聯合航空 (UAL) 2007 Q2 法說會逐字稿

Good morning, and welcome to UAL Corporation's earnings conference call for the second quarter of 2007.

My name is Carissa, 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.

Plea go ahead, sir.

Thank you, operator.

Welcome to UAL's second 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 noon 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 those 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, UL's Chairman, President and CEO.

Thanks very much, Robert, and good morning and welcome, everyone.

Joining me and participating on the call today are Jake Brace, our Chief Financial Officer, and Graham Atkinson, our Chief Customer Officer.

Also here with us and available to take your questions are Pete McDonald and John Tague.

Earlier today, we reported a net profit of $274 million and operating cash flow of over $1 billion, up 51% from the comparable period last year.

Total operating revenue for the Company was over $5.2 billion and it was the highest in our history for any single quarter.

We reported the highest second quarter net income in seven years, more than double our net income of a year ago, despite recording a $192 million noncash tax charge this year and none last year.

Thanks to the work of John, Kevin and the revenue management team, we had strong revenue results.

The benefits of our recent domestic capacity pulldown and strong execution contributed to an exceptional June performance that was further enhanced by an unexpected, but very welcome volume of close-in bookings, leading us to exceed the recent revenue guidance that we had issued.

We actively managed capacity and stabilized our domestic market, while strengthening the net worth with targeted international growth.

The mainline capacity reduction that the team put together put pressure on unit costs, which will continue into the third and fourth quarters, but our focus on effective execution delivered CASM that was 0.5% better than our guidance.

Our guidance for full-year CASM, including fuel, remains unchanged, and Jake will speak to that in more detail in just a second.

A solid operating profit of over $0.5 billion and our pretax profit of $465 million underscore that our plan at United is on track.

We're making a discipline -- disciplined decisions about core and noncore assets and how best to invest in our business.

Our investment plan as measured by our capital budget calls for the Company to spend some $1.2 billion this year and next.

After the quarter ended we entered into an agreement to divest our ownership stake in Air Inc., a provider of transportation communications for which we will receive cash proceeds of approximately $130 million.

At United we continue to transform our Company, making decisions that balance the interests of our customers, our employees and our investors.

In 2006 the management team turned our attention to continuous improvement, beginning to implement standard work processes throughout the Company.

We're seeing significant progress from our employees and management team who are developing and implementing standard work processes to deliver consistent performance and to eliminate waste across the Company.

We're investing in new products, we're investing in new services, both in the air and on the ground to meet the needs of our most demanding customers.

As you have by now no doubt seen and as Graham will discuss in a moment, yesterday we unveiled a major upgrade to our business cabins.

By focusing on our customers and improving our work processes, we will drive margin leadership.

As such, we're redirecting our efforts and our investments to align with the customer, which has become a cohesive theme for the work being done across United.

Investments in high-value customer touch points, such as our red carpet clubs, lobby and gate areas and even check-in units continue to reduce our costs and facilitate new revenue generation opportunities.

Information technology investments, from baggage-tracking systems and desktop systems to front-line printers, will have the greatest impact on enabling our employees to deliver an improved and consistent experience for our customers across our system.

We're investing in a long-term project that will migrate our legacy passenger processing systems to a state-of-the-art Star Alliance common IT platform that we are jointly developing with Amadeus.

This system will be used by many Star Alliance carriers and will result in our move from Galileo's Apollo System to Amadeus.

The system will provide employees with easier-to-access information, reduce our technology development and maintenance costs, and importantly improve our efficiency and our service to our customers.

At United, we'll continue to invest in our people, processes and equipment that will enable our employees to provide the high level of service that our customers expect from us.

At the same time, we're listening to employees and making investments to improve the work environment for them.

We're investing in our aircraft, including equipping part of our 757 fleet with blended winglets that will enhance the capability and fuel efficiency of those aircraft.

And as I mentioned, yesterday we unveiled our new lie-flat business class seat.

We'll be the first U.S.

carrier that will have a truly 180-degree lie-flat seat in both first and business class.

As I mentioned a moment ago, Graham will further describe significant improvements to our first and business class cabins, including a new cabin decor, enhanced entertainment systems, better on-board dining options, and improved customer amenities.

As a Company we are particularly excited about our innovative new lie-flat business class seats that will clearly place us in the market-leading position among U.S.

carriers and competitive with leading international carriers.

Our international network continues to expand, with an increase of passenger and cargo service to the Middle East, one of the world's most rapidly-growing business regions.

We're adding more flights between Washington, D.C.

and Kuwait City, and we signed a coach air agreement with Qatar Airways.

We have launched new nonstop service to Asia and to South America.

In addition, daily nonstop passenger and cargo service between Los Angeles and Hong Kong and between Washington, D.C.

and Rio de Janeiro is expected to begin in October of this year.

Last week we announced that we were applying to fly San Francisco-Guangzhou in 2008 and Los Angeles-Shanghai in 2009, as part of the new frequencies opening up to China.

In the short-term, the route and aircraft realignment and cabin reconfiguration will provide the capacity necessary and the product quality to capitalize on international growth opportunities.

As part of our introduction of the redesigned first and business class seats, we will resize the cabins on our international aircraft.

On all but the 767 fleet, this will mean a net increase in total seats.

We have no immediate need to invest capital on growth or replacement aircraft.

That said, we frequently communicate with the aircraft providers to ensure that when we need aircraft, they will be available to us.

In the interim, we continue to invest in our existing fleet and make other highly-leveraged investments that will strengthen the core business and deliver improved earnings.

On that note, I'll turn the call over to Jake, who will take us through more of the details of this quarter's performance.

Jake, over to you.

Thanks, Glenn, and good morning, everyone.

Our fundamental performance this quarter was quite strong and reflects our continued focus on execution.

Importantly, we continue to generate significant operating and free cash flow this quarter.

Operating profits were up $277 million, or up 107%, to over $0.5 billion, and we doubled our operating margin from 5.1% to 10.3%.

