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Operator
Good morning and welcome to the UAL Corporation's earnings conference call for the third quarter of 2007.
My name is Bill, and I will be your conference facilitator.
Following the prepared remarks from UAL's management we will open up the line for questions from analysts.
At the end of the analyst Q & A at approximately noon Eastern time we will take questions from the media.
(OPERATOR INSTRUCTIONS).
This call is being recorded and copyrighted.
Please note it can not be reported, transcribed or rebroadcast without UAL's permission.
If you do not agree with these terms, simply drop off the line.
I would like to turn the presentation over to your host for today's call, Katherine Michaels
Katherine Michaels
Thanks, Bill.
Welcome to UAL's third-quarter conference call.
The earnings announcement was released early this morning and on our web site, www.united.com/IR.
Let me point out that the statements in the press release and those made during this conference call may contain various forward-looking statements which represent the Company's expectations or beliefs concerning future events.
All forward-looking statements are based upon information currently available to the Company.
A number of factors could cause actual results to differ materially from our current expectations.
Please refer to our press release, form 10-K, and other reports filed with the SEC for a more thorough description of these factors.
Lastly, during the course of our call, we will be discussing several non-GAAP financial measures.
For a reconciliation of these non-GAAP numbers to GAAP financial measures, please refer to our earnings release.
And now I would like to turn the call over to Glenn Tilton, UAL's Chairman, President, and CEO.
Glenn.
Glenn Tilton - President, Chairman, CEO
Thanks, Kathy.
Good morning and welcome everyone on the call.
Joining me and participating on the call today are Jake Brace, our Chief Financial Officer; John Tague, Chief Revenue Officer.
Also here with us and available to take questions are Peter McDonald our Chief Operating Officer and Graham Atkinson, our Chief Customer Officer.
Earlier today, we reported our third-quarter results, which reflect the financial gains being driven by our work to improve every aspect of the core business.
Our performance is among the best in the industry across nearly every financial metric, be it revenue, profit, margin and cash flow.
We reported a pretax net profit for the quarter, excluding special items of nearly $.5 billion.
Well over twice the pretax profit we reported a year ago.
Our net income again excluding special items was $295 million, increasing by some $132 million, 81% higher than the quarter a year ago.
In spite of fuel at around $75 a barrel.
And a tax rate that was 17 points higher year-over-year.
Both are operating revenues and expenses had special items associated with them this quarter.
The effect of which was an increase in GAAP-free tax and net income and Jake will speak to these in a few moments.
We continue at United our disciplined approach for capacity management and our numbers clearly demonstrate that we are benefiting from the work of John and his team to aggressively manage deployment of our assets and improve our revenue performance.
Our passenger revenue performance was among the best in the industry with main line passenger unit revenue excluding special items increasing by 9.7%, compared to the third quarter last year.
John will add his personal perspective and that of his team on the quarter later in the call.
We are continuing to focus on controlling our costs with operating expenses in line with our guidance, up approximately half a percent from the previous year.
As we indicated, when we provided guidance last month, our third-quarter CASM was impacted by a non-cash charge for surplus and obsolete maintenance inventory and increased accrued expense for profit-sharing programs that would be paid out to all employees and have been driven by the improved revenue expectations I discussed a moment ago.
As has been often mentioned this is a high-class problem for United.
It is worth noting our programs to have the same metrics -- our programs have the same metrics for everyone, management and front line and our profit-sharing program pays out essentially from the first dollar of pretax profit.
Our employees have earned over $100 million in profit sharing year to date.
Actual payouts, of course, will depend on our fourth-quarter performance.
Our operating profit excluding special items was $589 million, almost double that of the previous year, with an operating margin of 10.7%, we improved upon the strong margins we achieved last quarter.
In addition, we generated operating cash flow of $342 million, $211 million higher than a year ago.
Our strong cash flow distinctive to United allows us the best in the business, reduce our debt and consider shareholder-friendly options in that vain, last month we met with our board for our annual strategic planning session to discuss the future of the company.
The management team and our directors have taken a deep analytic dive across all elements of our business, looking ahead to our competitive position in the marketplace five years out.
The entire team, those who develop the plan and those who have responsibility for its execution joined the board for that discussion.
As I told our employees on a recent call, the performance we are posting across the company, as evidenced by the results this quarter has put us in a position to look to our future with confidence.
Our five-year plan builds on our strong competitive results as we work to further differentiate ourselves in the marketplace with our best customers.
Our five-year plan provides a road map to better manage through the down cycles that are inevitable and create value for all stakeholders, both of which the vast majority of the U.S.
airline industry has consistently failed to do.
Rather as those of you on the call know better than most, U.S.
airlines have consistently destroyed value.
We recognize that in order to succeed, we must take a different approach, pursuing all opportunities to create value and position for the Company for long-term success.
We have long stated our belief that consolidation is a strategic imperative for the industry and can create benefits for all stakeholders.
We are looking at every segment of our business to determine what is core and what is not, to eliminate cross subsidies that mask inefficiencies.
We are identifying how to unlock the value associated with the portfolio of businesses such as Mileage Plus and our maintenance division.
By [disaggregating] and eliminating cross subsidies we will strengthen these businesses and our core business.
While discussion among locking the value of these businesses has drawn considerable attention, the bulk of our effort is concentrating on improving the airline.
We will further strengthen our airline by continuing to focus on delivering better experience for our customers, offering differentiated products and services that our customers value, developing new sources of revenue, controlling our costs, implementing standard work processes across the system, and by providing the tools and training our employees need and by improving their work environment.
We measure and we track our success through a balanced scorecard that aligns work across the Company for all work groups.
We set stretch targets which are tied directly to our success sharing and profit-sharing program, in which, as I said earlier, everyone participates.
A scorecard is a critical connection from our board room across the organization, with performance boards throughout the airports and management offices along with issue boards where every employee is expected to raise issues and ideas that impact or improve performance.
This brings transparency to our goals and our progress, and most importantly involves everyone in achieving these goals.
Our success is a direct reflection of the work our people are doing across the Company to improve our performance, and our focus on improving our customers' experience at every interaction is working very well for us.
We continue to invest in new products and services for our customers very shortly, our inaugural flight for our new International premium product takes off from our hub in Dulles to Frankfurt.
This is a significant upgrade.
