聯合航空 (UAL) 2008 Q2 法說會逐字稿

Good morning.

Welcome to UAL's Corporations earnings conference call for the second quarter of 2008.

My name is Theresa and I will be your conference facilitator today.

Following the prepared remarks from UAL's management, we will open the lines for questions from analysts.

At the end of the analysts' Q and A at approximately noon eastern time, we will take questions from the media.

If you have a question, please press star, followed by the digit one on your touch-tone telephones.

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, Kathryn Mikells.

Please go ahead, ma'am.

Thank you, Theresa.

Welcome to UAL's second quarter conference The announcement of our financial results was released earlier this morning, and is available on our website at www.United.com/IR.

Let me point out that the information 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.

Also 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 the tables at the end of our earnings release.

As we announced on July 11th, our second quarter results were impacted by a number of special and unusual charges, totaling $2.6 billion.

The overwhelming majority of which were non-cash.

These charges included following: A special non-cash charge of of $2.3 billion for goodwill impairment, non-cash special charges of $194 million related to the impairment of certain 737 aircraft that are being retired from the company's operating fleet, aircraft pre-delivery deposits and certain indefinite live intangible assets other than goodwill net of a related tax benefit.

Severance charges of $82 million related to staffing reductions that will occur as a result of the capacity changes that the company has recently announced.

Other largely non-cash charges of $54 million related to certain projects that have been terminated or indefinitely deferred by the company, as well as the non-cash balance sheet adjustment to increase certain employee benefit obligations.

And a $29 million cash gain from a litigation settlement.

As Glenn, Jake and John walk you through the numbers for the quarter they will be excluding these items unless otherwise noted.

Our results for the quarter and year to year were also impacted by the deferred revenue accounting that we adopted for the Mileage Plus program in 2006 as well as the change in the the mileage expiration policy from 36 to 18 months that we announced in early 2007.

In the second quarter of 2008, the change to deferred revenue accounting decreased Mileage Plus revenues by $42 million.

In comparison, in the second quarter of 2007, the impact of mileage plus accounting was essentially a push as the company recognized $47 million in additional revenue from the change in the expiration period for miles that effectively offset the $46 million decrease in consolidated passenger revenue, driven by the change to deferred revenue accounting.

On a year-over-year basis, Mileage plus accounting resulted in a $43 million decrease to second quarter 2008 consolidated passenger revenue, depressing our passenger unit revenue growth by about 1 percentage point.

You can find more information about all of these items in the tables at the end of our earnings release.

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

Glenn?

Thanks very much, Kathy.

And good morning and welcome to everyone on the call.

Joining me and participating on the call today are Jake Brace, Chief Financial Officer, and John Tague, Chief Operating Officer.

Pete McDonald, Chief Administrative Officer and Graham Atkinson, our Chief Customer Officer are also with us this morning and they're available to take questions.

Earlier today we announced our second quarter 2008 results.

We reported a net loss of $151 million, excluding the accounting charges that Kathy just walked us through.

An increase of some $773 million in fuel expense over last year drove a second quarter pretax result that was $617 million worse than 2007.

Our industry continues to be challenged, perhaps as never before, by fuel prices that are marring higher, most recently hitting an all-time high of of $147.27 a barrel.

Our revenue results for the quarter were in line with our network peers and we are taking steps to improve, particularly internationally, where industry growth has been rapid for the last several quarters and is beginning now to put pressure on yields.

As part of our capacity reduction, we are pulling down international capacity and eliminating routes that are not performing well.

As John will discuss later, we expect these changes will significantly improve our revenue performance internationally.

We are also taking steps to improve our liquidity.

We recently closed a number of transactions that add approximately $550 million in additional cash, which Jake will talk about further.

And we have a number of actions underway which Jake will also speak to during his segment.

We believe these steps, together with our large pool of unencumbered assets, position us well relative to -- to peers.

As fuel again hit record prices during the second quarter and as fuel expense increased nearly $350 million over the first, we intensified the actions we are taking to offset the skyrocketing cost as well as to strengthen the competitiveness of our business at United.

As we told you last quarter, we are executed against a plan focusing on enabling United to compete and return to profitability over time with fuel at these levels.

We are cutting capacity and grounding 100 planes.

Significantly more than the number we discussed with you just a quarter ago.

By the fourth quarter, mainline domestic capacity will be down some 16% year-over-year.

In doing so, we expect to be able to leverage our capacity reductions to pass more cost into the marketplace.

We're taking the difficult but imperative action of reducing the size of our work force across the company.

We also are pursuing new revenue streams, our new baggage fees chief among them.

We continue to reduce our costs and today announced we are reducing non-fuel operating cost by another $100 million, Bringing our total cost reduction program to $500 million.

Enabling us to maintain our full-year non-fuel unit cost guidance despite the significant capacity reductions we have underway.

Our capital expenditures, reduced to some $450 million this year, will be focused on safety and investments that are critical to improving the travel experience for our customers.

We're doing all we can to control our costs and improve our revenue to offset fuel and together with the Air Transport Association and a broad-based coalition, we are calling on Congress to take action on excess indexed fuel speculation that is adding to volatility and driving the price of oil well beyond its underlying fundamental value.

Our industry faces more than a $20 billion increase in its fuel bill this year, and United's portion of that is more than than $3.5 billion.

This requires action in Washington and different thinking about how we can best run our businesses in this economic environment.

We believe that our partnership with Continental is one such example.

As we announced last month, we will be linking our networks and services worldwide to create revenue opportunities, cost savings and operational efficiency.

Continental will join the Star Alliance, the world's leading global alliance after exiting Skyteam, following the closing of the Delta/Northwest merger.

Continental, along with our existing immunized star alliance partners will jointly apply for anti-trust to join our immunized transatlantic alliance which will enable us to coordinate schedules and pricing across the Atlantic and to share revenues generated in these markets.

We expect to next pursue a similar agreement in Latin America.

The teams are off to a very good encouraging start, pursuing several work streams to ensure our new partnership extends well beyond simple code-sharing benefits.

Specifically, we are identifying the path to create additional customer benefits and airline and partner revenue by more closely aligning our frequent flyer programs.

Leveraging Continental's and United's combined buying power to reduce our overall spending, providing a world-class airline IT infrastructure in order to improve the services we offer customers and reduce cost, extending our lounge network to provide more opportunities for personalized service, focusing on enhanced joint spaces across our linked networks, and optimize on and off airport facilities to enhance network connectivity, and make it work for our customers and our employees while we maximize cost-saving opportunities.