At the pretax level, our profit this quarter of $465 million was four times higher than the same quarter last year.

This improvement was driven by good cost control complimented by excellent revenue and capacity management.

Our profit performance was also enhanced by lower net interest expense resulting from our debt reductions and our recent refinancings.

Our net profit this quarter was $274 million or $1.83 per diluted share.

As Glenn noted, our second quarter net profit is after booking income tax expense of $192 million.

As we've noted in previous quarters, tax expense should be viewed primarily as a noncash item.

Due to our large NOL balance, we anticipate paying only minimal cash taxes for the foreseeable future.

Because of the effects of fresh start accounting, we continue to stress that cash generation is an important performance metric for United.

Strong cash performance in the second quarter continued the pattern we established last year and saw again in the first quarter of this year.

We generated over $1 billion in cash flow from operations, up 51% year over year.

As a reminder, our cash flow from operations was up 38% in the first quarter of this year.

Free cash flow, which we define as operating cash flow less capital expenditures, also grew strongly.

We generated $956 million in free cash flow this quarter, for a total of over $1.5 billion year to date.

As Glenn mentioned, our capital budget for 2007 and 2008 is a total of $1.2 billion, $550 million in 2007 and $650 million in 2008.

We expect roughly a third of this to be invested in our existing aircraft and on our customers, a third on infrastructure projects, and a third on IT enhancements.

During this quarter, we invested $78 million in capital projects, but our level of investment steps up in it the second half.

Recently we refinanced approximately $1 billion in municipal bond and mortgage debt by issuing $694 million in enhanced equipment trust certificates and $270 million in special facility revenue refunding bonds related to the Denver International Airport.

The proceeds from these debt offerings were used to refinance existing aircraft leases and mortgage debt associated with 13 wide-body aircraft, as well as the existing Denver municipal bonds.

We expect these transactions to save United approximately $10 million for the remainder of 2007 and $22 million for the full-year 2008.

Combined with the first quarter refinancing and $1 billion paydown of our bank facility, we expect to save about $100 million in financing costs in 2008 from these various transactions.

We ended the quarter with total debt, including off-balance sheet capitalized airport rents and municipal debt, of $12.4 billion, which is a reduction of about $1.5 billion so far this year.

Our cash balance remains strong at $5.1 billion as of June 30th, which included $871 million of restricted cash.

Our net debt currently stands at $8.2 billion, a reduction of about $2.5 billion since exiting bankruptcy.

As you know, our reported earnings include a number of noncash fresh-start and exit-related charges and we've attempted to identify these impacts for investors since they obscure some fundamental year-over-year improvement and negatively affect comparisons to our competitors.

This is the case again this quarter.

All the details can be found in the tables to our earnings release as well as posted on our website.

One of those effects, the impact of Mileage Plus accounting, was muted this quarter for two reasons.

The impact of fresh count -- of fresh-start accounting change cost us $46 million in revenue in the second quarter versus the previous method.

However, offsetting this was a $47 million revenue benefit from the change to the expiration period for miles from 36 months to 18 months that we announced in January of this year.

Net-net, the effect of Mileage Plus accounting changes was basically a push this quarter.

While our second and third quarters are historically United's strongest, our strong revenue performance this quarter was more than just seasonality.

The results reflect the focused effort we've taken to drive higher passenger revenue growth.

In reaction to a weaker domestic-yield environment, we announced plans in May to reduce 2007 mainline domestic capacity growth by approximately 2% from the previous-planned levels.

Given the domestic market's slow revenue growth and excess capacity, we believe that removing marginal domestic capacity is the appropriate response and are pleased that a number of other carriers, including low-cost carriers, have also announced plans to slow domestic capacity growth, as well.

Our domestic capacity reduction was offset by an increase in international capacity of 2.9% for the second quarter.

The shift in capacity deployment is in response to strong passenger unit revenue performance in the international markets.

This decision is already paying off, as we've achieved particularly strong unit revenue increases in June.

Second quarter consolidated PRASM was up 4.7% and mainline PRASM was up 5.2%, both higher than the guidance range we provided.

Going into the summer, we decided to hold back a large amount of inventory for high-yield customers.

Our actions created an environment where the unexpected strength in walk-up bookings for the last two weeks of June -- undoubtedly partially due to other carrier's and weather difficulties --contributed to both traffic and yield performance being greater than we forecast when we issued our guidance.

Our consolidated results were driven by 0.8 of a point higher load factor and 3.6% higher yield versus the second quarter of 2006.

Similarly, our mainline results were driven by a one point higher load factor and a yield improvement of 4% year over year.

Despite difficult 2006 comps, we still delivered significant international PRASM growth of 12.6% for the quarter.

PRASM growth in the Atlantic was particularly strong, growing by 14.3% year over year on top of an 8% increase last year.

Pacific market PRASM growth was also robust, up 11.4%, again on top of an 8% increase last year.

Latin America PRASM increased 6.9% year over year.

The domestic market continues to experience yield pressures driven by capacity growth in the industry.

Domestic mainline PRASM was up 1.2%, aided by a year-over-year capacity reduction of 3.3%.

Domestic pressures particularly affected regional markets, where PRASM performance showed a year-over-year decline of 1.6%.

These results were driven by yields that were 1.4% lower than the comparable period in the prior year and slightly lower load factors.

Longer stage lengths and longer aircraft played a contributing role.

However, overall, Express continues to improve its contribution to the bottom line, improving year-over-year profitability by $25 million to a $71 million contribution for the quarter.

Continuing on the revenue front, we continue to look for new revenue streams that are generated by service unbundling.

Our first unbundling initiatives focused -- focusing on upsell revenue have proven successful.

We set a revenue goal of $100 million for economy-plus upsell initiative in 2007.

We expect to beat this and we expect that economy-plus upsell will bring in $175 million in 2008.

Cargo and other revenue of $441 million was at the top end of guidance.

