We continue to expect upward pressure on maintenance expense, as I mentioned, airport rents and landing fees, medical and dental expenses, and a modest salary increase averaging 1.6% across all work groups.

As we have done in past quarters, we'd like to point out that our reported earnings include a number of noncash fresh-start and exit-related charges which can be somewhat confusing, especially since they obscure some fundamental year-over-year improvements.

I'd like to particularly highlight the effect on revenue in the fourth quarter, as it's been much larger than in previous quarters, and it affects the comparability to year-over-year and to other carriers.

At exit, United began using the deferred revenue method for its frequent flyer accounting.

This method has been adopted as the international standard by the IASB.

And United is currently the only major U.S. carrier that follows this practice.

While we believe the deferred revenue method more accurately depicts revenue performance, it also leads to greater revenue volatility.

In the fourth quarter, the new methodology resulted in a $95 million reduction to revenue we would have otherwise recorded under the old methodology.

Excluding UAFC and this noncash fresh-start accounting change, fourth quarter mainline RASM increased 5.9% year-over-year versus the 3.3% we reported.

We expect to see a significant negative year-over-year impact of this accounting change in the first quarter of 2007 before it begins to annualize.

On the cost side, excluding noncash fresh-start and exit-related charges, our year-over-year nonfuel mainline CASM for the fourth quarter and full year actually dropped approximately 1% from the comparable period in 2005.

We are really looking forward to the day when we annualize these exit-related expenses.

Turning to the balance sheet, we estimate we spent $131 million on capital expenditures and $122 million for debt payments.

We ended the quarter with a total cash balance of $5 billion, of which unrestricted cash and short-term investments made up $4.2 billion.

Total balance sheet debt including capital leases ended the year at $10.6 billion.

Net debt, defined as on-balance sheet debt and capital leases, plus capitalized aircraft rent, minus unrestricted cash, was $9.4 billion, an improvement of $900 million from February 1st.

As I discussed during our Investor Day in December, we continue to have more cash than is optimal.

We face limited debt maturities.

We have no material defined benefit pension plan obligations.

And we have no aircraft capital spending.

We expect to reduce our cash balance by about $1 billion by paying down debt, and we have launched the syndication of a new $2 billion loan facility to replace our $3 billion exit facility.

We expect a significant rate reduction and also anticipate freeing up collateral in the facility, including all of the 101 aircraft and the spare parts originally pledged.

Our plan is to close the transaction in early February.

Now let me turn the call over to Pete to discuss our operational performance.

Thanks, Jake.

This morning I'd like to discuss the challenges that we took upon ourselves in 2006 to drive better performance for both our customers and our investors.

As Glenn mentioned, our performance agenda is focused on four areas: Continuous improvement, controlling costs, optimizing revenue and improving our customer experience.

Most fundamentally, in 2006 we challenged ourselves to make a step change in asset utilization; a set of initiatives we call Resource Optimization.

Within the Resource Optimization umbrella are a number of key efforts: tightening aircraft turns, reducing actual block time and optimizing our investment in real estate resource.

Taken as a whole, Resource Optimization contributed significantly to our success in achieving our $300 million in 2006 benefits.

Let me give you some metrics to help put into perspective the excellent work of both our frontline employees and our management team as Resource Optimization ramped up.

Let's start out with domestic average scheduled ground minutes.

This is really a proxy for how much time our airport and maintenance staffs have to turn an aircraft.

In the first quarter of 2006, ground time was 3% lower than it had been in the first quarter of 2005.

By the fourth quarter, ground time was fully 7% lower than it had been in the fourth quarter of 2005.

This is where standard work becomes such a key element of our operational strategy.

Using standard work packages in all of our ground operation is the best way to improve our ability to consistently and safely turn aircraft in these reduced time frames.

It also helps us improve the delivery of consistent quality service to our passengers.

A commitment to standard work enabled us to achieve some substantial year-over-year improvements in aircraft utilization in 2006.

Aircraft utilization was up 3% in 2006 compared to 2005.

We delivered this result despite an increase in 2006 mainline load factor of 0.7 points, to 82.1%, from an already high load factor in 2005.

We also took real estate out of our system where it made sense.