As Larry and I agreed during our progress review this Friday, this partnership has all of the elements for success: a shared commitment and understanding of the opportunities that we can create together between our companies and management teams with the capabilities, the attitude and the relationships to make those opportunities a reality.

As we work through the difficult task of getting costs permanently out of the company, generating new streams of revenue and resizing the workforce to match the business, we need also to focus on future opportunities, to enhance our ability to compete globally.

Our agreement with continental is such an opportunity for both of our companies, and there's commitment to move forward aggressively, to realize the full potential of this partnership.

I'll now turn the call over to Jake who will walk us through more of the numbers in greater detail.

Jake, over to you.

Thanks, Glenn.

And good morning, everyone.

Our loss for the quarter is a direct result of the punishing price of fuel the industry is experiencing.

During the quarter, oil averaged about $124 a barrel for us, up 27% from the first quarter and up 90% from last year.

As I will discuss in a few minutes, of the past 90 days, we have accelerated and intensified the actions we are taking in response to this industry crisis, as well as increasing our cash balance to support the execution of those actions.

The bottom line for the quarter was that the increase in fuel expense significantly outpaced the industry's ability to pass on these costs to consumers.

At United, consolidated fuel expense rose $773 million as the price per gallon of jet fuel rose more than 55%, driving a second quarter operating loss of of $87 million, $624 million worse than the same period last year.

While we beat the consensus, we recorded a net loss of $151 million or $1.19 per share for the quarter.

Our revenue results were solid, with second quarter mainline RASM increasing 5.1% year-over-year, consolidated RASM increased by 4.4%, excluding the impact of mileage plus accounting as Kathy mentioned consolidated revenue per ASM was up 5.3% and cargo and other revenue of 475 million-dollars was up 7.7%.

In contrast to the passenger business, we saw very strong performance in cargo revenues which grew by approximately 30% as we successfully passed on rising costs of fuel to cargo customers through substantial fuel surcharges.

Our performance was also helped by higher mail volumes as we benefited from the year-over-year addition of our new domestic mail contract.

A little bit of guidance here.

We expect cargo and other revenues of about 450 to to $460 million in the third quarter of 2008.

Turning to costs, operating expenses increased by about 17% in the second quarter with the increase almost exclusively attributable to higher fuel expense, including hedging gains average mainline jet fuel expense for the quarter was $3.24, up from $2.08 a year ago.

The total mark-to-market of our fuel portfolio as of July 18th, last Friday, was $135 million.

On an accounting basis, we will booked $30 million in realized gains during the second quarter, and $208 million in unrealized gains.

We recognized a cash gain, an economic gain, if you will, of $51 million for contracts that settled during the second quarter.

We also recognized a below the line gain of $22 million for fuel hedges that did not qualify as economic hedges.

Importantly non-fuel costs for the quarter were a little bit better than our guidance with mainline CASM excluding fuel exceeding 2.6% year-over-year.

While the beat was small, we are encouraged that we saw a good cross performance as we took capacity down 1.3% during the quarter.

We are holding the line on costs and are committed to removing both variable and fixed costs from the system as we take down capacity.

Now let me walk you through some of the expenses where we saw significant year-over-year changes this quarter.

Landing fees and other rent declined by by $16 million year-over-year or roughly 7.5%, driven by the timing of certain airport rent credits which were received a quarter earlier than last year, as well as the savings from our efforts to optimize our airport real estate, regional affiliates expense increased $114 million year-over-year on $131 million increase in regional affiliate fuel expense.

The variances in salaries, purchase services and other operating expenses are all due to the effects of the accounting charges that Kathy outlined earlier.

We continue to see the results of our debt reduction and refinancing efforts with interest expense for the quarter down $13 million or 9.5% versus laster, however this was offset by a $34 million decline in increase income due to lower yields on cash as well as a lower average cash balance versus last year.

As I mentioned earlier, we recorded a gain of roughly $22 million in the second quarter on transactions that did in the qualify for hedge accounting and thus were booked below the line.

Net-net for the quarter totaled non-operating expenses was $65 million, $7 million lower than a year ago.

Despite incurring $773 million in higher fuel costs, we generated positive cop rating cash flow of $218 million in the second quarter, free cash flow which we define as operating cash flow less capital expenditures came in as positive $127 million for the quarter.

Enhancing our cash position is critical.

We executed a number of transactions to bolster our cash balance and we have a number of other actions underway.

As noted in our press release this morning, we raised $90 million through aircraft financing transactions and asset sales in the second quarter and we also completed a $241 million aircraft financing transaction earlier this month.

In this transaction, we utilized the equity we had built up in some existing aircraft mortgages enabling us to raise cash without encumbering any additional aircraft.

We also entered into agreements in principle for several aircraft and other asset sales worth about $40 million.

The company also freed up up $130 million in restricted cash during the second quarter, as well as an additional $50 million during the third quarter.

These transactions were very efficient vis-a-vis utilization of collateral.

After all of the transactions are closed we will still have have $3 billion in hard collateral remaining, including over $2 billion in aircraft.

And now some real time information.

Hopefully we've just crossed the wires with a press release announcing that we've come to an agreement in principle with Chase to extend the terms of our agreement with them on both the the Mileage Plus credit card and our credit card processing agreement.

As part of this transaction, United will receive a payment of $600 million from Chase which relates to the advance purchase of frequent miles and for the extension of the contract and we expect this transaction to improve our cash flow in addition to this by $200 million over the next couple of years.

In addition, the level of -- of credit card holdback that we are required to maintain on our processing agreement with Chase payment tack has been reduced to $25 million, this reduction will result in the release of approximately $350 million in previously restricted cash.

As a result of these agreements, we expect to increase our cash position by approximately $1.2 billion including a billion dollars in the short term, and the additional $200 million over the next five years, combined with the $550 million that I just told you about, we expect that we will have improved our cash balance by $1.7 billion in the near future.

And as I said before, all of these transactions use very little collateral and we still have more than $3 billion in unencumbered assets, including $2 billion in aircraft.

We ended the quarter with with $2.9 billion in unrestricted cash, excluding the financing transactions and the release of the unrestricted cash -- the release of the restricted cash that occurred in the second quarter, we closed the quarter with unrestricted cash and short-term investments balance of $2.7 billion in line with our guidance.

Our main focus is on making the substantial changes necessary to get the business profitable in this environment, essentially offsetting the $3.5 billion increase to our fuel bill.

As I said, as fuel prices have soared, we have intensified and accelerated the action plan we discussed with you last quarter.

I would like to take a few moments to update you on the status of each of the areas of focus.

First, we are sizing the business appropriately.