However, on a year-over-year basis, second quarter cargo and other revenue performance was also affected by the same three factors that affected our first quarter results.

First, other revenue was lower due to lower fuel sales through United Aviation Fuel Corp., UAFC.

Second, other revenue also declined as we exited some low-margin third-party maintenance work.

And third, cargo resul -- cargo revenue showed a year-over-year decline reflecting weaker Pacific yield and United ceasing to carry domestic mail as of the end of the second quarter of 2006.

As I noted last quarter, we signed a new, higher-margin long-term contract with the U.S.

Postal Service to restart carrying domestic mail, which began at the end of April.

The agreement extends through 2011 and is expected to generate $10 million to $15 million in revenue in 2007.

We expect our other revenue -- to record other revenue of approximately $980 million to $990 million for the full year of 2007, with revenue roughly evenly spread between the last two quarters.

Included in that guidance I just gave you is our expectation that UAFC revenue will be about $5 million in each of the third and the fourth quarters.

On the nonoperating side, we recorded a $22 million, one-time gain from our refinancing transactions.

This one-time benefit resulted in a lower nonoperating expense than we would consider a steady-state number.

Going forward, we expect total nonop expense to be about $100 million a quarter, absent any significant new refinancing transaction or changes in the interest rate environment.

However, nonoperating expenses in the third quarter will be lower than this, as it will benefit from the $44 million gain on the sale of our equity stake of Air Inc.

that Glenn mentioned.

As a Company, we continue to be focused on cost management.

Our cost performance this quarter was good, with our operating expenses down 3.6% and mainline CASM down 3.8% this quarter versus the same quarter in 2006.

Mainline CASM,, excluding fuel and severance, was down 0.5%.

Our cost performance came in a little bit better than the guidance, despite the fact that we began pulling down mainline capacity this quarter.

About $10 million of our better performance was due to expenses moving from the second quarter to the third quarter.

Now let me walk you through some of the expenses where we saw significant changes in the quarter.

Salaries and related costs were $52 million lower than the second quarter of last year, primarily due to lower stock-based compensation expense, as well as the $22 million severance charge we booked last year.

Maintenance was up $27 million.

Inflationary increases related to our V2500 engine maintenance contract and the cost of component parts accounted for the majority of the increase.

We've long expected significantly higher maintenance expenses in the third and fourth quarters, as we have more aircraft visits scheduled for the back half of this year and our previous guidance has reflected this fact.

Having said that, we are experienced even higher maintenance costs than we plan, and our current cost guidance reflects that higher expectation.

Turning to distribution costs, despite passenger revenue being up 4.5%, distribution expenses were better by $11 million or 5% this quarter, reflecting the savings from new contracts with online travel agencies and renegotiations with major vendors.

In the second quarter, the Company entered into and exercised fuel hedges that were classified as economic hedges.

We recognized a net gain on hedge contracts in the second quarter of $17 million, of which $3 million related to hedge positions settling in the second quarter.

All of this was recorded as fuel expense.

Including the benefits of hedging, average mainline jet fuel price, including taxes, was $2.08 per gallon for the quarter compared with $2.16 last year.

While we are on the subject of costs, I do want to touch on one issue that affects not only our costs but also our revenues, so it's impacting our customer; that is air traffic control delays.

With significant operations at the top seven airports affected by ATC delays -- namely Newark, LaGuardia, O'Hare, Philadelphia, JFK, Boston and San Francisco -- United has been the carrier most affected by ATC delays.

34% of United's mainline system arrivals are scheduled at one of these seven airports.

In comparison, as a group, the other five network carriers have only 21% of their mainline flights scheduled to arrive at these airports.

We know these ATC delays are frustrating for our customers and our front-line employees, and they are equally frustrating for us.

We manage our daily operations to minimize the impact of ATC delays, but that's not enough.

The 2007 FAA reauthorization bill is a crucially important opportunity to modernize our ATC system and address the significant aviation challenges the U.S.

airline industry faces.

Despite the challenges produced by an environment of increasing load factors and ATC congestion, our recent performance continues to improve our relative standing in the DOT on-time ranking.

For the 12 months ended May, United ranked third for on-time arrivals among the six network carriers.

As structural changes are made to the operating environment, such as the new O'Hare runway expected to open in November 2008, we expect our rankings to improve.

Despite the hurdles they face, our employees responded well to the challenges, and I'd like to take a moment to thank them for their wonderful performance this quarter in what has been one of the most challenging summers in years.

Graham will now fill you in now on some of the key initiatives we're rolling out to improve the customer experience and ultimately boost revenue.

Graham?

Thanks, Jake.

Those of you who attended our investor day back in December 2006 heard us talk about the opportunity to gain a greater share of the premium customers in the industry.

That's the less than 10% of customers who generate about one-third of the industry revenue.

We're doing this by executing against a plan of providing the right services to meet the needs of diverse customers, with a particular focus on attracting more frequent business travelers and other premium customers.

The goal simply put is to meaningfully improve the travel experience of premium customers.

As part of this process, we're enhancing the international first and business class cabins, as Glenn said, including new decor and seats a new on-demand entertainment system, better on-board dining options, and improved amenities.

This major upgrade symbolizes our commitment to consistently deliver products and services that are fully competitive on the world stage.

The work we're doing to improve the international premium travel experience is closely tied to United's overall customer experience work, designed to make our most valued guests feel more relaxed, more respected and rewarded during every interaction with United.

Yesterday at the National Business Travel Association meeting in Boston we announced the launch of our new international business class seat, with a true 180-degree lie-flat seat with a personal on-demand, in-flight entertainment system, new business tools, and exclusive personal amenities, including the ability to download and play your iPod audio and video content.

With this seat, United will be the first U.S.

carrier to offer fully lie-flat seats in business class.

Building on the 2006 unveiling of the international first class suite, our new premium cabins are designed to provide our customers with the optimal space to work, sleep or relax, while enjoying the latest entertainment and amenities.