Such as by transitioning out of remote Express facilities in San Francisco, Los Angeles, and Washington-Dulles.

Despite a challenging operating environment in which to implement Resource Optimization, we were able to achieve the goals that we set out for ourselves.

One statistic that I believe speaks very powerfully to this effort is this: Resource Optimization allowed the Company to generate the equivalent of nine mainline and 18 express aircraft without having to purchase any incremental airplanes.

As we move to higher levels of asset utilization, there was an impact on our operational performance in the early months of the year.

We are now returning to the levels of operational reliability that we and our customers expect.

Take our [arrival 14] performance, for example.

From 2002 to 2005, United consistently led our five major network carrier peers in performance on this metric.

But in the first quarter of 2006 our performance slipped.

Since that time, we have seen steady improvement.

In the first quarter, our arrival 14 performance came in at 74%, and by November, we had improved to 78.

This improvement is reflected in our Department of Transportation rankings, as well.

In October, United came in third in arrival 14 performance versus our five network carrier peers.

In November, the most recent data available, United came in first.

This clearly represents solid execution against our performance agenda.

We are also focused on driving ever higher levels of efficiency in the operation.

Take our Airport Operations division.

Going into 2007, we will be using enhanced volume forecasting and manpower planning tools to make certain that we provide the service that our customers, especially our best customers, expect.

For example, on good operating days, we will be using these tools to better match our demand by targeting specific times and locations where we can take costs out of the airline, while maintaining our service standards.

We expect that this effort will improve both our costs and operational performance, as some of our savings in the valley times get reinvested in helping us manage the peaks better.

We face other cost pressures in the airport environments, such as a 10% increase in the average number of bags checked per passenger since the foiled London terrorist plot last August.

In 2007, we are going to continue to look aggressively for ways to mitigate these trends.

As Glenn said, cost discipline is hard-wired into our business strategy.

We also know that we need to support our customer service strategy.

In some cases, we meet the need through reallocating resource.

For example, we're installing cameras in our largest airport lobbies so that we can move staff to our Premium check-in and security lines as required, to deliver on our service standards for our most valued customers.

On the other hand, there are times where we need to make a targeted investment.

For example, our maintenance organization is intensely focused on maintaining the Premium cabins, seats, video equipment, on our fleet of long-haul international wide body aircraft.

In 2006, we invested to reduce service defects in our international First and Business class cabins.

And in 2007, we are going to continue the effort, as we begin to transition to our new International Premium product later this year.

Of the many challenges we successfully overcame in 2006, one really stands out to me.

And that is our response to the extraordinary December storms that affected our two largest hubs, Chicago and Denver.

Let me put the severity of these weather events in perspective.

The percentage of our flights cancelled due to weather in December 2006 was nearly five times higher than the average rate of the 12 previous Decembers.

The Chicago storm, which occurred on December 1st, caused O'Hare to operate under the lowest hourly arrival rate in the past four years.

The impact of the first Denver storm on the airport was unprecedented.

Between December 20th and the 22nd, the airport was closed for 45 hours.

And then barely a week later, Denver suffered another significant snowstorm on the 29th, just as the New Year's holiday weekend was kicking off.

I would personally like to thank all of our employees, but especially those who were directly involved in the storms at Chicago and Denver last month, for the very professional way that they responded to these extraordinary challenges.

Many of them worked around the clock to ensure that as many of our customers as possible were able to make it home safely for the holidays.

Now before I turn the call back over to Jake, I'd like to summarize for you our 2007 continuous improvement agenda.

As you have heard, we accomplished our 2006 resource optimization goals, in large part because of our adoption of continuous improvement processes and techniques.

One of the things we have learned and adopted from companies like Toyota, Boeing, and Alcoa, is the importance of standard work in driving further efficiency improvements.

When you have a standard work process, you have can find efficiency enhancements and quickly implement repeatable enhancements to other stations.

When each station is doing things its own way, it's hard to introduce scalable improvements.

We learned, as we implemented Resource Optimization in 2006, that our operations were far from using standard work processes across the system.

In 2007, we will continue to drive standard work to all stations and into more processes.

When standard work is implemented across all stations and in all functions in the Company, from ramp service to vendor order entry, we will be able to quickly scale a new process improvement to have a meaningful system impact.