The industry simply cannot recover higher fuel crosses unless we affect a shift in the supply curve and in order to get a shift in the supply curve we must increase capacity.

This isn't rocket science, it's Econ 101.

At United, we are leading the industry in permanently reducing capacity, removing 94 narrow-body aircraft and six wide body aircraft from our operations retiring our entire fleet of 737 aircraft and phasing out our Ted product.

We will deploy A-320s currently flying in Ted markets to many routes previously covered by 737s, substituting A-320s for older inefficient 737s results in about a 16% reduction in fuel burn per seat across our entire fleet the 737 retirements will result in a 2.4% improvement in fuel efficiency.

We plan to remove three quarters of the 100 aircraft of our fleet by year end with the remaining aircraft coming out in 2009, these retirements drive a 16% year-over-year reduction in main line domestic r n capacity in the fourth quarter as Glenn mentioned and about a 20% reduction in the full year 2009 compared to 2007.

We are using our capacity discipline to pass higher commodity costs onto consumers.

We continue to lead fare and fuel surcharge increases and also recently reinstated minimum stays in some markets as part of our efforts to recoup higher fuel costs.

We are creating significant incremental revenue by unbundling our products.

Last quarter, we announced our new second checked bag fee, in June we announced that we will be charging for the first checked bag.

John will give you more details around the financial targets we have for ancillary revenues for this year and next.

While revenue will fill the lion's share of the gap caused by higher fuel, reducing costs will also make a meaningful contribution.

As Glenn mentioned, we reduced our 2008 cost savings target by $100 million to $500 million, more than twice the original 2008 target we discussed with you in January.

A large portion of this incremental reduction in expense comes from the salaried and management reductions we are making this year, around 1500 positions or 20% of our salaried and management workforce.

We expect these changes to save us $235 million in 2009.

As we reduce capacity, we also need to reduce our frontline workforce.

We expect to reduce this group by about 5500 employees, or about 12% by the end of 2009.

We fully understand how difficult these reductions are for our people and we are working to mitigate the effects of it by implementing several voluntary programs.

We've announced voluntary programs for pilots, flight attendants and airport employees and are discussing voluntary programs with our other unions.

Lastly, as I mentioned on our call last quarter, we are also reducing our capital spending.

We now have a non-aircraft capital spending budget of $450 million for 2008 which is $200 million less than originally planned.

We are operating in an environment that the industry has never seen before.

At United we are executing against our action plan to offset the impacts of rising fuel expense.

We have a solid cash position.

We have successfully raised quite a bit of cash in the last 30 days.

We are stabilizing our business and accelerating the pace of our actions to enable profitability in the current environment.

Now let me turn it over to John.

Thanks, Jake.

Today and on these calls going forward I will talk with you about the steps we are taking to improve our cost, revenue and operating performance.

Our focus and our energy are all about generating a breakthrough in performance.

The pressure of the industry environment and the need to do so is obvious.

Importantly we also see the opportunity.

I'm going to walk you through some of the specific actions we are taking to improve our performance and regain profitability.

In addition to the work we have underway to right-size our capacity we are pursuing an aggressive agenda focused on the basics of running a good airline.

Simply put, an airline that runs on time with clean planes providing the platform for our employees to deliver great service and in doing so deliver great financial performance.

To that end, we are turning all of our attention to five fundamental areas: Deliver industry-leading revenues, achieve the full potential of our cost performance, drive top tear operational performance and improve the cleanliness and workability of our products, all in support of a courteous, caring and respectful service environment.

Our focus is clearly set on the areas focused on an industry leading performance at united.

First on the revenue front United's revenue growth rates lead the industry for the trailing 12 months, our second quarter results are quite competitive but somewhat below our own expectations and clearly insufficient to address the gap created by rising fuel costs.

Second quarter mainline Prime mainline PRASM was up 4.7% year-over-year and consolidated PRASM was up 3.9%, our consolidated results driven by 7.7% increase in yield partially offset by a 3 point drop in load factor.

Similarly our main line results were driven by a yield improvement of 8.2% year-over-year on a 2.7 point decline in load factor.

Domestic market performance was solid.

Benefiting from a 4.8% reduction in mainline capacity.

Mainline domestic PRASM was up 5.9%, driven by a strong yield increase of 8.6%.

International PRASM was up 3.2% year-over-year on capacity growth of 3.7%.

While Latin America continues to see very strong PRASM growth, up 16% this quarter, growth in other regions has decelerated as we and the industry have added significant capacity.

In the Pacific region, China, including Hong Kong, has been particularly hard hit as industry capacity has grown by more than 20%.

China represents over 40% of United-specific capacity.

PRASM growth in Japan and the intra-Asia operations was quite strong.

In the Atlantic region we've seen 20% capacity growth in Heathrow and significant growth in our core areas of strength in Germany, which resulted in a PRASM growth of less than 1% this quarter.

Our domestic performance is clearly benefiting from the capacity actions that we have taken and we recognize the developing oversupply situation in the marketplace and have taken steps to address it with the elimination of six 747 aircraft, additionally eliminating 8% of our international capacity in 2009 will result in a substantial reduction of our current international losses.

At current fuel price, the economics of many routes right now just don't make sense.

We are aggressively responding to market conditions by permanently eliminating underperforming capacity.

And we will continue to have a bias towards more action should market conditions require it.

In June we announced capacity reductions for the fourth quarter of this year, and into 2009.

By the fourth quarter of this year our domestic main line capacity will be down about 16%.

International capacity will be down 7%, resulting in a 11% reduction in consolidated capacity.

In 2009 we will reduce capacity another 8% compared to 2008.

All told, 2009 capacity when compared with 2007 reflects about a 13% reduction in the company's consolidated capacity.

In implementing these changes we are aggressively looking at our network, routes that cannot profitably withstand the pressure of elevated fuel costs are being eliminated.

Our fourth quarter capacity will be down 20% in Los Angeles, 16% in Denver, 12% in Chicago, and 11% in San Francisco with 3% in Washington.

We recently announced that we will close seven stations this year, we are looking at our international network and we are making the right choices to improve performance.

Closing Nagoya, reducing service to Mexico city, eliminating Los Angeles - Frankfurt, Los Angeles - Hong Kong and Denver - Heathrow routes in the fall while also reducing our service to Moscow and Ghaungzhou .

We expect the elimination of these unproductive routes to provide a mix improvement of our RASM, improving our results by three points.

We recognize that the impact of our reductions have on communities that we serve and the importance of a strong network and schedule towards our customers, and we are focused on minimizing the impact to the network by retaining service through other hubs and through our alliance partners.