United will be the only U.S.

carrier to offer fully lie-flat seats in first and business class across the entire international wide-body fleet, and is the -- is the only U.S.

carrier that offers four differentiated products on all international overseas flights; United first, United business, economy plus and economy.

Only one other airline internationally offers first class true lie-flat business and an enhanced economy products.

We intend to compete with the very best international carriers with the quality of our international premium cabin experience.

The first prototype aircraft in each fleet will be reconfigured later this year, with the bulk of the fleet reconfigured during 2008 and 2009.

As Glenn pointed out, we're resizing the international fleet cabin sizes as part of this effort.

Total seats on the 747 will increase by 8%, on the 777 aircraft will increase their seat count by between 4% and 6%, and total seats on the 767 aircraft will be reduced by 5%.

When the reconfiguration is complete, our international fleet will have more seats overall.

While half the international fleet will be reconfigured in 2008, the impact on 2008 capacity will be negligible.

As we normally do, we'll guide you on 2008 capacity when we report our third-quarter results.

In the short-term, we continue to focus on initiatives that will drive immediate results and measurable improvements in customer satisfaction.

Our frequent business and other premium customers told us they want courteous and thoughtful service, simpler processes and help when there are travel disruptions.

Accordingly we've rolled out many new initiatives over the last few quarters and focused on this, including launching a 1K one-call desk that provides a single point of contact for our 1K members for all of their service needs, complimenting the Global Services one-call desk that was well received by customers late last year.

We now provide a next-flight guarantee for Global Service members during travel disruptions, in which Global Service customers will be rebooked on our next available flight, regardless of availability.

We've created a new, more orderly boarding process, with a separate boarding lane, clear signage and distinct red carpet to provide our best customers with front-of-the-line access whenever they choose to board the flight.

And we've redesigned the premium lobby areas at our primary airports to create a more-organized, less-congested, and distinctive environment for check in.

At San Francisco, Chicago and Los Angeles, we've also been able to offer front-of-the-line priority security to our very best customers.

By alleviating their concerns and making the experiences of our guests more consistent, we believe we can strengthen their loyalty to United, making them more likely to promote United to their friends and their acquaintances.

At the same time, improving the customer experience does not mean increasing costs.

We continue to focus rigorously on cost containment and that remains a priority for me, as well.

We're simply making smarter decisions about allocating resources, which is evident in the results that Jake described earlier.

For example, looking at our nonaircraft capital spend of $550 million for 2007, our investments are focused on: Product enhancements for premium customers; core infrastructure needs and equipment that will enable operating efficiencies and more consistent service delivery; investing in IT equipment; continuing to deploy self-service units in lobbies for check-in; on concourses for rebooking during irregular operations; and in baggage claim areas to assist in reporting and tracking lost bags.

All have the advantages of being both cost efficient and customer friendly.

At the end of the day we don't believe that cost discipline and enhancing the customer experience are mutually-exclusive concepts.

So, with that, I will hand it back to Jake.

Thanks, Graham.

Before providing some additional guidance for the quarter and the remainder of the year, I'd like to remind all of you that starting last month we began a new practice of providing pre quarter-end guidance.

Accordingly, prior to the end of every quarter we will issue an investor update, with updates on our expected performance for that quarter, and hopefully you'll find this helpful.

As it relates to current guidance, we expect third quarter North American capacity will be down 4% to 5%, while international capacity will be up 3.5% to 4.5%.

Overall mainline capacity will be down 0.5% to 1.5%, Express capacity will be up 1.5% to 2.5%, making third quarter consolidated capacity down 0.5% to 1.5%.

For the full year of 2007, we expect mainline capacity to be flat to down 1% and consolidated capacity to be down 0.5% to up 0.5%.

We estimate that mainline CASM, excluding fuel, last year's severance charge and special items, will be up 4% to 4.5% in the third quarter of 2007.

As I mentioned earlier, in addition to ongoing inflationary pressures, we saw in the first half of the year, we have significantly more heavy maintenance checks scheduled in the third and fourth quarters of this year.

This is contributing 1.5 to two points of the overall increase in CASM.

The other large contributor is purchased services that accounts for about two points.

IT expenses are the largest contributor, as the rollout of new computer hardware and other tools to our front-line employees, as well as some long-term IT investments that have a -- an operating cost impact, drive this increase.

The $10 million in expenses that moved from the second to third quarter and lower ASMs also contributed to the increase.

However, our full-year CASM expectations, excluding fuel and special items, remains unchanged from the beginning of the year when we gave you guidance of up 1.5% to 2%.

You can find our fuel and hedge position guidance in our earnings release and on our website.

And finally I want to provide you with a quick update on our view of the revenue environment.

We continue to expect strong performance in the third quarter.

Our outlook for the North American unit revenue is solid, slightly better performance than we saw this quarter, driven by capacity reductions.

Internationally we expect unit revenue growth in those regions to remain quite strong.

Now, operator, we'd be happy to open the call up to questions.

Thank you.

(OPERATOR INSTRUCTIONS) And our first question comes from the line of Robert Barry of Goldman Sachs.

Please proceed.

Hi, guys, good morning.

Good morning.

Very impressive cash flow.

Was wondering if you could remind us -- or update us on what the latest outlook is for '07 and what the back half looks like?

I seem to remember there might have been some seasonal boosts to the cash flow in this quarter.

Yes, we don't provide, Robert, any specific cash flow guidance.

We saw big increases year over year.

I will comment on the historical seasonal patterns, which is that we typically see a big buildup in cash and big cash flow in the first half of the year and then pretty flattish cash flow in the second half of the year.

So, we're not -- we're not seeing any big change in the seasonal pattern, but the first half of the year is a very strong half relative to the second.

Okay, and then just a follow-up.

Could you -- could you just give us your latest thinking on uses of cash flow?

I know that there's not big aircraft replacement needs, but I know there's also been some indications of considering either dividends or share repurchases.

Is that a possibility or is the focus really going to be on investing in the airline and paying down debt?