This is a multi-year effort, but we believe these fundamental improvements in how we go about our work, provides the platform to continue to implement meaningful improvements.

We continue to work hard to mitigate inflation by maintaining our cost disciplines and improving efficiency, while never compromising safety.

Back to you, Jake.

Thanks, Pete.

Turning to guidance for the first quarter and the full year 2007, as we noted in our release, we have reduced our capacity growth expectations from what we previously discussed with you.

While not a huge reduction, we thought it was prudent to trim some marginal capacity out there.

For 2007, we expect mainline capacity to increase between 0% and 1%.

Previously we had said we would grow about 1%.

We expect United Express capacity to grow between 3.5% and 4.5%, leading to a consolidated capacity increase of 0% to 1%.

We expect first quarter mainline capacity to grow between 0.5% and 1%, Express capacity to grow 7% to 7.5%, and consolidated capacity to grow 1% to 1.5%.

We estimate that mainline CASM, ex-fuel and profit sharing programs, is expected to be down 1% to 1.5% in the first quarter 2007, as compared to the first quarter of 2006.

For the full year, mainline CASM, ex-fuel and profit sharing programs, is expected to be up 0.5% to 1.5%.

The decrease in planned 2007 capacity growth had the effect of somewhat increasing our 2007 CASM guidance.

As of yesterday, United had hedged 33% of forecasted fuel consumption for the first quarter of 2007, predominantly through crude oil, three-way options, with upside protection and a weighted average basis beginning at $65 per barrel and capped at $74 per barrel.

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

Again, as of yesterday, United had hedged 23% of forecasted fuel consumption for the second quarter of 2007, predominantly through crude oil three-way options, again.

Upside protection on a weighted average basis beginning at $59 per barrel, capped at $69 per barrel.

Payment obligations on a weighted average basis begin if crude oil drops below $55 per barrel.

So in summary, our fourth quarter results continue to demonstrate the progress we are making and that our plan is working.

And now, operator, we are ready to open the call for questions.

[OPERATOR INSTRUCTIONS] David Strine, Bear, Stearns.

First for Jake, and then for Glenn.

Jake, in the first quarter, what is your spot market price assumption for jet fuel, setting all the fuel hedges aside?

Setting the fuel hedges aside, let me think about that for a second.

I don't know the ex-hedge number.

Our number with the hedges is 189.

Right.

I'm trying to think.

I'll have to get back to you, and see if we can get the ex-hedge number.

Obviously, that moves around -- the hedge effect moves around all the time.

Okay.

And then the second question, with respect to revenue, it seemed in that the fourth quarter, the noncash hit you took on revenue really jumped up to $95 million.

So the first part of the question is why did it pop up so much in the fourth quarter?

And moving into next year, how will you be treating this issue?

Are we going to sort of lap this?

Or will we continue to see a big fluctuation in the noncash charge quarter to quarter?

Let me answer the first part of that question first.

When we adopted the standard, we began to see the volatility in the performance.

And quite frankly, we did not forecast it very well in the fourth quarter, which is why we significantly increased the estimate of it.

We estimated much lower than we actually performed.

But there was two things.

One was the forecast issue, where it was something we just did not do as good a job as we should have in forecasting it.

But secondly, we learned that it is a lot more volatile in the fourth quarter.

And what we saw in the fourth quarter was a lot more burn than -- a lot more earn than burn.

And that caused us to also increase the amount of noncash.

So it's much more volatile.

We didn't get the forecasting right.

But we also experienced a fundamental trend that was different than we had seen in the fourth quarter of previous years.

As to its continuation, as I mentioned in my prepared remarks, we expect to continue into the first quarter.

January's a big month.

We also expect to see some in February and March.

But after the first quarter, we think we've pretty much lapped it.

Okay.

And all of that was in passenger revenue?

None of it should be added back to other?

The amount we told you was a passenger revenue effect.

Great.

And then just last quick question on RASM.

Stripping that -- or adding that back, I should say, and adding back the $40 million hit you took from the storms, when you look at your bookings out into the first quarter, are you seeing any meaningful difference in terms of the year-over-year growth rate?