The current environment requires a step change in revenue production.

In addition to the value we are driving through capacity reductions, we must unlock significant new revenue streams.

On our last call I walked you through the details of the revenue opportunity from upbundling our product and introducing new merchandising initiatives, as well as raising a number of the miscellaneous fees and charges.

Several of these initiatives are either underway or will be introduced shortly.

Jake mentioned the first and second bag initiatives that we are currently implementing.

We estimate that the potential revenue from the new baggage service handling fees will be about $275 million annually in 2009.

Revenues from new optional services to be introduced will be approximately $100 million in 2009.

This is in addition to the approximately $270 million in Economy Plus and Premium Cabin upsell.

This totals to $650 million in 2009 for merchandising initiatives, an improvement of of $450 million versus 2007.

We also will be collecting more than $600 million in other fee revenue in 2009, up $150 million from 2007.

Combined, these opportunities now represent over $1 billion in our 2009 estimates, a $600 million increase relative to 2007.

And as Glenn discussed, we are continuing to work on our new partnership with Continental and we see significant cost savings and revenue opportunities from our relationship.

The alignment of the management teams is quite encouraging and productive.

As is our mutual assessment of the value opportunity.

Moving to our revenue outlook, despite a continuing soft economy, we expect continued solid unit revenue growth in the third quarter, and we also expect to start seeing the full benefits of our capacity pulldown and the industry capacity reduction late in the third quarter of this year.

While it is quite early in the booking curve, we have reason to be encouraged by a strong yield performance and improvement in book load factor year-over-year during the fall period.

The requirement for us is straightforward.

Revenue must improve substantially, and yield must carry the bulk of that burden for that improvement.

Should demand levels fail to support our yield requirements more capacity adjustments will be required and the full cost associated with the capacity must be taken out of the system.

As Jake mentioned earlier, cost performance for the quarter was good.

However, the environment and the opportunity emphasizes the need to do more, and we have targeted a number of opportunities for improvement including maintenance cost reduction, principally to be achieved by supply chain, materials management and efficiency opportunities in our base and line maintenance operations.

We are setting the bar high, and expect to significantly close the gap relative to our historical lack of competitiveness in our maintenance cost position.

We also see opportunities in catering to readjust our service patterns, explore new supplier models, leading to a continued substantial reduction in our catering costs.

Across the organization, we are looking at opportunities we see in salaries and wages, particularly in the overhead functions.

As Jake mentioned, salaried and management staff is being reduced by 20%.

Additional opportunities exist, and we need to do more.

We have also begun to engage our express partners, and believe that there are a number of potential levers to reduce the cost of the United Express lifts.

We are working with our partners to translate the efficiency practices such as fuel saving techniques to the express operations.

Distribution and cost of sales continues to be a key focus area in our cost reduction efforts.

Actions we've set in place, even over the past several weeks, will reduce our agency commissions by more than $80 million on an annual basis, helping us achieve our overall cost saving target this year, and working towards a significant improvement in costs for 2009.

We are continuing to do more.

Our actions include the rework of all agency incentive programs, walking away from many agencies altogether where appropriate cost of sale targets cannot be achieved, including the recent termination of a large multinational agency agreement.

We also stopped participating in agency affiliate programs, eliminated consolidator commissions in the Pacific and reduced numerous base commissions internationally.

These are not actions we take lightly.

But they are appropriate actions to reduce our cost of sale.

And we believe necessary to succeed in this environment.

Fully realizing our opportunity to improve costs is essential to our success.

And I can assure you we have the will and the opportunity to bring down the improvements necessary to achieve our goal.

Moving to the operational side, our performance was neither acceptable nor was it competitive.

Our action plan and goals are substantial.

United must deliver top tier operational performance.

The work required to do so is clear.

And it forms the basis of our improvement plans.

Over the last 12 months, we've consistently placed in the bottom tier among network carriers across the DOT performance measurements.

To improve our performance, we are focusing our efforts in several specific areas: Improving our out of service aircraft performance, improving execution on turn times, addressing our schedule structure, focusing on a regular operations recovery, and better aligning all of our operating divisions against our new goals.

We are making straightforward changes to our schedule, increasing ground times by eight to ten minutes in September.

We are also increasing the number of crew held in reserve and are focused on improving the departure performance of our very first flights of the day.

In part by increasing the number of spare aircraft we have available by four compared with the third quarter of last year.

Finally, the addition of a new runway at O'Hare in November, combined with our capacity reductions and those of our competitors should give our operating performance a big boost.

These changes should also set our employees up for success in their efforts to present the best United to our customers.

We are fully confident that these investments are refired to improve operational performance, although they are very consistent with our cost objectives and in fact we believe that they will be substantially funded through the cost benefit of running an on-time airline.

Fundamental to each of our focused areas is providing and fielding the right team.

To that end, as you know, Joe Colshack joined United as Senior Vice President of Operations.

Joe served as Delta's Executive Vice President of Operations for a number of years and clearly has the right experience and expectations to be successful in this role at United.

Recently joining Joe, we announced that Timothy Canovan also joined United from Delta as Vice President of Line Maintenance and Aircraft Appearance.

This represents just a few of the months that we are making across the company to put the right team in place to go after these opportunities, and we are confident that we will make steady progress each quarter and we will continue to report that progress in calls in the future.

These leaders share common characteristics: They have deep functional experience.

They are true performance managers, with a strong sense of urgency.

And the well-earned confidence to get the job didn't and show up with the results.

In closing, we've done the work to find the areas of opportunity for improvement.

We've set the stretch targets, put the right leadership in place and we are executing against our plan.

The current environment demands more action and you can count on us to continue to act aggressively and responsibly.

We know what we need to achieve.

How we need to do it, and that we are ultimately accountable for that outcome.

Now I'll turn it back to

Thanks, John.

And let me move to guidance here real quickly, for the third quarter we expect mainline in North America and capacity to be down 5.5 to 6.5% while international capacity is expected to be down 1 to 2%.

Overall third quarter mainline capacity is expected to be down 3.5 to 4.5% and Express capacity expected to be flat which results in consolidated third quarter capacity being down 3 to 4%.

For the full year 2008, we expect mainline capacity to be done 7.5 to 8.5% and consolidated capacity to be down 3.5 to 4.5%.

Our current capacity plans have sized the business to solve for $125 per barrel crude.

If higher fuel prices prevail, we are ready to make further capacity adjustments to account for this and in fact John and his team are in the process of examining what the next round of capacity cuts would look like.