Thanks.

Well -- so Robert, it would be fair to say that our position hasn't changed from the discussion we had at the conclusion of the first.

We are -- we're looking at all of the uses that we have for our free cash and we're keeping our options open.

So, I think that the $550 million and the $650 million Graham said speak to our focus on our capital investment, and we're aware of the fact that there are other opportunities for us, as well.

It would be well received by certainly the constituency on this line and we continue to review that internally.

Is there a -- just one last follow up.

Is there a minimum level of cash balance that you're targeting as -- that you're targeting?

Yes, Robert, it's Jake again.

We -- at the beginning of this year we used what we considered sort of all of the excess cash above a minimum cash level to pay down our bank facility by $1 billion, and so we ended up the year -- last year with just over $4 billion and we took it down to about $3 billion by paying down the exit facility.

So, as we sit there and look at the risks that we see out there for high fuel prices, terrorism threats and just general risks in the aviation industry, we think of about $3 billion as our floor, at least for now.

Now that's something that we'll continue to evaluate with our board as to what the right floor is, but that's -- that was the view we took at the end of last year and we haven't updated it from there.

Was that including the restricted cash?

That's unrestricted.

Okay, thank you.

You're welcome.

You bet.

Thank you, Robert.

Your next question comes from the line of Michael Linenberg of Merrill Lynch.

Please proceed.

Yes, good morning.

Mike, how are you?

Hi.

Two questions, I guess the first to Jake.

I look at your fuel guidance, the $2.30 per gallon in third quarter of '07 and then $2.42, and I'm just curious.

Was that -- maybe this was put together a couple of weeks ago, but with the fuel curve having gone from contango to backwardation -- I think that's the first time we've seen it in two or three years -- could that $2.42 now -- is there an element of conservatism in that number, number one?

And number two, has that changed your thinking on hedging and maybe how aggressive you want to hedge, given that the curve is backward dated?

Yes, I think that we did put that estimate together, not as long ago as you suggest, but last week.

And if we had to do it over, it would be -- clearly be lower based on what the -- what's happened in fuel over the last week, including today.

So, there is a little bit of conservatism in that number, I would say.

As it remains -- as it relates to our hedging policy the way we're looking at -- while the forward curve isn't in backwardation, the levels to which you can buy ahead, are still pretty high.

They're still over $70, and so I'm -- we're all thinking about whether we ought to change and buy forward, but buying forward to a $70 price isn't very [attractive] at this point.

Okay.

And then just -- my second is just on your restricted cash.

It's a sizable number.

How much of that, if any, is related to a holdback and is there an opportunity there to free up some additional cash?

There are two things that drive our restricted cash.

One is we do have a holdback with our -- with our credit card processor.

And then we also have a sizable amount of restricted cash held by various states to support worker's compensation liabilities.

And so we're working on both of those fronts.

We've had some success recently in the area of worker's comp, but we're working on both of those fronts to try to free up some restricted cash.

But I'm not predicting the ability to do any on the credit card side and I have a little bit of optimism on the worker's comp side because we have seen some progress there recently.

Okay, thanks and nice quarter.

All right, thank you.

Thank you, Michael.

Your next question comes from the line of Frank Boroch of Bear, Stearns.

Please proceed.

Hi, good morning.

Morning, Frank.

Glenn, I wanted to just get a sense -- update on -- how you view these things philosophically.

Over the years United has sold down its interest in the number of assets, whether it be flight kitchen assets, Air Wisconsin, Galileo, Apollo, Orbitz and what not, and just trying to get your take as we sit here today.

How do you view the airline relationship with areas that it would continue to need to do business with?

I think, Frank, our view is if -- if the relationship between the two is accretive to our results, if we see a relationship that would actually be of mutual benefit to the two, then we continue to pursue that as a philosophical or a strategic relationship between the assets or the businesses.

I think that, with respect to significant assets that are within the core portfolio that might actually be in a position to perform at a higher level, we could imagine that performing at a higher level if we were to focus on them as businesses per se rather than as service providers to the core business, to the airline, we're open to seeing it that way, as well.

So, as we scrub our portfolio of business opportunities, including holdings, we think about them in the context of how to get them to maximum value creation.

Okay, great, and one last.

On the seatings reconfiguration that was announced yesterday, could you maybe give a little more explanation behind the decision to reduce the premium seatings and increase the more economy number of seats?

Frank, John's here with us, and Graham has spoken to the customer side of what we think we have created here.

I'll let John speak to the calculation.

I would first start out by suggesting to you that the actual resulting seat configuration is extremely competitive and comparable to other U.S.

carriers, in terms of a number of premium seats.

It does, however, represent, as you say, a reduction in our premium seat level.

And I think people are reading this the correct way.

We want to be competitive in a world market, as Graham suggested.

We have a financially responsible business case around introducing lie-flat United.

And as a result of that, we are going to focus on true revenue in these cabins to a greater extent than U.S.

carriers have typically done.

Hence, we think this is a very profit-accretive reconfiguration and we're very happy with the outcome.

Of course, any outcome is a result of compromises, but we think we made the right ones.

Great, thanks.

Thank you, Frank.

Your next question comes from the line of William Greene of Morgan Stanley.

Please proceed.

Yes, good morning.

I'm wondering if you can comment a little bit on the RASM trends that we've seen, basically over the second quarter and even here into July, because as I recall on your conference call in April, you talked a bit about some foolish pricing that was going on out there.

And I presumed that you saw a lot of that go away and then the economy, or just the macro trend sort of helped you out, because I wouldn't think that your capacity cuts could have had that much effect in this quarter, but maybe you could just add some color as to how these things progress?

Did we really comment on foolish pricing that we saw out there?

I may have to confess to that.

(LAUGHTER) I don't -- this is John again.

Never to my satisfaction, but I think the results in the second quarter are very much a part of us taking control of our destiny around our capacity plan and our revenue execution.