Or are things remaining pretty steady?

Let me have John Tague take that one.

He's here with us.

Yes, I think, David, as Jake indicated, we think the revenue fundamentals are quite strong.

And looking through to core performance in the quarter was in the range of a 6% unit revenue increase year-over-year, despite the fact that we added capacity during a somewhat unrewarding seasonal period.

We see the pricing structure is being in very solid shape, and we're quite positive about that.

So we fully expect to achieve unit revenue growth in 2007, albeit not at the rate of 9% plus year-over-year.

So we're not seeing any change in the stability of the fundamentals.

And we continue to be encouraged by our ability to produce positive performance, despite the fact that we are lapping some very, very tough comps with domestic performance having increased in the 2006 period in the low to mid teens in the first three quarters last year.

So no course correction from our perspective.

Okay.

For the full year, you still feel like it it's going to grow.

And then for the first quarter, at this point it seems as if you should remain on a steady track, in terms of the year-over-year RASM growth rate, compared to what you had in the fourth quarter?

Yes, we think our performance stacks up quite well in the fourth quarter when you look through these noncash charges.

And on that basis, we would expect a fully competitive performance in the first quarter, as well.

Okay.

I have taken too much time, so Glenn, I'll maybe do my question to you off-line.

Thanks so much.

Michael Linenberg, Merrill Lynch.

Two questions.

Pete, you went through some of the efficiencies, where you freed up nine narrow bodies and 18 express aircraft.

I'm curious where you are on the wide body front.

And as you add some of the new services that were mentioned, including the new capital to capital service to China, where are you on the wide body front?

And which, if any, of the subfleets are you now seeing some tightness?

That is, that you're just -- you're all tapped out on capacity?

Hey, Michael, it's Glenn.

As we go forward, if you could speak up a little, it would be helpful.

But we are going to toss that question over to John, as well.

Okay.

Thanks, Michael.

I think as we sort of mentioned at the investor conference, having a fixed fleet constraint is really somewhat of a rewarding constraint, in terms of reoptimizing the fleet.

So you saw that we suspended Chicago-Osaka service in the first quarter.

And again, we announced the Kuwait in the fourth, which is performing quite well.

We redeployed from New York to Washington for Narita.

The specific service relative to Beijing will come out of a domestic deployment of that wide body.

So I would say around the edges, we still have some opportunity to move moderate amounts of capacity from domestic to international.

And we will always continue to reoptimize the international fleet to its fullest earning potential, and we have some additional changes coming forward in that regard.

Okay, very good.

And I guess my next question to Jake.

Jake, you talked about not being a cash taxpayer for some time, and you talked about a large NOL.

Can you give us a better sense of the size of that NOL?

A ballpark number [inaudible]?

As of the end of the third quarter, we haven't done all the tax accounting for the fourth quarter.

As of the end of the third quarter, the NOL was right around $8 billion, net of cancellation of indebtedness income.

So it's quite a substantial number.

Yes, very big.

Thank you.

Great.

Gary Chase, Lehman Brothers.

Could I just go back to follow-up on some of the questions that I think it was David Strine was asking around revenue?

Obviously, the $95 million deferred revenue hit you took in the fourth quarter was a huge one.

You say that's going to continue into the first quarter.

Is there any sense, as we look it at it today, of what the magnitude of that is?

Are we looking at another $95 million impact in the quarter?

Is there any way to know what you're thinking on that front?

We haven't -- we didn't publish that number, and we're a little bit hesitant to forecast it.

But it's a number that's of a similar magnitude.

It's all deferred revenue, it's all noncash, it's just an accounting entry.

Right.

But it's of that sort of magnitude until we get to annualize it.

But we will disclose what the number was, certainly in the first quarter release, so you can do it.

And as we work through the details of the forecasting, we'll try to get something out there more definitive than what I just said.

But it's of the same order of magnitude.

As Jake, I think, alluded to, we don't think this is very indicative of core performance when you look through it.

But we do believe this is the right way to look at the income impact of these programs.

And while it is not comparable, it is causing us to continue to become more commercially disciplined around these programs, which is directionally what we think should occur in the industry.

I think John said exactly, Gary, what I would have added to Jake's comments, is we're focused on making the right decisions.