It will ensure that United has the leading U.S.
premium product, with fully lie-flat seats in both first and business class and is competitive with the best foreign carriers.
Setting United apart by providing more personalized experience for our best customers, coupled with the impact of process improvement across the system will continue to drive margin leadership and improve reliability.
Reliability and on-time performance are just as important to our customers.
Regardless our exposure to ATC-challenged airports, we outperformed peers on average on-time performance and the handling of bags.
We have demonstrated our willingness to work with the government on solutions to relieve the burden on the nation's antiquated ATC system.
As we did when we voluntarily reduced arrivals at O'hare, the largest hub.
These measures while somewhat effective in the short term are not the answer to the problem as they constrict growth and competition canned limit service to smaller markets, nor is charging for slots or congestion pricing that penalizes carriers for flying when their customers want to travel and does nothing to address the inequity of how the system is currently funded.
We need to move to a satellite-based system, funded appropriately with both commercial and corporate jets paying their fair share, and we need to do so now, to meet customer demand and eliminate delays that cost airlines and their customers billions of dollars each year.
We continue with United to strengthen our international network the announcement of a new route to China.
Next year, we will begin service between San Francisco and Guangzhou, our 6th daily nonstop service to China.
Sourcing aircraft from our existing fleet for new international service by moving out of less profitable routes and operating our aircraft more efficiently.
This disciplined project is for improving margin performance and generating a reasonable financial return in the capital we have deployed throughout the business.
With that I will hand over to Jake to take us through more of the quarter's results.
Jake, over to you.
Jake Brace - CFO, EVP
Thanks, Glenn, good morning, everyone.
As Glenn mentioned this quarter we were clearly hitting on all cylinders with great revenue results, exceptional margin improvements, continued strong below the line performance in improved in cash flow.
Our results this quarter as Glenn mentioned include a number of special items associated with our bankruptcy case impacting both revenue and operating expenses.
We had a one-time noncash credit to passenger revenue of $45 million this quarter related to the final resolution of certain administrative claims from our restructuring.
We also had $22 million in restructuring-related cost reductions.
As we walk you through our numbers for the quarter, we will be excluding these items in order to provide a clearer picture of our fundamental performance.
We generated operating profit of $589 million this quarter, a year-over-year improvement of $284 million or 93%, resulting in a nearly 5-point improvement in our operating margin to 10.7%.
Pretax income, which given our NOLs is the primary metric we use to measure our performance was up 127% to almost $.5 billion.
Net income this quarter was $295 million or $1.96 per diluted share beating the consensus.
Our third-quarter net profit is after applying a tax rate of 41%.
I note that this tax rate was a couple of points higher than the rate used to develop the consensus.
This means that our outperformance of consensus is greater than it would appear at first blush.
As Glenn noted earlier third quarter 2006 we had a tax rate of 24%.
As you may recall the third quarter of last year was the first time we booked a tax expense since emergence.
That tax expense was based on year to date pretax income and resulted in a lower effected tax rate for that quarter.
With that being said, despite the large increase in tax rate, net income grew by $132 million or 81% year-over-year.
As we have noted in previous quarter, tax expense should reviewed primarily as a non-cash item.
Due to our large NOL balance we anticipate paying only minimal cash taxes for the foreseeable future.
As you know our reported earnings include a number of non-cash fresh start and exit-related charges, and we have attempted to identify these impacts for investors.
As usual all of the details of these effects can be found in the tables to our earnings release and posted on our web site.
The impact of Mileage Plus accounting was mild.
The fresh start accounting methodology cost us $35 million in revenue versus the previous measure which was more than offset by $50 million revenue benefit from the change to expiration from miles from 36 to 18 months.
Net-net the effective Mileage Plus accounting changes resulted in passenger revenues increasing by $15 million.
On a year-over-year, these accounting changes resulted in revenue increasing by $32 million.
As many you will have noted passenger unit revenues came in significantly above guidance.
First the one-time special credit to passenger revenue of $45 million which I noted earlier.
Second September core revenue performance was significantly stronger than we had expected, higher by approximately $50 million.
John will provide you more details on our strong revenue performance in a few minutes.
Cargo and other revenue of $438 million came in slightly above the top end of our guidance.
We saw strong performance in cargo revenue that grew by 8.2%, reflecting increased freight volumes in both domestic and Atlantic markets.
One factor affecting other operating revenues is lower third-party pass-through fuel sales at United Aviation Fuel Corp.
This quarter pass-through fuel sales were down $85 million to $3 million.
We expect to record other revenue of approximately $225 million to $235 million for the fourth quarter and $990 million to $1 billion even for the full-year 2007.
Included in that guidance is our expectation that UAFC revenue will be about $5 million in the fourth quarter.
Including UAFC, third-quarter main line RASM increased 9.7% year over year.
Consolidated RASM, again excluded UAFC increased by 9%.
Turning to cost, our cost performance this quarter was good, especially in light of the 1.3% consolidated capacity reduction with operating expenses up approximately half a percent and main line CASM of 1.2% this quarter versus the same quarter of 2006.
As Glenn mentioned, our mid-september cost guidance reflected $31 million in additional expenses to recognize a non-cash charge for surplus and obsolete maintenance inventory and also higher accrual for profit-sharing programs driven by improved revenue expectations.
As we closed the book for September, our better than expected revenue performance caused us to increase our accruals for profit sharing even further.
As a result mainline CASM excluding fuel was up 5.8% at the top end of our guidance.
Now let me walk you through some of the expense categories where we saw significant changes this quarter.
Maintenance was up 17% or $43 million due to a combination of higher maintenance volumes and rate increases on our V2500 power by the hour contract.
Purchased services were $42 million or 14% higher, primarily due to increased IT expenses for new applications and other technology being deployed in support of our customer and employee initiatives.
In addition we increased outsourcing versus last year and also had a small negative impact from the weakening dollar.
Finally depreciation and amortization costs were up $19 million due to the one-time non-cash charge of $18 million for surplus obsolete maintenance inventory I just told you about.
We recognize a net gain on hedge contract of $18 million, of which $8 million related to hedge(inaudible) settling in the third quarter.
All of this was recorded in fuel expense, including the benefits of hedging, average mainline jet fuel price including taxes was $2.22 per gallon for the quarter compared to $2.30 last year.