Clearly there has been, I think, a moderate improvement in overall industry expectations in the quarter relative to what we expected three or four months ago.

But we are very aggressively taking hold of segmentation.

We're looking at the competitive set in every route, in every cabin.

We are hand managing this outcome to a great extent, particularly in our international results.

So I would have to attribute it to the right capacity plan and allocation and just exceptional execution on our -- on our team's part.

And we're seeing continued strong results from both of those initiatives continuing in the third quarter.

So, your capacity cuts actually did materially affect these results?

Oh, I think they certainly set up the table for a much better result than we otherwise would have achieved.

However, I would note that our domestic capacity reduction was not as great as some of our competitors.

Okay.

And then, Jake, just a couple of housekeeping items.

Profit sharing, did you pay any in the quarter?

I didn't see any in the press release but maybe I missed it.

We did not.

We accrue profit sharing (inaudible) --

Oh, sorry accrued, that's what I meant.

-- but we didn't disclose what we accrued.

But we did accrue some profit sharing in the quarter.

You did, you just didn't disclose it?

We just didn't disclose it, that's correct.

Okay.

That's it.

Thanks for your help.

Okay.

Thank you.

Appreciate it.

Your next question comes from the line of Ray Neidl of Calyon Securities.

Please proceed.

Yes, with the cash that you're building, did you say anything about possibly doing a stock buyback?

And if you were contemplating that, what would the -- what do you think the reaction of your pilots would be?

Ray, we -- we answered the question a few questions ago by saying that we continue to have discussions with the management team and the board on the various best uses for our free cash flow, and we're -- we continue to have those discussions.

We haven't made any judgment on the particular point that you reference.

And at the end of the day, it's not unlike any other decision that we make, and maybe I need to say this.

We are managing this business to maximize value for our shareholders and we're perfectly content with that being the rationale for the decisions we make, such as the one that you mentioned.

Okay, great, that's a good answer.

Basically overall, Open Skies with Europe, you know, what are your benefits and challenges?

With your Dallas hub, are you trying to really duplicate what Continental does at Newark and what Delta's trying to do at JFK?

And are you looking at new medium-size cities to overfly the big hubs, including maybe Stansted London Airport?

All righty, John here.

Yes, as you suggest we are running the largest trans-Atlantic carriers but we get there through what I would call a big pipe strategy, clearly much bigger presence in major city pairs with large aircraft.

We've had success in changing that, in certainly markets like Zurich.

We've re-entered Rome -- not that I would characterize that as a secondary --but they are broader markets than we've operated in in a number of years and we're having very good success with those.

We expect Open Skies to be very supportive of our alliance relationships.

It should put us in a great position to take advantage of our anti-trust community with our partners.

So as we look forward, on balance we think that is accretive.

It will cause some competitive pressure here and there in the short term.

I would note that relative to Dulles, I don't know any other way to say this than Dulles is the real deal now.

I know there's been a lot of skepticism as we developed this market throughout the bankruptcy, but I just cannot tell you how encouraging and how strong our international results are from Dulles.

So, granted it doesn't take a lot of depth and a lot of market in terms of frequency, but Kuwait is performing extremely well.

We opened up Beijing with probably less than six weeks open-for-sale time.

We're just getting very, very strong results out of Dulles and our confidence in its potential as a true international hub is growing all the time.

Okay, great, just one last thing.

You did -- it was a very good quarter.

Congratulations on that over -- overall.

Was -- with this very strong Pacific operations, did that contribute a lot to you beating everybody's estimates?

Well, I think we had good experience in it the Pacific, as you saw and much of that was yield driven.

I think folks may have been concerned about some of our traffic reports, but we were very consciously managing for yield throughout the quarter in all the segments, but particularly in the Pacific.

I think we -- you got to note the Atlantic, too.

We had almost -- we had about a 25% improvement revenue year over year.

I think that that's just a significant result in any environment, but certainly is a much better result than some of our competitors experienced.

So we continue to see upside and opportunity internationally.

Long term we can't wait to go to market with the product that we announced this week.

We think it's going to drive exceptional revenue and profit performance.

But we're equally as encouraged by the fact that we're stabilizing a domestic system and we're going to produce some good results domestically in the third quarter.

So we've not only eliminated the drag domestically, we've got it contributing and I think that sets the table for a good outcome in the third quarter.

Great, thanks a lot.

Thanks, Ray.

Your next question comes from the line of Kevin Crissey of UBS.

Please proceed.

Hi, Kevin.

Good morning.

Good morning.

Can you talk about the performance of Ted relative to the rest of your domestic network?

Well, I think the markets that Ted is deployed in, as you know, have been under more pressure, so it really has little to do with the product offering.

We're very happy with Ted and it's clearly the best configuration we could have in a stressful pricing environment, but of course Florida's been under a lot of pressure.

But we're very happy with it.

No one should mistake the fact that the product has reached relative maturity for any lack of confidence in the decision we made or our willingness to continue it.

It's the right product for these markets and these markets have to be a part of the United system.

Okay, thanks.

And if we could -- if I could be more specific on a question that was earlier raised, I think, or at least eluded to, what do you see as the pros and cons of outsourcing a mileage program for any airline, not necessarily just for yourselves?

Well, the -- my answer to it -- to the larger question about assets that we have within the portfolio, that we want to maximize the value of is that we want to make certain that we continue to keep the program as accretive to our core business and we're very focused on it being supportive and accretive to the core business.

However, at the same time, if we could affect a strategy that unlocks its value for shareholders and continue to have it contribute to the effectiveness of the airline, we're focused on that opportunity, as well.

I think -- this is Jake.

The -- obviously mileage programs are a strategic asset of an airline.

They are very important to the airline.

And at the same time, as a separate business, they could conceivably be worth quite a bit of money.

And so trying to figure out is there a way to separate the strategic portion of the business from the -- the economic portion of the business is the challenge.

Now, Ace has done that and Air Canada's done that with Aeroplan, so that's something that we're going to look real hard at.

but that's the tension that you face.