We'll take the frustration of the accounting treatment as it comes.

But the message we'd like to convey to you on the call is we really are focused on making what we believe to be the proper decisions.

Right.

No.

No, understood.

I think people will look through the noncash aspect.

I'm just trying to get a sense of the size of it.

And if I could ask to you follow-up a little further, as well, John.

As you followed up on that question, you mentioned core performance being similar in terms of RASM gain in the first quarter to the fourth.

I mean, are you predicting that core RASM will be up in that mid single-digit range, the 5%, 6% range, in the first quarter, after we -- well, before you take whatever the adjustments are on the deferred revenue account, et cetera?

Well, let me clarify.

I don't think that I said it would be similar to the fourth.

What I suggested was I think when you look through to our core performance, it was quite competitive with the industry in the fourth.

And we would not expect, on that same basis, for it to be anything other than competitive in the first.

So, we're clearly not providing guidance around that.

But as we said, we are comfortable that we are going to see RASM growth for the full year.

I think there's some cloudiness across the industry as to order of magnitude right now.

And clearly, we see the opportunity for ourselves to be very focused on managing our peak performance in the second and third quarters effectively.

That's where the opportunity around this capacity discipline really avails itself to us.

So we don't see any underlying change in the basic stability of the revenue.

I think that's probably the message we're trying to convey.

I said it in my opening.

We're optimistic across the margin as we look out into 2007.

And that's got two significant components to it, right?

Number one is the advanced bookings reflective of the economy, as the economy seems to be presenting itself to us, in 2007 is an opportunity.

That, together with the fact that we're optimistic and confident that we are going to continue to reap the benefits of our initiatives that Pete described.

So we are going to do the work.

And we are going to do so in a year that we are not pessimistic about.

I would note that in the first and second quarter of last year, as I said, we had a low to mid teen year-over-year improvement in the domestic system.

So, the fact that we can look forward with confidence around those numbers is encouraging.

We are seeing very good international performance.

And I think that will continue to be a focus and emphasis for the Company.

We have been redeploying capacity directionally there for some time, and around the edges you will see us continue to do that.

But very robust performance across the international entities.

Okay.

I thought that was the message you were trying to convey, but I wanted to clarify.

The way you answered that question, it sounded like maybe you were thinking mid single-digits.

Just one last very quick one.

The noncash stuff, could you just remind us, Jake, how much of that falls out of the equation in '07 versus '06?

If memory serves, it's around $100 million.

Is that accurate?

Your burden on the noncash side goes down this year, does it not?

If you separate into it revenue and expense, and so we'll talk about the expense for a second.

We haven't provided any explicit guidance, but one of the pieces of it is the 123R expense, which it does go down quite significantly year-over-year.

But I don't think we've provided any public guidance on that yet.

But it's a significant number.

And for 2006, that was well north of $100 million, right?

2006 number, if memory serves, was $159 million.

Got it.

Thanks very much, guys.

Robert Barry, Goldman Sachs.

Question on the CASM.

I realize that you lowered the ASM growth outlook, and that's accounting for some of it to be up.

But it seems like that might only account for about a third of the increase versus the prior guidance, which I think was to keep it flat.

So I was wondering what else was happening there?

Well, the preliminary guidance we gave you was obviously before we had completed our planning process for 2007, and we tried to caveat it that way.

I think the biggest contributor to our changing our expectations was, in fact, the ASM change that we made.

The environment is not a lot different than we have been telling you all along.

We continue to see cost pressures in maintenance, and that will continue into 2007.

We continue to see cost pressures at the airport, airports like Los Angeles, tremendously increasing their rates are putting pressure on us.

And the landing fees, as well, at the airport.

So, those are the things that we were overcoming in the process.

And we're challenging the team to do better.

But the biggest change from what we told you before was, in fact, the ASM change.

Okay.

And you mentioned that there were two favorable insurance settlements in other.

Can you quantify how much that was?

We'll look at doing that off-line.

They were meaningful enough to mention.

I don't think either one of them is material.

But we'll look to do that off-line.

Okay.

And then just another follow-up on the revenue.

I know you had mentioned, I think it was last quarter, about a $100 million revenue opportunity from some of the revenue initiatives.