On a nonoperating side we recorded total non-op expense of $91 million at the low end of our guidance.
Before going through our cash performance I want to point out starting this quarter we included a condensed cash flow statement along with our press release and we hope you find this information helpful.
We again delivered strong cash flow in the third quarter.
Our operating cash flow of $342 million was $211 million or 161% higher year-over-year.
As a reminder, our cash flow from operations was up 38% in the first quarter of this year and up 51% in the second quarter.
Free cash flow which we define as operating cash flow less capital expenditures came in at $60 million this quarter up from $38 million last year.
Free cash flow was artificially depressed by the effect of an aircraft financing transaction that we completed this quarter.
In order to refinance certain aircraft in our fleet at a lower cost, we purchased three aircraft during the quarter that were previously leased for a total purchase price in excess of $150 million.
The purchase of these aircrafts were financed with the proceeds of the WTC transaction that we executed at the end of the second quarter.
I want to stress that this transaction did not result in any change to the company's fleet count which remains at 460 mainline aircraft.
The purchase price for the aircraft was classified as a capital expenditure causing free cash to be lower than it otherwise would have been.
Excluding the effects of this transaction we would have generated more $200 million of cash flow this quarter, significantly higher than last year.
We also continued our efforts to deleverage our balance sheet, repurchasing $76 million of debt securities this these securities are classified as held-for-sale investments on our balance sheet but effectively a reduction in debt.
As we noted in our press release, when we discussed our total debt balance, we deduct this repurchase debt.
During the quarter, we reduced our total debt by $210 million through execution of the transactions I just referred to as well as schedule of debt amortization.
We ended the quarter with total debt, including off balance sheet, capitalized aircraft rents and municipal debt of $12.2 billion.
Year to date we have reduced total on and off balance sheet debt by $1.6 billion and expect a reduction of approximately $100 million in 2008 financing cost through these and other transactions implemented since the first of the year.
Our unrestricted cash and short-term investment balance remains steady at $4.2 billion despite the cash outflows during the quarter for the aircraft purchases I mention, other capital expenditures and debt reduction.
Our net debt currently stands at $8.0 billion a reduction of approximately $2.7 billion in the last 20 months.
Despite the challenges produced by an environment of increasing load factors and ATC congestion, our recent operating performance continues to improve our relative standing the DOT on-time ranking.
In 12 months ended August, United ranked third for on-time arrivals among the six network carriers in comparison to a year ago we ranked fifth.
Our baggage performance also continues to improve the United ranking first among our peers in DOT baggage performance both in July and August.
As we move forward with our five-year plan that Glenn highlighted a few minutes ago, we are working to mitigate the difficult ATC environment and our pursuing nearly 40 policy, process, resource and infrastructure opportunities to strengthen reliability of profits across our system, including pursuing an ATC mitigation strategy with the FAA and supporting the O'hare modernization program.
Our expectation is that these initiatives will improve our performances while simultaneously helping to control cost.
John will fill us in on the quarter revenue results and the work under way to continue to drive for strong revenue performance.
John Tague - EVP Mktg. Sales and Revenue CRO
Thanks, Jake.
During the third quarter, United passenger revenue performance was among the best in the industry.
We achieved these results by delivering against our strategy of continuously driving improvement in all areas of revenue execution and aggressively managing our capacity.
Third-quarter mainline PRASM was up 9.7% and consolidated PRASM up 8.9%.
Strong results for September pushed us above the guidance we provided and further reflect the benefits we are enjoying as a result of the actions we have taken to improve our revenue performance.
International markets continue to perform exceptionally well.
Despite a very difficult comp year-over-year, we still delivered significant International PRASM growth of 10.8%.
Latin American PRASM increased by 11.7% year-over-year.
Pacific PRASM growth was particularly robust up 9.2% on top of a 14.1% increase last year.
PRASM growth in the Atlantic was strong, growing by 12.2% year-over-year on top of a 10.8% increase last year and against the capacity increase of 4.4% this quarter.
Our performance across Europe was solid.
One of the things that differentiated us from our competitors was that our Heathrow performance was quite good, with year-over-year RASM growth in the low double digits.
Earlier this year, we knew we had to act decisively to reverse the domestic drag on our performance.
And I am pleased to report that our domestic improvement has kept pace with our momentum.
Domestic main line PRASM up the 9% aided by year-over-year capacity reduction of 4.6%.
Regional markets also improved with PRASM up 4.6%, lower than our main line results due in part to a 4.6% increase in stage link and capacity growth of 1.3%.
Overall, express continues to improve its contribution of the bottom line, in fact increase big 13% or $8 million year-over-year.
I know that many of you are interested in our Transcon performance in the face of new LTC competition.
Well, new competition obviously affects us, our RASM performance in those markets continues to be excellent, with year-over-year RASM growth of 13% in the quarter.
Our consolidated results were driven by an approximately one point higher load factor and 7.8% increase in yield versus the third quarter of 2006.
Our main line results were driven by 1.1% increase in load factor and a yield improvement of 8.2% year-over-year, providing nice evidence that as load factors continue to reach record levels, we can drive performance improvements through yield.
I would like to spend a few minutes discussing United's view and strategy on capacity planning and allocation.
United has had a long-standing commitment to capacity discipline.
Three years ago, we led the industry in shifting capacity towards high-perming International markets while dramatically reduce our domestic capacity spent.
This past spring, we -- excuse me, we accelerated the strategy once again, reducing our domestic capacity growth by about 2% from previously planned levels without compromising the quality of our schedule.
This decisive action is part of a long-term strategy to drive improvements in revenue performance at United, particularly during softer domestic market conditions.
Clearly, our approach is paying off, given our second and third-quarter results.
This in combination with a festive revenue management and actions to strengthen the network resulted in a turn around of our domestic unit revenues.
Our five-year plan that Glenn discussed earlier calls for the continued dedication to responsibly drive capacity discipline in a manner that reflects market realities around profitable demand.
I want to emphasize profitable demand.
United is not meeting available demand today, and if we were, our revenue performance would not be nearly as strong.
For far too long, this industry has deployed capacity based on a slavish belief in marginal economics.
Somewhere in the process, the industry has lost sight of the fact that marginal costs don't say marginal and marginal revenues not only often stay that way but can actually be destructive to core revenue performance.