A large number of unencumbered aircraft in our fleet, even after removing the 737 and the latitude in our collective bargaining agreements gives us the ongoing flexibility that we need to make the changes to the business necessary in light of this environment.

On the cost side we estimate that mainline cost per ASM excluding fuel will be up 1.5 to 2.5% in the third quarter, and up 1.5 to 2.5% for the full year as well.

All of those numbers exclude the special and other accounting charges we highlighted it this quarter, as well as any other special or accounting charges that may be incurred later this year.

As you will note, our full year cost guidance remains unchanged from the guidance we provided in January, despite the significant reduction in capacity since that time.

Reflecting the additional cost reductions that we discussed earlier in the call call.

As you know, as the airline shrinks, it becomes increasingly difficult to maintain the same cost per ASM excluding fuel however we are committed to getting the cost out of the system as we reduce capacity and are pleased with our progress so far this year.

You can find our fuel and hedge position guidance in our earnings release and now, Theresa, we are ready to open the call for questions.

Thank you.

First we will take questions from the analyst community, then we will take questions from the media.

The question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS).

We'll take our first question from William Greene with Morgan Stanley.

Yeah, hi.

I'm wondering if you can talk a little bit about the elasticity of demand on the corporate and leisure side, obviously with the increases in fares that we've seen you would be expecting to see quite a bit more of that and I would like to hear your thoughts.

Yeah, Bill.

John Tague here.

I think we've all been a little disappointed in yield performance relative to the changes we've made to the pricing structure and the fuel surcharge increases and we're clearly seeing business travelers change behavior and book earlier and so we have seen a modest decline from that perspective.

We continue to believe we have the right level of capacity now.

And we believe that for the time being our fourth quarter capacity plans were addressed with this trend in mind.

But, at the end of the day we've got to right size around a profitable demand base.

And I think the next six to nine months will give us clear indication as to what that is.

Okay.

And then if we turn to the Star alliance, now that Continental's joining, does it change how you think about the part of it with US airways?

Would you -- do you even have the right to recess it is or is that solely an US Airways decision.

No.

We've come to an agreement with US airways and we expect them to fully participate as they have in the past, which is one of the great accomplishments of this agreement is to be able to bring Star -- with Continental into the Star Alliance and maintain the enormous partnership and it's full economic impact to US Air.

Bill, this is Glenn.

We had an unanimous vote of all of the Star members, including US Airways in support of Continental joining the alliance.

Okay.

Thanks for your help.

You bet.

Our next question comes from Mike Linenberg with Merrill Lynch.

Yeah, two questions.

One your capacity cuts in North America, they are big and you are also cutting Express later this year and yet I believe you're still committed to the five domestic hubs.

How do you -- you know, how do you cut that big without compromising the integrity of the network or reducing the connectivity?

I mean what are some of the challenges that you run into here?

John again.

I think that when we talk about the competitiveness of the network, we really have to look at what is the relative strength of the network.

And the whole industry is going through the type of dramatic capacity reductions that United is.

And so I think we're quite comfortable around the relative strength of the network.

A number of the reductions that we took might be elimination of service to some hubs but clearly not all hubs, again allowing for continued presence in each of these cities.

And so, look, these are hard decisions to make but the need to do so is inarguable.

And we're quite comfortable that we can flow traffic over multiple hubs with the five, and that our comparable profit is still quite robust from a network perspective.

Okay.

Good.

And just my second questions when you look at some of the cuts, L.A.

Denver a little bit bigger than say, what is going on Dulles, is there an opportunity to downsize facilities and get savings from reduced rental expense et cetera.

Yeah.

Let me start by saying that the fourth quarter sort of comparative cuts may be, , somewhat misleading.

If I look at 2008 in total, Denver is being reduced by 5.2 Dulles is actually growing a bit a bit.

L.A.

is down by 1.1 and actually the biggest cut comes in Chicago with a 10.3 reduction.

However we do see a -- significant opportunities to reevaluate opportunities for our facility's foot present particularly in combination with the relationship and discussions we have underway with

Okay.

Very good.

Thank you.

That is one of the things that we would really ask everybody to focus on a bit, is not just that Continental is coming into the Star Alliance but that the partnership arrangement with us gives us opportunities that are unique to any relationship that we've had with a previous Star Alliance partner.

Very good.

Okay.

Great.

Thank you.

And we'll go next to Gary Chase, Lehman Brothers.

Good morning, everybody.

Hi, Gary.

Hi.

Was curious on a couple of quick follow-ups on the credit agreement that I was trying to read as you were running through the call, the first is are there -- you obviously freed up $350 million in cash.

Are there circumstances where that could change adversely and you'd be subject to additional cash restrictions, or should we consider that more of a permanent condition here?

No.

There are -- some triggers in there, just like there would -- there were in the original agreement.

We modified those triggers though in a way that we think was actually favorable to the current agreement and so we'll outline the specific whys of those triggers in our SEC filings but you can think of them as sort of along the Continental lines.

Okay.

And then the second question on that is I'm curious about the comment that says that we'll improve cash flow about by 200 million in the next two years.

I mean, is that P&L?

I'm just curious why you used the term "cash flow" and if you could give us a little flavor as to how it is going to improve cash flow.

Sure.

It is -- that is P&L.

The deal has a number of components.

Obviously there's a liquidity component which -- which we outlined.

Right.

Of approximately $1 billion.

But in addition to that, we improved in certain areas both the rate per mile and the number of miles that we had -- that we'd be selling in the short term so that -- that will -- more of a P&L improvement but it is better than our current circumstance, which is why we highlighted it in the press release.

Is the -- is the rate improvement, Jake, the substantive portion of it or is it more the volume?

Both of them are relevant to that.

Okay.

And then just a quick one, if I could, for John.

The -- the -- or I guess Glenn or Jake.

You've all talked a lot about the Continental alliance.

If that were happening in a vacuum I could see why there would be clear optimism on that front but it is -- and I mean you have delta and northwest merging, you have four-way immunity being granted to Sky Team.

There are at least press reports, and I should say at least we fully expect British Airways and American to fully immunize their alliance, when you think of all of the different things shifting on the alliance front, not just what is happening to united and continental in a vacuum how do you feel about your ability to retain revenue and retain benefit net of all of those competitive changes?

Well, the two -- a couple of things to think about, number one, Gary, we -- we'd obviously accentuate the work that we are doing ourselves that -- that the three of us have outlined on the call as the most important book of work that we have to do at united.

So it -- that work, which again we think is opportunity within united, is priority work.

That work also enables us to take full advantage of the work streams that we have agreed with continental.