Any update to that?

How it's tracking?

I think you may be referring to our Economy Plus up-sell, where we reset the target from a target of $50 million in '06, which we did exceed, to a target of $100 million in '07.

And we are fully confident that we will exceed that, and we know that there's more to pursue beyond that for 2008.

Okay.

Thank you.

Jamie Baker, JPMorgan.

Continuing on the line of questioning set forth by, I think, David and Gary, and apologies if you already answered this, but I had to drop off the call.

I'm wondering in which specific month of the quarter you took the revenue readjustment?

Only in hopes that I can reconcile the impact on the ATA monthly figures.

Was the $95 million all December?

Or was it spread equally over the three months of the quarter, for example?

I think it was mostly in December, Gary.

There was some in each of the quarters, but -- Jamie, I'm sorry.

And I think most of it was in December.

We do book some every month.

But we did the bigger adjustment in December.

Okay, that's very helpful.

And do you plan to make reconciliations of -- based on the new standard, what your 2006 actual mainline RASM was?

We have disclosed in our release what the quarterly noncash adjustments were to revenue, if that helps.

Yes.

That should do it.

We haven't sort of recalculated the RASM as we did with the 5.9, but I think the math is pretty -- .

I can follow-up with Robert if necessary.

Okay, thanks a lot.

I'll turn it over to somebody else.

And we disclose that in each of the quarter releases, so you'd want to pick up the two prior periods, as well.

Sounds good.

Thanks.

Helane Becker, The Benchmark Company.

So Jake, just one point of clarification.

You don't have to pay AMT on taxes, you just have an entire credit for the NOLs?

Well, that's why when I said it, I said no material taxes.

So you do have to -- you can only exclude 90% of your AMT taxes, so you do a 2% cash tax obligation.

But I don't think that's really material.

No, it's not.

I just wanted to be sure I understood that correctly.

Thank you.

You bet.

And then as we're looking forward to some of the comments that you made with respect to the cost pressures on maintenance and some of the other line items, how should we be thinking about that, in terms of the seasonal pattern to it?

Well, we gave you our first quarter guidance.

And so you can see that we are expecting CASM to be down in the first quarter.

And then it sort of builds through the year to get to the full year guidance.

So the cost increases are a little bit back-end loaded.

Okay, great.

Thank you for your help.

Raymond Neidl, Calyon Securities.

Jake, you talked about the three storms cost you about $40 million in lost revenue.

And you mentioned a little bit about the costs excluding fuel.

Do you have that estimate, with the fuel savings and without the fuel savings?

I'm sorry, with the fuel savings and without the fuel savings?

Yes, just a rough estimate, if you have that.

It's not a big number.

The nonfuel extra cost was, if memory serves, $4 million or $5 million.

And the fuel savings, I believe, was 12.

Oh, okay.

So it was mostly a revenue type of problem.

Yes, it's mainly revenue.

I think the net sort of operating effect was about $30 million, $30 million or $31 million.

Okay, great.

And with the -- you're pretty optimistic on the business going into this year, it sounds like, as other airlines, and that's probably being reflected in the upward trend toward the stock prices.

I'm just wondering, even though you have a large cash balance, are you going to be accessing the equity markets?

We made our balance sheet -- I'm sorry, Glenn is -- we are approaching life a little bit differently than some of our competitors.

We have an excess cash balance.

We recognize, as other people do, we need to repair our balance sheets.

We are doing that out of our cash balance, and that's our focus.

We don't have any plans to tap the equity markets.

Okay.

So I think -- and to the first part of your question, which I think is actually more important, we do see the fundamentals in the industry as very solid.

You have a -- the fuel environment is very -- is much better than it has been.

The capacity environment remains good.

The demand environment, while maybe not seeing the kind of year-over-year increases we have seen before, is still very solid.

So we are encouraged by the fundamentals.

And we don't have lot of capacity out there.

We don't have a lot of cash that we have to pay.

And so we're looking to generate a lot of cash this year.

I think, Ray, the point is that -- to get Pete into the conversation, everybody in the room that can participate, not only are we bullish on the fundamentals, as Jake just said a moment ago, the opportunity for us to perform, we're bullish on the impact of our work.