It's the quality of the revenue that will ultimately enable the industry to produce a sustainable return on the assets and capital that we have deployed in the business.
Our observation over the last few years is that rather than expanding the revenue pie, marginal capacity pollutes the entire pricing curve.
United has shown that by being disciplined, we can improve the quality of our revenue and expand our profit margin.
As we look forward, you can expect that we will continue to be prudent in our capacity planning, while we utilize all the other levers we have available to continue to strengthen our revenue performance.
Our five-year plan seeks to expand upon the gains we have achieved through execution quality, while bringing to scale the successes we have had in creating new revenue streams.
We need to have the commercial courage around enhancing the revenue model and reducing settling costs.
It is the right capacity plan that makes that possible.
Our results demonstrate that this is true for United, and we believe true for our industry.
As Jake will discuss momentarily, we will be taking further reductions in domestic capacity in 2008 while pursuing quality growth opportunities Internationally.
There has been a lot of discussion recently about a weakening economy and its potential effect on travel demand.
From our perspective, we are not seeing any evidence of a slowdown in demand, looking close in at the fourth quarter, we expect strong and balanced unit revenue growth both internationally and domestically.
Bottom line is that we are encouraged about our revenue performance as we look forward to 2008.
Because we have appropriately set the table, and we have a willingness to use all the tools at our disposal to influence the outcome while executing a strategy that we believe is consistent with our shareholders' expectations.
Now back to Jake.
Jake Brace - CFO, EVP
Thanks, John.
Moving to guidance, our fourth-quarter capacity guideness is appropriately conservative, reflecting escalating fuel prices with spot rates close to $90 a barrel.
For the fourth quarter, we expect North American capacity to be down 4.5 to 5.5% while international capacity is expected to be up 4.5% to 5.5%.
Overall for the quarter, main line capacity is expected to be down one-half to one and a half percent.
Express capacities are expected to be up 2.5 to 3.5% resulting in fourth-quarter consolidated capacity flat to down 1%.
For the full-year 2007, we expect main line capacity to be down .5% to 1.5% and consolidated capacity to be flat to down 1%.
For 2008, we expect main line capacity to be flat to up 1% with domestic main line capacity down 3 to 4% and international capacity up 5.5 to 6.5%.
W expect United Express capacity to be up 1 to 2% leading to consolidated capacity being flat to up 1%.
Having said all that, we retain the abilities to further reduce capacity if necessary, as we have a large number of unencumbered aircraft and as well as some that come up for lease renewal next year.
And on the cost side, we estimate that main line CASM, ex-fuel, and special charges will be up 6 to 6.5% in the fourth quarter.
Approximately half of the year-over-year increase is driven by higher maintenance cost due to increased heavy maintenance volumes, both air-frame and engine as well rate increases in some of our outsourcing contracts.
Another one point of the increase is due to lower operating expenses in the fourth quarter of 2006 from the two favorable insurance settlements.
Higher profit sharing expenses is causing one point of the year over year increase.
Since the end of the second quarter, our earnings forecast has risen causing a substantial increase to our profit sharing expectation.
I comment on the implied change in our fourth quarter cost guidance.
While we didn't provide explicit cost guidance in the fourth quarter, if you used the data we provided for the three quarters and the full year, you would of have backed into an increase in fourth quarter CASM ex-fuel of 4.8% based on our previous guidance.
That obviously at midpoint is being raised to 6.25%, an increase of some 1.4 points.
There are three things that drive that.
One is we have further lowered capacity versus the previous guidance we gave you.
Second, I just mentioned our profit sharing expectations have grown for the year.
I would note that we book profit sharing a little differently than some of our competitors in that we estimate our full-year profit and then we book a proportion of that in each quarter and since our full-year profit expectations have gone up, the amount that we will book in the fourth quarter has also gone up.
And then the third piece that has increased our guidance somewhat modestly is maintenance expenses and we can talk about that more in the Q & A.
For the full-year 2007, CASM ex-fuel special charges and severance is expected to be up about 2.5%, slightly higher than our prior guidance reflecting higher maintenance cost and increased profit sharing I just mentioned.
We are still in the process of completing our budget and will provide 2008 CASM guidance on our fourth quarter conference call.
You can find our fuel and hedge position guidance in our earnings release and now, Bill we are ready to open the call for questions.
Operator
Thank you very much, sir.
First we will take questions from the analyst community this then we will take questions from the media.
(OPERATOR INSTRUCTIONS).
Please hold for a moment while we assemble our queue.
Our first question comes from the line of Frank Boroch of Bear Stearns.
Please proceed.
Frank Boroch - Analyst
Good morning.
Glenn, I was hoping you could maybe shed some light on the 250 initiatives you alluded to.
Sort of what is first up in the five-year strategic plan you can share with us today?
Glenn Tilton - President, Chairman, CEO
Frank, there are two types of initiatives, we appreciate the question, that we are focusing on.
Strategic as I mentioned in my comments and I think Jake and John have both referred to them.
We discussed with the Board.
We are further along in developing the possibility of the MRO transaction than we are with Mileage Plus.
We've said previously that we are focusing both as businesses within the portfolio of businesses at United so we can clearly make a distinction as to their value.
We hope to have a P&L for Mileage Plus developed by the first of the year and then we will run the business accordingly.
But we are further along with the maintenance division.
The 250 initiatives really speak to the issue of the core business.
We have initiatives all across the business that are a function of the $4 billion capital budget we have allocated across the strat plan, and they cover the full spectrum of the margin from revenue, all of John's initiatives he alluded to in his comments, to Peter and the management of the operation and Graham in the customer experience initiative we have under way.
The point we want to make with 250, we have reached the point that the improvement we expect of ourselves throughout the five-year plan is going to come in smaller increments than those you might be accustomed too.
For a company that has just come out of restructure we go talked of increments of value in large numbers.
These are going to run the full spectrum from managed in the context of tens of thousands up to millions.
And I think that is the point we wanted to make with 250.
We also wanted to make the point that we are very transparent in the way we account for the accountability around these initiatives, Frank.
Frank Boroch - Analyst
Okay.
Great.
That's helpful.
Glenn if you can maybe touch on your latest thinking with oil approaching $90 a barrel and some calls for recession next year, do you think the likelihood of industry consolidation has increased?