As I said a moment ago in response to Mike, yes, it is membership in the Star Alliance but it is also the creation of joint ventures in numerous international markets.

As we said, we're going to progress from the Atlantic in what we're calling A plus-plus and we shouldn't leave recognition of Air Canada out of this.

They have been a strong participant in it.

Air Canada, United, Continental, Lufthanza.

If you look at the revenue opportunities that that combination presents to us across the Atlantic, and then you triangulate it into the foot print that continental has in Latin America that candidly we do not and then you go from there to the Pacific I think that you can see the strength of the network opportunity that John and his team, Kevin, will have to execute.

But the thing that excites me about it is what we have agreed with respect to efficiency, productivity, cost reduction in areas such as and I will just mention one because I think it presents itself promptly in areas such as IT and procurement of IT.

And there is truly an opportunity for us there that I think is going to be competitive with the other propositions that you mentioned a moment ago.

You can look at it two ways, I suppose.

It is on the one hand we think aggressive and on the other you could say that it is defensive.

But, nonetheless it is something that we have to add to our own book of work and in that regard Gary, we're really -- we're very excited about it, Larry and I both.

I would only add one thing, our alliance valuation models looking at just the alliance impacts, both competitively and with this agreement could he chair impacts and things of that nature as Glenn suggested just a small box of the opportunity.

These have been very accurate models in the past and they suggest that we will fully recover the impact of the competitive changes you've noted and generate that new value just from an alliance evaluation perspective.

Okay, guys.

Thanks.

You bet.

Our next question comes from Ray Neidl, Calyon Securities.

Hey, Ray, how are you?

Doing well, thank you.

As an old oil man you sounded pretty militant.

I take some exception to old.

I said old not old.

You sound pretty militant which is understandable about the recent sharp increase in oil prices but do you think that that trending in futures has really contributed to that and it is not basically a law of supply and demand?

What is your opinion on that?

I think it has absolutely contributed to volatility and unpredictability.

I think that the indexing, speculation has created to -- an enormous momentum play in oil that almost in an unique commodity context.

So I think that it has certainly contributed.

I don't think that to accept that, to take that position, Ray, one need argue the point relative to supply and demand.

And, as I've said in my very, very frequent visits to Washington, A, the country need as comprehensive energy strategy.

B, it needs to moderate the growth in this particular commodity activity.

I think that the opacity and the over the counter trade is too great.

The ratio of the over the counter volume to the the NYMEX and the physical side of the business is too disproportionate and I think that bringing some disclosure transparency as the Reed bill does that I note was just voted to the floor unanimously by the Senate for consideration and debate is -- is an important part of the proposition.

That having been said, I think that the solutions on the supply side are equally important.

I certainly think that we need to open up the offshore.

And I think we also need to pursue alternatives, Ray.

And I think all of that, if we do that and if we show resolve will bring down the perception of the future value of this particular commodity.

If we don't do that, I think it will continue to escalate.

Okay.

And there seems to be another ill wind beginning it blow this time for the industry, this time coming from Europe where the environmental movement is putting in new rules, regulations, taxes and fees on the airlines, being an international carrier with large operations to these areas do you think that this will be the next crisis for the airlines as governments try to raise extra cash by taxing airlines under the guise of environmental protection?

Ray, I don't know.

I will let John speak to it here in a second.

I do not know if I would call it the next crisis but I would certainly refer to it as piling on and certainly it is an incremental challenge that we don't need and I think as usual, ray, it was said best by Giovanni when he said this is absolutely the wrong thing at the wrong time and we subscribe to IATA's assessment of it.

John, want to add anything?

Maybe you, Kevin?

I think that Glenn said it all.

We're now beginning to see the European carriers be under the same pressure that we are and hopefully we'll have an unified front here.

As you know, Europe has often been out in front of some of the issues that ultimately end up in the States so we're working very, very hard to moderate the impact, Ray.

Great, thank you, guys.

You bet.

Thank you, Ray.

We'll go next to Daniel McKenzie, Credit Suisse.

Hi, good morning, thanks.

You know, first off, just a quick housekeeping detail, what's the loss per share after adjusting for the out of period fuel hedges?

I'm arriving at a a loss of $3.63 per share but I suspect I'm not adjusting the tax rate properly.

We don't -- you have to be careful in there because the only taxes in there relate to the special charge and so you should think of it as zero tax, if I recall correctly, that number was $2.99 excluding the out of period mark to market.

I see.

Okay.

And then, John, I'm wondering if you could provide some perspective about the link between corporate travel and the need to adjust capacity to keep RASM constant.

I guess in particular, I appreciate we're not seeing any significant decline today but if corporations begin by cracking down by cutting corporate travel, say, 10 to 15%, does that mean that capacity needs to be cut 10 to 15% to hold RASM constant?

Well, I -- I think that, you are correct in saying that we're really sizing the system around the most profitable core customer base and it is inevitable that we're going to see changes.

As I drove to work this morning I even heard that if you work for some investment banks you will in the be able to fly in first class and so I thought that that was a significant change and so our capacity plans assume that that is going to occur.

The elasticity of this market is less than some of the other markets but nevertheless it exists and we'll size the market around that and we believe, as Jake said, for $125 we got the capacity in the right place but if learnings over the next several months suggest that -- that more needs to be done, we'll do more.

Okay, great.

And then just for my second question, I'm wondering if you could talk about, your contract actual flexibility to cut regional affiliates line.

I'm wondering how much regional flying can you cut without cause?

We recently terminated seven aircraft in 2009.

Most of our flexibility is further out in the 10, 11, 12 range.

Although we do believe that contract extensions and the few that we may be willing to provide could provide economic and/or capacity relief.

We are also lowering our utilization, which is driving the reduction and the outlook for express capacity we're seeing.

And so, , we're going to press on this issue.

It is inevitable that we're going to have to improve the economics and the flexibility of these relationships, and for those that recognized that early in the game there may be extensions available.

For those that don't the risk around, 50-seat aircraft at renewal is going to be theirs to

And I -- this is Jake.

I'd remind you that we have, a lot of flexibility in the rest of our fleet.

And so we can change to whatever -- whatever environment we need to change to.

So it's -- even though we may have a little bit less flexibility on the regional side, we have a lot of flexibility on the mainline side.

Okay, great.

Thanks a lot.

Appreciate it.

We'll go next to Jamie Baker, JPMorgan.

Yeah, good morning, everybody.

Good morning, Jamie.

Jake, a question on the aircraft side, are you concerned that the windows for raising money against unencumbered aircraft is closing?