Right.

And I think from a revenue perspective, if it was the right enterprise decision, we're confident that we can resolve this to the ongoing benefit of the core, as Glenn said, and make it completely in line with our revenue generation strategy at the airline.

You know, the question that was posed of us -- I think by Robert philosophically -- is how do we look at this philosophically?

This -- these three attempts at answering your question, I think, are very much on point.

Philosophically, if we think that there is an opportunity for us to unlock value that is in the assets, such as a mileage program, at the same time perhaps have the opportunity to dramatically improve its performance as a business, as Jake said, which may well be possible if you get it out and separate from considerations of the airline itself, then we very much want to look hard at that.

I think, again, back to the philosophical approach.

that we don't go into a preconceived perception that it cannot be done.

We take the view that we should ask ourselves how it should best be done.

Okay.

Would it have any implication for -- I mean if you were looking at acquiring or being acquired, my thought is that it makes it a more interesting proposition to have that already outsourced, and given your view on consolidation, it would have potentially implications?

I think with that business, scope and scale is extremely important to that business.

So, consolidation, it seems to me relative to that business, would have synergies of its own, not dissimilar from the synergies that would benefit on the revenue side, the combinations and perhaps also on mileage business on the cost side, as well, but would benefit the core business.

So creating a mileage business of greater scope, scale, efficiency and effectiveness would be analogous and supportive to the benefits of the airline itself.

Okay, thank you.

You bet.

Your next question comes from the line of Bill Mastoris of Bank of New York Capital.

Please proceed.

Thank you.

Jake, over and above your $100 million in savings for '08 through your refinancing efforts, are there other opportunities out there to either refinance or do other double ETC deals that might help you, at least as far as reducing that interest income line -- I'm sorry, interest expense line, I apologize?

Yes, we -- I think there are other opportunities out there, so we've been tackling the opportunities that are from easiest to hardest and we're going to continue to drive down interest expense.

We exited bankruptcy with some relatively high-cost debt and debt-related securities and we're going to continue to try to drive that down, and I think there are more opportunities there.

Would those include the double ETCs or would those involve any of the refinancing of some of the older ETCs?

Well, I don't want to get into specifics of what we might target for refinancing, but I -- suffice it to say that there are opportunities out there and our treasury group is looking at them every day and I'd be surprised if we didn't do some more.

Okay.

And if you could refresh us on your '07 CapEx assumption that would be greatly appreciated.

And as a follow up to that, is most of that on the technology end related to making the switch from Galileo to Amadeus?

The answer to the last part is no.

We do have some spend on a new reservation system in this year but not the vast majority of it.

Our total capital budget for this year is $550 million.

We have -- as you look at the numbers we spent about $160 million in the first half of the year, and so we're planning on spending the rest of that in the back half of the year, so we're a little back-end loaded.

But the spend, as I mentioned in my prepared remarks, is split.

A third of it is aircraft-related and customer experience-related, a third of it is infrastructure projects, and a third of it is in IT, so that's the basic split.

Okay, thank you.

Thanks.

Your next question comes from the line of Gary Chase of Lehman Brothers.

Please proceed.

Hi, Gary.

Good morning, everybody.

I just had actually a -- this is kind of a quick knit, although it does catch the eye.

The full-year capacity guidance in domestic at down 4% to 5% would seem to be a -- would seem to be a pretty good-size change from where you were last and no change to the third quarter or obviously the second.

So was just curious if there was a big draw plan there or we're reading something --?

Jake has an answer to your question.

Yes, it's a typo.

I apologize.

So the --

Well, that's not the one I was hoping to hear, not.

(LAUGHTER)

Obviously we can't affect the full-year capacity that greatly in the last two quarters of the year given where we were.

So, in it the -- we're putting out an updated SEC filing, but it'll show that number as down 2.5% to 3.5%.

And just as a reminder, where do the mileage -- or excuse me, economy-plus upgrades show up?

In passenger revenue or in other?

Passenger revenue.

Okay, so we're seeing the benefit there.

Is there a way to quantify -- was there any material contribution last year from that?

Yes, there was.

I'm trying to remember the number.

It didn't -- we're running north of $100 million this year.

We were probably a little $70 million or so last year I think was the number and our plan, as I mentioned, is for next year to be $175 million.

Okay, but that wouldn't have explained the outperformance this quarter?

No, the outperformance for the quarter is -- as you said, was -- we were well-configured in the supply-demand relationship and then demand showed up and we had our inventory -- we had seats to sell at very high fares and that's what happened, especially in the last two weeks of the year -- of the month.

Okay, guys, really appreciate it.

Thank you, Gary.

Your next question comes from the line of Jamie Baker of JPMorgan.

Please proceed.

Hi, Jamie.

Good morning, gentlemen.

Good morning.

Question for Glenn.

I just want to clarify one of your responses from earlier in the call.

I'm curious as to the degree to which labor is involved as you explore potentially unlocking value and/or returning cash to stakeholders.

Are you proactively explaining the rationale behind -- behind this examination to your pilots?

Or am I mistaken, are these decisions largely independent of any labor considerations?

So, Jamie, I know that it's transparent to all of you that we have a pilot director on the board, and so all of the discussions that we've had this morning with respect to the strategy of the Company, the long-term strategy of the Company will be discussed, as it always is, at the September board meeting of our Company.

So, we have a board meeting this week, which will be attended by our pilot director and the IEM director.

We will then move to the strategy discussion -- the long-term strategy discussion in September, which will include all of the issues that are strategic to United and to UAL Corp.

that have been queried on the call, and our labor directors will attend those discussions in their full context.

At the end of that discussion, Jamie, Pete McDonald and Jake Brace, and John will take the board decks and the board discussions to those labor groups that are not a part of the board discussion per se.

So our rationale for our value-creation decisions and the philosophical way in which we look at the opportunities for United to create shareholder value and truly to maximize shareholder value, but at the same time to create long-term sustainability and viability for the entire enterprise we focus on investability, is transparent to all of our labor groups.