Glenn Tilton - President, Chairman, CEO
Well, two things, Frank.
Number one, I think that oil is going to continue to have a risk premium associated with it which is virtually incalculable.
Evidenced by the current situation playing out on the Turkish, Kurdish border that clearly the market didn't expect.
And I think that triangulates than Frank into a financial speculation relative to the risk premium.
It probably puts anywhere $15 to $20 into oil that frankly we simply can't account for relative to the fundamentals of supply and demand.
You continue to see demand being pulled down.
I saw a report yesterday Frank that talked about Chinese demands coming in lower than expectations.
Sooner or later the fundamentals obviously are going to have their moment and I think as well, prices in between $70 to $90 will continue to stimulate alternative forms of energy and that will ultimately have its effect too.
Right now I think the market is all about risks and financial players and commodities and we need to recognize that.
With respect to recession, John spoke to the fact that in our business anyway, we aren't seeing any evidence of it, Frank, but my view is that at some point, we are all going to do the work that we are able to do independent of one another and at some point we should turn our attention at the synergies that exist between us in the industry which we would classify at our vernacular here at United as unnecessary waste.
Frank Boroch - Analyst
Great, okay, Thank you.
Operator
Thank you very much, sir, ladies and gentlemen your next question comes from the line of Gary Chase of Lehman Brothers.
Please proceed.
Gary Chase - Analyst
Good morning, everybody.
Glenn Tilton - President, Chairman, CEO
Good morning, Gary.
Gary Chase - Analyst
Wanted to see if you guys could give us a little more flavor for the capacity plans you put in the release regarding 2008.
Excuse me.
Looks like the domestic cuts are a bit deeper than we have been thinking and certainly more than the run rate you are on now.
Incrementally, can you give us a little flavor for what is happening in there.
Also, John, in the vein of what you were saying, the slavish reliance on marginal economics can just explain to it-- I'm sorry?
Glenn Tilton - President, Chairman, CEO
That is exactly what he said.
Gary Chase - Analyst
Can you explain to us on the international side, what is the opportunity that is driving, you know, the need to dial up the growth there, because it seems like that is what you are doing is supplanting domestic for international.
John Tague - EVP Mktg. Sales and Revenue CRO
Yes.
I think as it relates to the capacity guidance, while we are not providing quarterly guidance for next year, you should assume the capacity reduction is coming out of the first six months of next year as we dialed our capacity down throughout 2007.
Gary Chase - Analyst
Right.
John Tague - EVP Mktg. Sales and Revenue CRO
We think that is the right place to be.
We simply reject the idea that capacity plans should remain stagnant regardless of the price of fuel.
It just doesn't calculate, but we are quite comfortable but retain the flexibility as Jake said to move up or down.
We have been relatively cautious in terms of international growth as compared to some of our peers but are growing at a rate that is greater than others.
I think as Glenn pointed out we continue to have significant opportunities to re-optimize within the existing Fleet so we are eliminating some marginal performing routes in favor of greater opportunities.
We are also improving our asset utilization as we relook at some of our maintenance criteria.
So we are getting good economics out of the existing fleet.
We, too, are cautious as to whether these unit revenue growth rates will continue to run at the level they are, and consequently, I think that is reflected in a relatively modest growth rate for international next year.
But international margins are recovering quite nicely.
Gary Chase - Analyst
Is there any way to characterize what you are doing domestically?
Does it come disproportionately from one area?
John Tague - EVP Mktg. Sales and Revenue CRO
I think as we have done really throughout the last three to four years, we have worked very hard to maintain the depth and breadth of our schedule and the scheduled quality particularly for our corporate customers.
That has been achieved by effectively utilizing the 70-seat regional jet capability, moving our wide bodies into more effective use internationally and consequently, simply down gauging the domestic network and that has been the answer in terms of margin performance.
Others are pursuing up-gauging in pursuit of lower marginal cost to than again in our view accept unprofitable marginal demand.
We are just going to continue down this path, and we are very pleased with the results.
I will point out that we don't think we are executing as well as we will be able to in the future on the revenue side, and there are lots more make our luck opportunities on the revenue side of United.
Gary Chase - Analyst
It doesn't sound like there are any big red zones we need to be aware of, right?
John Tague - EVP Mktg. Sales and Revenue CRO
We are seeing a very, very balanced outcome across the entities that tells us our capacity allocation is on target right now but we are -- you know, we are very, very keen to constantly re-evaluate.
The wonderful things about airplanes that they are movable.
Gary Chase - Analyst
And then just a quick net on the 13% Transcon gain, is that in virgin overlap markets only or is that for the entire Transcon entity for United?
John Tague - EVP Mktg. Sales and Revenue CRO
That is for the entire Transcon entity for United.
But again we are pretty circumspect of how we are managing our capacity against LTCs.
We are not fighting the battle between the titans, we are trying to offer a product for our corporate customers and demonstrate that we can produce an acceptable financial return in the face of continuing LTC competition, and that's where our strategy is focused.
Gary Chase - Analyst
So it is not materially different in the virgin markets?
John Tague - EVP Mktg. Sales and Revenue CRO
I will point out that JFK, San Francisco where we had the most significant virgin overlap during the quarter did experience positive unit revenue growth year-over-year.
Gary Chase - Analyst
Okay, thanks, everybody.
Glenn Tilton - President, Chairman, CEO
Thank you.
Operator
Thank you very much sir.
Ladies and gentlemen, your question comes from Robert Barry of Goldman Sachs.
Robert Barry - Analyst
Hi, guys, good morning.
Hello?
Hello?
Hello?
Operator
Pause one moment, Mr.
Barry our speakers -- we have a technical difficulty.
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We will take your question than.
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You may proceed.
Robert Barry - Analyst
Okay, thanks.
Let me see if I can remember my question.
Glenn Tilton - President, Chairman, CEO
Robert, it wasn't anything you said.
Robert Barry - Analyst
Just two questions.
One is on the fuel hedge front.
Can you just update us on your thinking there.
It looks like certainly versus what we have seen come through so far, there seems to be lower hedging at United for 4Q and higher expected oil price.
Jake Brace - CFO, EVP
This is Jake.
I would comment on the last part of that saying we obviously were having a difficult time with the volatility of fuel, so our higher expected fourth-quarter price is driven by the forward curve, and I think other peoples may have driven out at different time with the recent run-up in prices our expectation for the fourth quarter have gone up.