I'm just trying to assess whether you're still focused on any near-term financial -- now that the the $1.7 billion is behind you?

Well, we chose, Jamie, to focus our initial efforts on things that didn't require more collateral, viewing that -- things that do require collateral are a little bit easier to do.

So we have also parallel paths and a number of other aircraft financings and obviously the selling of the aircraft that we are going to permanently ground, both of which we think can raise substantial liquidity.

So we're -- we've got those efforts underway in parallel but we just chose to focus on the -- you know, on doing it in a very collateral friendly way first and then tap the secured markets second.

Got it.

And -- and secondly and I guess expanding on what Glenn was speaking to earlier, given the main line capacity and the full-year cost guidance that you've given it implies very, very strong cost control in the fourth quarter and I'll admit that perhaps I haven't been the kindest among the analysts to United in the past on the subject of cost control but this really does imply very stellar performance.

Can you outline some of the additional inputs that contributes to your confidence to offer up this guidance?

I'll let John speak to it, Jamie, and I'll -- I'll be silent on your comment relative to your own perspective on our abilities.

Well, I'm humbled here as long as you deliver on it.

I'll let John outline some of the areas that are incremental to what he mentioned in his prepared remarks, Jamie, but re really do thing it is two things.

Number one, we have perfect transparency into our competitiveness or lack thereof.

We are focused on the significant few, and we really do mean the significant few and they will yield benefit to us, and we are putting the right team in place to he can cute against the opportunity.

So I'm -- I'm very confident.

And I'll turn it over to the guy that I'm going to be talking to every morning at about 8:00 on our progress.

John, over to you.

I think as Jake indicated certainly the -- the reduction of 20% in SAM is significant.

We are also beginning, you will know, during the quarter and looking forward beginning to see significant improvements in our maintenance cost outlook.

You know, part of that is focusing on an improvement agenda but part of that is making sure that we're fully capitalizing on the structural change that the elimination of the 737 creates.

We know where all of this money is.

You know, there isn't a blank space in the guidance that Jake indicated.

We have programs, commitments, and I would say that my perspective is that this does not represent our full potential.

As Jake indicated, reduction in cost is -- is tough in a capacity reduced environment but we in the industry have no choice.

The value of the incremental $100 million that Jake indicated is about 250 million on an annual run rate.

So it's important to indicate that these are -- we're not getting this performance through deferral.

We're getting it through sustainable cost elimination.

Okay.

This is Jake.

I just add that I think you've seen both with us and -- and maybe to a lesser extend in the industry, as we have faced this -- this very difficult time and unprecedented cost challenges of the industry, and especially united as found different ways to adapt.

And that, I think, is -- you know, when you are -- when you are facing the kind of cost pressures that we face from fuel, you look at the world a little bit differently and that is what we've been doing.

And when we look at it differently, we see -- we see these opportunities out there.

So we're -- we're very, very confident that we'll be able to deliver on these numbers.

Excellent.

Thank you very much for the clarity.

I appreciate it, everyone.

You bet.

Thank you, Jamie.

We'll take our final question from Kevin Crissey, UBS.

As you guys are reducing capacity are you starting to see low cost carriers get into these markets or make incursions into that?

We haven't seen a substantial change in low cost carrier plans.

They tend to be flattish right now.

Although, as you know, we've seen some significant increases in Denver principally on the part of southwest.

So I think as -- as you've heard, as I've heard, Southwest seems to be biased to capitalizing despite the current economic condition of the industry but overall we don't see a significant threat.

Low-cost carriers with the exception of Southwest pay the same for fuel that we do and we're very competitive in terms of our revenue premium.

If these markets weren't profitable through United I have no reason to believe that they would be profitable for a low-cost carrier.

Right.

Thank you.

Thank you.

Okay.

If I could, operator, let me wrap up for a moment just with a couple of remarks.

Number one, it's -- it's a privilege that the Chief Executive Officer gets to be able to thank people for extraordinary work during challenging times, and with respect to the crafting of the new agreement with Chase, the executive team here on the call gets the opportunity to thank Dennis Carey, our Chief Marketing Officer, Kathy Mikells, somebody very familiar to all of you on the call, the two of whom are sitting here with us, both of them a little bleary eyed and Kathy, of course, for whom this work was decidedly extracurricular, took her back to her days as Treasurer of the company and the Vice President for Financial Analysis and Planning and I personally and the executive appreciate the work that Dennis and Kathy put in to reach this agreement and I want to thank Robert Sidhoven who is our Vice President responsible for Mileage Plus who was the third very important member of the team in crafting this new agreement.

That having been said, I also want to thank Ray Fischer at JPMorgan Chase and his team for all of the work that they put in to the effort on behalf of of United at an important partner and customer of JPMorgan Chase and it just furthers the quality of our long-term relationship with that institution.

So thanks very much for that.

And I'll bring it -- bring the -- this segment of the call to a close.

Thanks.

And we'll turn it over now to the call for the media.

Thank you, operator.

Thank you.

We will now take calls from the media.

We'll go first to Susan Kerry, "The Wall Street Journal."

Good morning.

I guess this is a question for Jake.

Just to make sure absolutely that I understand on your Chase agreement, do I take it to mean that your credit card holdback has gone from 375 to $25 million?

Yeah.

Actually 385 to 25.

I was rounding off to 350 as the difference.

But, yeah, that's -- that's what's happened.

That's what's going to happen, I should say.

And is this -- I mean what did you have to do to effect this very large reduction in the holdback?

We have the situation that Chase is our credit card provider and we have a -- the Mileage Plus credit card relationship with them, as well as a broad and deep relationship between our institutions that goes back many, many years.

And we negotiated across both of those agreements and we had certain things that we wanted to achieve and they had certain things that they wanted to achieve and the -- the teams got together and found a way to achieve what all of us needed to do.

And so it was -- it was a complete agreement on both sides of that relationship.

I will not say all sides of the relationship.

Because we -- have a banking relationship with JP as well.

But it was a comprehensive negotiation and done on a very rapid time frame to a very successful result.

Well, thank you.

So just to follow up then, I mean $385 million at -- I assume that that was a holdback that dated from when you emerged from chapter 11.

And was seen from what I've seen from the analysts over the last couple of years as a rather high holdback, especially during the better couple of past years and so to go down to $25 million when the industry is in crisis seems like a rather dramatic change.

I would agree with that.

Okay.

Thank you.

So, no, so I agree and so the holdback that we had was as a result of the agreement that we exited bankruptcy with, and it required 25% holdback under the -- in the current situation that amounted to $385 million as of today, and that agreement going forward is going to change, and we're going to go down to a $25 million holdback under the current situation.