Okay, excellent.

I appreciate that clarity.

Good quarter, and congratulations to Robert, in particular, on his promotion.

Well done.

Absolutely.

Thank you very much for that, Jamie.

Your next question comes from the line of Daniel McKenzie of Credit Suisse.

Please proceed.

Yes, hi, thanks.

Just wanted to circle back on the mileage program.

It sounds like there potentially is opportunity there, I'm just wondering how you're thinking about that program and its product life cycle?

In particular I'm wondering if you can provide some perspective about growth prospects, even as United trims its network?

You know, John and his team are focused on unbundling revenue optimization opportunities across the full spectrum of all of the assets for which they are responsible, and that's a step toward unlocking value for shareholders in those assets.

So, if we take just a subtle pivot over to optimizing the current opportunity that we have in Mileage Plus, I'll let John speak to that, which is just slightly different from our unlocking value in the program itself for shareholders.

John?

Well, I think that clearly the depth-and-breath issue is a little bit of a misqueue sometimes.

We've actually, I think, increased the relevancy of the network for our customers, while reducing the capacity spend associated.

And that reduction in capacity spend doesn't have any impact on the folks that are engaged with the Mileage Plus program.

They're still getting more routes, more cities and greater frequency between cities than they've experienced in the past due to a regauging of the domestic network and a substantial international expansion, so we've not seen any corresponding impact in the Mileage Plus profile.

We think we have good core revenue growth in Mileage Plus.

Certainly we have a very relevant credit card product that we've enhanced over the last 12 to 18 months, so we see good, what I would characterize as traditional growth in Mileage Plus.

And as Glenn mentioned, we are learning more and more about how to unlock the value of the transaction flow and the eyeballs we have, in effect, with our very large customer volumes.

So, we see significant opportunities, both within the airline and within Mileage Plus, to unlock new streams of revenue that are industry accretive, as opposed to simply pushing them back and forth and progressively escalating competitive responses.

So, we're pretty confident that we've identified new streams of revenue, as indicated by Mileage Plus and other things we've done in the program that are going to continue to grow significantly in the years ahead.

Good, thanks.

And then just a second question relating to regauging of the aircraft.

I missed if that was just on the international routes only or is that domestic, as well?

I guess what I'm getting at is United in the past has talked positively about the performance of the PS product, and given the entry of Virgin America, I'm wondering if -- what are the pros and cons of rolling out PS more broadly on the transcon markets?

Well, as -- this is John again.

As you would have expected, we certainly considered an event like this when we made the PS decision, and that was one of the tests we wanted to run the decision through is if we had a very, very large LCC entry in the market that was beyond what we were seeing, would we still be happy with the fact that we made the decision, and I think resoundingly so.

We are in the transcon markets to provide a market-leading, competitive, profitable product for our very best customers.

We are not in the transcons markets to win the volume war at any price, and we feel very well set up to continue to meet the needs of those customers with the PS product and are confident that it stacks up extremely well relative to the Virgin entry.

Okay, great.

Any chance or any plans to potentially expand the PS service?

Well, I think we have some -- some issues to resolve relative -- you know, Graham's focused on making sure that the beat selection in the long term's going to be the right answer.

We've had some issues with that.

I think once as we can get on the other side of that problem, yes, we clearly see that we will grow the PS product.

Most certainly in the markets we currently serve and we will evaluate selectively additional markets, as well.

From a profitability perspective and a customer-reception perspective it certainly commands our attention to do a little bit more.

It is a very high-class problem for us and we're getting a tremendous amount of sponsorship of your point from our customer base.

So, that a -- that's a good problem and good opportunity for us to have.

Okay, great.

Thanks very much.

You bet, our pleasure.

Thank you.

Ladies and gentlemen, this concludes the analyst and investor's 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, operator.

We appreciate it.

In closing, as I said in my message this morning of congratulations and of appreciation and thanks to our employees, our results this quarter are all about performance.

These results are going to continue to improve.

They're the result of good work and they're the result of solid analysis and good thinking, the many changes we are all making across the Company through continuous improvement and focus on our customer.

I don't have any doubt that we're going to continue to strengthen our core business and improve its results, just as we said we would when we completed our restructuring.

And we'll continue to make the right long-term decisions for the viability and the sustainability of this enterprise.

With that, I've got the pleasure of thanking an executive of our Company and wishing him well in his new endeavors, as Jamie Baker did a moment ago, and at the same time, welcoming another participant to the room and on this call.

I want to congratulate Robert for all the work that he has done leading up to the recognition that he's received as he takes up his new post and ask him to say a few things.

And I want to welcome Kathy Mikells, who is going to step into this frame and take it to the next level, Robert having established the foundation.

And I'm going to give the two of them, who are with us today, an opportunity to comment on just that.

So, Robert, first over to you.

Thanks, Glenn.

It's an exciting time to be part of United and I truly have enjoyed being able to communicate all the good work that's going on across the Company to the investor base.

But having said that, Mileage Plus is the industry's leading frequent flyer program, so I look forward to returning and growing that business.

Thanks, Robert, well said.

Kathy?

First of all, Glenn, I just wanted to echo your comments with respect to all the good work accomplished under Robert's stewardship.

I think our May capacity guidance update and our recent introduction of our investor update before the end of the quarter are just two examples of our efforts to timely communicate important information to all of our investors.

I look forward to working with all of you, both everyone in the room here at United and all of you on the phone, to continue to build on that strong foundation and further strengthen our communications with the investor community.

Thanks very much, Kathy.

As Jamie asked his question a little while ago about our processes here, both of these two individuals are examples of the talent that we are developing here at the Company that we discussed with our board at the October meeting, after we had the strategy session, and we're very proud of the fact that we are able to offer them new challenges in their careers.

So, congratulations to the two of you.

And with that, I'll hand it back over to the operator.