We really think that we have an opportunity in 2007 to leverage the initiatives that John and Peter and others would mention to you, in an environment that is the environment that we like to find ourselves in to leverage the work.

Okay, great.

Thank you very much.

Daniel McKenzie, Credit Suisse.

Jake, just a couple questions here.

On the $8 billion of NOLs, is there anything out there that, as of today, that could impair any of these NOLs?

Well, you have to be very mindful of the rules related to change of control as they apply to NOLs.

And we have put things in our charter to deal with that.

So, we're hopeful that our NOLs go away through generating lots of pretax income, and not any other way.

So we are very focused on the things that can make NOLs go away, and are -- have no plans to trip over them.

Sure.

And then the $2 billion refinancing that you are planning to do here in early February, can you provide some perspective on how that's going to impact net interest expense in our model as we go through this year?

At least some kind of range?

Yes, well, we're out in the marketplace right now with a 150 basis point reduction on the rate, so that will reduce interest expense a lot.

Obviously, will reduce interest income.

Also, we think the net of those two runs right about $5 million a month benefit.

So net interest expense will improve, we think, by about $5 million a month depending on what the actual execution is out there.

Okay, good.

And then one last question here.

Glenn, it appears that Congressional rumblings -- well, at least, Congressional rumblings are suggesting that Congress may be prepared to put the screws here to industry consolidation.

And I'm just wondering, what kind of read are you getting from your Congressional sources?

And how should investors interpret the headline news that we'll probably get over the next couple of days?

We'll have an interesting data point tomorrow.

And we will be watching the hearing to get a sense of attitude, just as you will be, and the nature of the questions.

But I think that the assembled group tomorrow will probably give a very balanced report out as witnesses to the issue.

The questions may be somewhat enlightening, as well.

But I don't interpret it yet the way that you described it.

I think that they are open minded.

I think the issues have been pretty well characterized.

Is it, in fact, good for the consumer?

Is it, in fact, good for communities that need continued service?

Will the stronger companies that come out of a consolidated environment be better able to serve those two issues, tend to those two issues?

I think that's really going to be the theme of the discussion.

Or are there unintended consequences of consolidation that are negative?

So I think that the hearing that opens up tomorrow is going to be illustrative.

And I'm not pessimistic about it.

Okay, great.

Thanks very much.

Kevin Crissey, UBS.

Just a quick one.

I wanted to see if you had any thoughts regarding an impact on a potential BA strike.

Would you see any benefit of that?

Yes, we would certainly -- this is John here.

We would certainly expect to see a moderate benefit from that, particularly at this time of year when we have available capacity for all comers.

And you don't have any of that factored in to any of the -- ?

No, I don't think it's going to be material.

Okay.

Thank you.

Roger King, CreditSights.

Given your bullish outlook on capacity and demand, what are your long-range plans for pushing up yields this summer?

Are you going to hold off seats?

Or are you going to take the conservative route and sell summer seats early?

John here.

It's hard for me to, I suppose, succinctly characterize or have a new management strategy.

But I think clearly in this environment, the biggest opportunity we have as we saw over the holidays at Christmas, is to responsibly manage our capacity in the peaks.

These are strong performance periods for United.

So I would expect that you should see us take full commercial advantage of that.

Okay.

So basically, if you have some peak periods, you will not pre-sell those seats months earlier then, in general?

As I said, we have very sophisticated systems around this issue, and we fully recognize the opportunity that we are presented with in the peak periods.

And as we have in the past, we will take advantage of that.

Thank you, sir.

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 comments.

Thanks very much.

We appreciate all of the questions.

The entire team here does.

As we have said, 2007 is going to be a pivotal year for United.

The management team is going to have the opportunity with our employees to build on the competitive foundation that we have created.

We are going to consistently put the customer in the middle of our decision making.

That's core to our strategy.

We are going to deliver on customer expectations, be as efficient as we possibly can be, ensure that we're cost effective as we provide that service to our customers.

And we are going to focus on margin leadership as a metric that we share with ourselves, our employees, and our Board, and, of course, all of you.

So we are looking very much forward to 2007 as we head into it in a very strong position.

Thanks for your participation on the call today.