Having said that, we are relatively modestly hedged in the fourth quarter.
Glenn talked earlier about the risk premium being built into the products out there, and, you know, we are looking for opportunities to hedge at some point that we think makes sense, and $88 we don't think makes sense to lock in fuel at these prices because we don't think this is the long-term rate.
But we are looking to be opportunistic in 2008 hedging, but we have very, very little hedge position in 2008 right now.
Robert Barry - Analyst
Was the '08 capacity plan developed under the assumption that $15 to $20 would come back out within the relatively short time frame of the fuel price?
John Tague - EVP Mktg. Sales and Revenue CRO
John here.
Our capacity plan continues to be flexible, and as we enter the year we will reassess what the forward curve looks like at that point in time and whether that causes us to consider different capacity plans.
We have obviously not done that yet.
Glenn Tilton - President, Chairman, CEO
You know, Robert, if you watched the market going into backwardation, you know that the market is suggesting that it sees the same circumstances close in that we do relative to the risk premium, and that also gives you pause when a market backwarded.
Robert Barry - Analyst
Okay.
Just finally can you update us on the timing for the mileage business.
It sounded like having a P&L done by the first of the year was the next step and what happens beyond that?
Would you kind of run it a little while before considering successive steps?
Or how are you thinking about that.
John Tague - EVP Mktg. Sales and Revenue CRO
Oh, you are exactly right.
We have a goal to get a P&L up by the beginning of 2008 that we can begin internally looking at the performance of that business unit.
Where we go from there we haven't determined yet because the first step really want to see what that business looks like, what the opportunities are, but we will look at that and move quickly beyond -- once we have visibility into the P&L and what that entity really looks like.
Not -- we don't have a specific timing.
We haven't decided what to do and whether to share the P&L information.
Obviously our bias is to both share the information and to do something that creates shareholder value with that entity.
That is our bias and we intend to act pretty quickly after January 1.
Robert Barry - Analyst
Okay.
Glenn Tilton - President, Chairman, CEO
Certainly works to our benefit, Robert, to have the management team of the MRO in a position to be able to understand their internal P&L prior to talking to interested parties relative diligence.
We want to be in the same position with the management team at Mileage Plus.
Robert Barry - Analyst
Fair enough.
Okay, thank you.
Glenn Tilton - President, Chairman, CEO
Thanks, Robert.
We appreciate it
Operator
Thank you very much sir, ladies and gentlemen your next question comes from Mike Linenberg of Merrill Lynch.
Please proceed.
Mike Linenberg - Analyst
Yes, gentlemen, two questions.
Good morning.
Glenn Tilton - President, Chairman, CEO
Good morning, Michael.
Mike Linenberg - Analyst
First what are the Cap Ex plans in '08 and the ASM forecast that you provided us, does that anticipate any fleet retirements in 2008?
John Tague - EVP Mktg. Sales and Revenue CRO
The answer to the second question is, no, it assumes the same fleet going forward, 460 to as I mentioned.
We do have flexibility to -- because we have unencumbered aircraft.
We have aircraft coming off lease next year so we can adjust downward if we want given this environment.
It is unlikely that we want to adjust upward, but we also have the flexibility to adjust upward with -- by gaining additional regional capacity next year, but obviously our focus is, with fuel this high it is unlikely that we will want to do that.
The capital plan for next year is for $650 million, and as I said, no aircraft swaps or no aircraft changes.
The fleet we have right now is the fleet we intend to have by the end of next year.
Mike Linenberg - Analyst
My second -- this touches on a statement made by John where he characterized the London Healthrow performance as quite good.
He indicated that RASM was up in the low double digits.
When you look at your markets and your primary competitor you both fly from Chicago and LA to Healthrow.
You are not in the New York market.
Is part of this maybe, you know, what you have in place with the Star Alliance carriers?
Is this BMI feeding you?
And sort of as a corollary to the question.
We have seen announcement from Delta and their friends on their JV.
Should we anticipate that over the next couple of months that United and maybe its partners over there will step up their agreement a notch?
John Tague - EVP Mktg. Sales and Revenue CRO
I think we are clearly benefiting in Healthrow for the elimination of our New York service year-over-year.
So that is a clear indicator.
Relative to the Air France Delta comment, we launched a pretty comprehensive joint venture relationship with Lufthansa in 2000 that creates sales without preference on both sides of the Atlantic creates pricing management by the respective parties in their home markets.
And is then quite effective and driven exceptional revenue performance for us across Europe and obviously particularly in Germany.
So we think that we are well down that path on a very comprehensive agreement with Lufthansa and that we also possess, by far, the broadest anti-trust immunity with our partners in the Star Alliance across the transatlantic.
So clearly contributing to our current results, it remains to be seen as to whether this recent agreement has accomplished something we have not yet accomplished.
It that is the case, we will take that on board and work with our partners to be sure we equalize competitively.
Mike Linenberg - Analyst
John, have you guys ever thrown a number out about the size of your relationship, you know revenue number out there.
Maybe that is what I am getting at.
John Tague - EVP Mktg. Sales and Revenue CRO
No, we have not.
Mike Linenberg - Analyst
Okay.
All right.
Very good.
Thanks.
John Tague - EVP Mktg. Sales and Revenue CRO
Thank you.
Glenn Tilton - President, Chairman, CEO
Thank you, Michael.
Operator
Thank you very much, sir.
Ladies and gentlemen, your next question comes from the line of William Greene of Morgan Stanley.
William Greene - Analyst
Hi, Jake I'm wondering if you can comment a little bit on CASM trends.
If we look at the second half of '07 the CASM -ex-fuel was rising faster than it was the first half.
Are you going to be able to offset all of the inflation we will have for 2008 or should we assume that it will grow that rate or even faster as you make these adjustments.
Jake Brace - CFO, EVP
You know we aren't giving specific CASM guidance for 2008 yet.
I can tell that you the run rate we are seeing in the third and quart quarter is not going happen in 2008.
We will quite handle it.
We again -- we knew going into the year that the back half of the year was going to be difficult on a CASM comp basis because we had some pretty low performance.
The fourth-quarter maintenance cost last year was unusually low, and so we knew going into the year that the back half was going to be challenged on a CASM basis.
We think that full-year CASM at two and a half is respectable.
We clearly want to do better than that, but respectable in this environment especially when we are shrinking capacity.
So next year we are not looking at anything like we are looking at in the back half of this year.
William Greene - Analyst
Okay.
For either Glenn or Jake.
On dividends, should we still expect that you will make some decision toward year end and give us sort of an update on what you are thinking in terms of a dividend policy and what you may do?
Glenn Tilton - President, Chairman, CEO
As we have said -- we have spoken to our board on subsequent occasions on this matter.
We have a theme laid out for them.
They have committed for them to go back to the Finance Committee and the board in December of this year which we will do.
We have another meeting this week.
We will update them on our thinking.
We pretty well settled them in the philosophy of the company which we have shared with you.
At the end of the year as Jake I think said on a call ago we will present to the board our recommendation on how best to proceed.
Jake, you want to add anything to that?
Jake Brace - CFO, EVP
I just want to mention we have covenance in our bank deal that would currently prohibit us from doing a dividend or a buyback.
We are talking to them right now about that.
Obviously don't have a resolution yet.
So we are pushing the ball down the field in that regard.
So obviously with what happened to the -- with the sub-prime meltdown didn't help our situation in getting an amendment, but we are trying to work through those issues with the bank.
William Greene - Analyst
Okay.
And just one real quick one.
Jake, can you share with us a profit sharing number that you accrued in the third quarter.
Jake Brace - CFO, EVP
No, I can't, because we haven't done that.
And we -- because of the way we book profit sharing, we make an annual forecast and then we book percentage of it.
If I would give you that number, you would know what our forecast was an I don't want to do that.
William Greene - Analyst
Did I misunderstand you when you said year to date $100 million?
Jake Brace - CFO, EVP
We said earned $100 million year to date, and that is simply taking the pretax income for the year times 15%.
William Greene - Analyst
Oh, okay.
Okay.
Thank you.
Operator
Thank you very much, sir.
Ladies and gentlemen, your next question comes from the line of Ray Neidl of Calyon Securities Please proceed.
Glenn Tilton - President, Chairman, CEO
Ray, how are you?
Ray Neidl - Analyst
Good, how you doing?
Very good quarter, guys.
Glenn Tilton - President, Chairman, CEO
Thanks very much, Ray.
Ray Neidl - Analyst
Demands still remain strong as you pointed out all over domestic, international and so forth.
Domestically, what would you say is the main impatant of increasing prices faster that they have been increasing.
I know you put through a price increase last week and some of it is being pulled back now.
Any certain airlines preventing the industry from putting the prices that demand justifies?
Jake Brace - CFO, EVP
Well, it wouldn't be appropriate for me to comment on that.
I would say we have mixed results with the price increase we put out last week, but nonetheless, overall, are favorable.
We continue to believe that, you know, a prudent capacity plan something critical to get a long-term revenue model here that deals with these the shocks as an expected consequence of our business as opposed to the exceptions.
So, we are driving very, very hard to create more commercial discipline on all of our pricing behavior, and I believe if the industry was accomplished commensurate to other businesses, that is going to have to be the pass.
Glenn Tilton - President, Chairman, CEO
Ray, we think it triangulates back to the benefit of disaggregating the businesses so you don't have the intrinsic subsidy issue in the portfolio which could actually extend to the subsidizing effect of a fuel hedge.
Ray Neidl - Analyst
To get back to the flight restrictions that you have talked about before.
If they do put in flight restrictions at JFK, would that have any effect on your hub operation at Dulles?
Jake Brace - CFO, EVP
I would think only positive in terms of the regional impact, but none from a scheduling perspective.
Ray Neidl - Analyst
Great.
And Jake, tax rate going forward, about 41%?
Jake Brace - CFO, EVP
Yes, use this rate that we had this quarter.
Ray Neidl - Analyst
Good.
Thank you.
Glenn Tilton - President, Chairman, CEO
Thank you, Ray.
Operator
Thank you very much, sir.
Ladies and gentlemen, your next question comes from the line of Kevin Crissey of UBS.
Kevin Crissey - Analyst
Good morning, everyone.
Glenn Tilton - President, Chairman, CEO
Good morning.
Kevin Crissey - Analyst
I wanted to focus on Mileage Plus and hopefully get a little more color there.
If we think about the miles that actually are purchased between the third party and the airline, is there any way you can give us a sense as to which is larger?
You have talked about $800 million in third-party revenue a couple of years ago.
How, if we look at it in terms of miles rather than revenue, how would we think about the airline relative to that?
Jake Brace - CFO, EVP
I don't think we are prepared to give any information on that right now, Kevin.
Because there is something that you heard us talk about when we were in Europe together, which is that the economic relationship between the airline and the mileage company needs to be determined, and that can be dialed up or down.
Kevin Crissey - Analyst
Right.
Jake Brace - CFO, EVP
I don't want to by giving you the number of miles that the airline awards to imply anything on what that economic relationship is going to be.
So we are working through that very issue right now as we create a P&L for the mileage business, and I don't want foreshadow that result.
Kevin Crissey - Analyst
Okay.
When we think about the -- you creating an internal P&L.
Its an internal P&L for not just a third party but the internal P&L for the entire business and including having some sort of transit payment for the airline.
Jake Brace - CFO, EVP
Yes.
And there would also be payments from the mileage company to the airline to purchase it.
Kevin Crissey - Analyst
Right.
Jake Brace - CFO, EVP
So that relationship is the among that the airline pays for miles and that the mileage company pays for transportation is yet to be determined but you are absolutely right.
That's how we think about the business is more than just a third-party segment.
Kevin Crissey - Analyst
Okay.
And in terms of the risks of such -- of the strategy.
Do you believe that you as a management team has identified what all the risks of a spinoff might be?
Jake Brace - CFO, EVP
I don't think we have yet.
We are going through that process.
We think we have identified a number of them, but we have not finished our work, so I wouldn't say that we have identified all of the risks.
Obviously somebody has done this before in Air Canada and Aero plant have done this and helpful in thinking about the risks and encouraging that -- that they found a way -- that they got comfortable with all the risks, but we haven't completed that work yet, Kevin.
Kevin Crissey - Analyst
Will the contract be an evergreen contract or you don't know yet?
Jake Brace - CFO, EVP
We don't know yet.
Kevin Crissey - Analyst
Thank you very much
Jake Brace - CFO, EVP
Thank you Kevin.
Operator
Thank you revery much, sir.
Your next question comes from Jamie Baker of JP Morgan.
Please proceed.
Glenn Tilton - President, Chairman, CEO
Good morning Jamie.
Jamie Baker - Analyst
Good morning gentleman.
Your earlier technical delay would have been more entertaining if you piped in channel 9.
Jake, following up to an earlier question, what sort of lead time do you think require, not only in terms of with the banks as it relates to an asset spend or a dividend payment, but also in terms of the labor approval as it relates to spinning off the MRO?
Jake Brace - CFO, EVP
So the -- you are focusing on the MRO?
Jamie Baker - Analyst
That's correct.
Jake Brace - CFO, EVP
That process -- we have a process under way right now.
And we are talking to both private equity and to various strategics and they are going through their due diligence process now, and I expect that before we get to a labor result, we are going to have to identify who is the winner, if you will, and what the terms of that are, and we are going to have to, you know, go talk to labor about all of that.
So I don't think that -- that is really not going to happen by the end of this year and more likely something that is in in the first quarter by the time you are actually -- you know toward the end of this year or early in the first quarter by the time you are talking to labor about a specific deal.
Jamie Baker - Analyst
You are suggesting that interested buyer would step up prior to knowing what an assumed labor buyoff would cost?
Jake Brace - CFO, EVP
No, I think we can -- they would obviously have their own expectation about what that would cost and whether, and what they could offer and what we could offer to the union.
And then we have to go see if we can make that happen.
Jamie Baker - Analyst
Okay.
Jake Brace - CFO, EVP
It wouldn't be any commitment until you actually had a deal with the union.
Jamie Baker - Analyst
Okay.
Glenn Tilton - President, Chairman, CEO
Jamie, when you think about it, the answer to your question is probably contingent upon who the interested party that succeeds would be and what their perception would be about the economics of such a transaction, including the labor transaction.
Jamie Baker - Analyst
Okay.
Thank you very much, gentlemen.
Glenn Tilton - President, Chairman, CEO
You bet.
Thank you.
Operator
Thank you very much, sir.
Ladies and gentlemen, your next question comes from the line of Daniel McKenzie of Credit Suisse.
Please proceed.
Daniel McKenzie - Analyst
Hi.
Glenn Tilton - President, Chairman, CEO
Hi, Dan.
Daniel McKenzie - Analyst
John, this may be a little bit early, but I am wondering what kind of preliminary perspective you can provide on '08 Corporate travel trends.
John Tague - EVP Mktg. Sales and Revenue CRO
You know we are not seeing any statistical evidence, nor are we hearing any significant anecdotal discussion around demand concerns from our Corporate portfolio.
So we are obviously not oblivious to what you and I read in the paper, and I think we are being conservative based upon the prospect of that, but we are not seeing any evidence in fact or in discussion to feed that.
Glenn Tilton - President, Chairman, CEO
You know in fact, Dan, we have been looking for it.
There are questions posed of us by a series of others folks on this matter, including our directors, and we have actually been looking for signs of our significant corporates cutting back on their business travel, but it actually seems the economic concern is driving them to compete on a face-to-face basis looking for an edge, such the least in the near term in this period as to we are not yet able to call the next economic cycle is to when it begins and when we now experience significant change.
We are actually seeing a sustaining experience.
Daniel McKenzie - Analyst
Very interesting.
And then I guess my next question -- I guess either for you, Glenn or you, Jake.
United has clearly been a strong advocate of industry consolidation, but two counter arguments have been that the political window has closed and then separately, concern has been expressed about consolidating at the peak of the earnings cycle.
I am just wondering how do you respond to these industry concerns.
Glenn Tilton - President, Chairman, CEO
Two -- two points first is, I think I said in the last call that we haven't really tested is the political window at all other than in the context of a hostile attempt.
So -- any perception that is consistent with that which you mentioned a moment ago is hypothetical.
We haven't gone to Washington and tested the antitrust and the political window with the proposition of a constructive and accretive to all stakeholders transaction.
Until we do, until the industry does, I don't think we are going to know the answer or not going to know the outcome.
I do think at the smaller airline level, there has been some activity that led to constructive consolidation that was resolved with the various regulatory authority.
So I am still of a mind that there is a tremendous amount of redundant overhead and redundant expenditure that amounts to waste that we independent of consolidation are pursuing on our own.
It would be hugely accretive to stakeholders if we pursued it in context of consolidated industry to run that waste out of the industry.
I don't think there is a constituency out there that will poorly serve.
Jake Brace - CFO, EVP
I would just add that the case where the economy is slowing and fuel is high, if that's all true, then that only makes the case for consolidation even stronger.
Daniel McKenzie - Analyst
Okay, great.
Thanks a lot, you guys.
Glenn Tilton - President, Chairman, CEO
Thank you.
Operator
Thank you, ladies and gentlemen.
This concludes the analyst and investor portion of our call today.
Before we take questions from the media, I would now like to turn the call back to Mr.
Tilton for a closing comment.
Glenn Tilton - President, Chairman, CEO
Thank you very much, Bill.
As I said earlier in a message to our employees, our results at United reflect the continuing work and discipline across the entire company.
This quarter, we saw significant gains in revenue and profit and our performance clearly sets us apart from our domestic peers.
With that having been said and as your questions reflect, we know there is more that needs to be done to succeed in an industry that is fast becoming global and will see intensified international competition over the next five years in all markets including the United States.
And that's the work that our five-year plan sets out in detail, as we continue to improve this company for all of our stakeholders.
And as we have told on many occasions and again on this call, we will be aggressive in looking at all of our opportunities that generate value for our shareholder.
At United we will believe that we should aspire returns that are competitive with the American industry in general be it by further strengthening United airlines, unlocking businesses under the UAL drum, using cash for share shoulder friendly actions or by advocating as we did a moment ago for consolidation of the sector.
It is clear us to that United a different approach is needed if we are to be successful in breaking the historic boom and bust cycle of this industry.
Our company will resolve to taking a different approach.
Being proactive rather than active and sustainable value of the long term for shareholders and all of our stakeholders.
With that, operator, we are ready to take questions from the media.