We do have some situations as we alluded to with the analysts where that holdback could go up.

But we're -- we're -- we're feeling that overall, it is a better situation than we -- than the agreement that we currently have today.

The -- I would echo what Jake said a little bit.

I want to emphasize that the team accomplished a very balanced commercial outcome in terms of the basic operating program going forward.

So I think everyone walks away from this negotiation feeling like it was a fair and equitable transaction.

Yeah.

I think -- I think everybody got something from this -- this agreement and that is the way that good agreements are done.

Your next question comes from Josh Frey, The Associated Press.

Good morning.

A little more on the credit card agreement.

So I -- I guess I'm still not totally clear on maybe what United gave up to get the smaller holdback and I'm wondering if maybe you sold frequent flier miles to Chase for perhaps less than what they were selling for before and if that is not it then maybe you can help me to understand what -- what went in Chase's favor on this.

Well I'll let Chase speak to their -- to their thing.

Would I just observe a couple of points, the -- the cost of a mile, if you will, what we're selling the miles to did not go down, it went up.

And what we principally did is we lengthened the term of the contract with Chase, that was something they want, and there was some other business terms that they want and we basically redid almost the entire agreement and refined it even though we'd been working together for a long time.

So there was -- there was a number of possibilities that were important to them and we were able to accommodate that and there were a number of things that were -- that were important to us and they were able to accommodate it and we reached a very favorable agreement for all parties.

Okay.

And just to double-check, when you see lengthened the term of the contract, you mean the affinity card contract or the processing.

Yes.

I was speaking about the affinity card contract.

Sure, sure.

And related to that, on the $600 million advance for the frequent flyer miles to some extent is that a future shift from revenue this year to next year.

Is there any concern that are you eating tomorrow's lunch today or is that not the right way to look at it.

It is a cash shift, not a revenue shift because we don't account for it that way, but it is a cash shift the advance sales of miles and it is something that was important to us to enhance our liquidity in these difficult times and soap we felt good about it but, again we -- we got what we needed out of that contract.

We didn't -- we got a higher price per mile, and that was something that was important to us.

And we also wanted some liquidity and all of that came together to be what we think is a good agreement and what we think they think is a good agreement.

All right.

Thank you.

Next question comes from Micki Maynard, the "New York Times."

Good afternoon, everybody.

Hi, Micki.

Hi.

I have a question for either Glenn or John and it is about aircraft owners, I've just gotten back from Farnborough, but you don't have any I understand and I realize that you are grounding planes and retiring plains but what will it take for you to consider actually placing some aircraft orders?

Does fuel have to come down?

Do you have to be more stable with liquidity?

What would be the proper environment for you to consider ordering some planes?

I think, Micki, if you take the sum of all of the responses that the various companies are taking to address the economic environment that we've described, characterized by $147.22 crude oil.

Yes.

Not to be specific about the number but, yes.

Yeah, I know.

I've got it etched.

Along with, I think it is about about $170-odd jet fuel price.

Yes.

So when we say 147.22 it is not actually what we buy.

Right.

You have to pay the refining.

It is a widening crack spread.

There's going to be a recasting of the entire industry and it's now stretch the, Mickey I think as you probably saw in the UK, it is stretched now offshore it is reaching Europe, it's getting to the Asian carriers and you are seeing a tremendous amount of capacity reduction coming into play in the offshore markets, and that is inevitably going to recalibrate the state of the industry and it is going to have, I think, an effect on order books for aircraft over time and you are seeing many deferrals, companies were touting the fact that they had the orders in place.

We think that that actually, as we have always said, has an effect on our place in the eventual queue.

And we -- we have said repeatedly that we thought that when things sorted out, our place in the queue would be to our advantage competitively or to our satisfaction competitively and I personally believe that that will turn out to be true.

John, Kevin, you want to speak to that?

I think first making money would cause us to do that and believing it is sustainable.

Yes.

We really have no pressure in terms of average age as Jake has noted quite often, particularly with the elimination of the 737s.

I think one of the things that people haven't yet focused on with the 737 elimination is think about the capital avoidance of reduced -- of eliminating the need to replace those airplanes over time.

So we feel that we will not be forced to do anything in the near to mid-term.

And when the economics underlying the decision are appropriate, we'll act.

One every the things that did happen at Farnborough was the announcement of a new airline flying to Dubai and we were told by Airbus -- sorry, by Boeing that three American carriers had decided not to take planes which freed up planes for Emirates to get for them.

That raises the question at some point by not taking planes and by return planes you are enabling your competition to spring up, so don't you have to order some planes in the only to make passengers a little more comfortable and potentially save some fuel, but also to keep others from getting them?

You know, Micki, maybe we could let Graham speak to the premium product that we are putting in place on the 76, triple 7s and triple 4s as the customer responsive capital initiative that we want to take first on aircraft that, as John said, are certainly within the range of -- acceptable youth in a fleet.

Graham, you want to speak to it?

Sure.

Mickey, this is Graham.

Hi, Graham.

And I think as we've spoken before, we've embarked on not purchasing planes but enhancing the customer experience.

And the initial result coming in from that endeavor and that investment are highly encouraging to the point that John and Jake talked about improving yelled and unit revenue.

So we don't see the -- the contention that you talk about.

And indeed we have embarked on this endeavor specifically to compete with the best of the best.

And I think both the deployment in Europe at the moment and shortly to be in Asia is beginning to change that paradigm.

We've seen significant market share shifts, significant yield increases and, indeed, significant customer satisfaction rating improvements.

So there is always going to be competition out there.

We're very respectful of it.

But we're for sure in the afraid of it and I think that we can absolutely compete with this new product.

Thank you.

Yeah.

I think -- you know, Mickey, what goes into our capacity discipline is the same thing that would go into the issue you referenced.

I mean, we're not going to operate capacity or new airplanes at a substantial loss in the open of preventing someone else from doing something.

Okay.

Thanks very much, gentlemen.

Okay, Mickey.

Our next question comes from Dan Reed, "USA Today."

Good morning, fellows.

A while ago John mentioned that the operational perform Alliance was I believe in the words were neither competitive nor acceptable.

Can you put some sort of dollar valuation on what that operational lack of performance is costing costing you?

Another way of saying how much could you -- could you pick up in terms of dollars, revenue, if you improved operations to your -- to your liking?

It's hard to target those -- hard to tie those down exactly.

II can tell you however that both the cost improvement and the revenue improvement is supportive of our need to -- but at the end of the day, we need to do this just simply from a reputation and sustainable performance perspective for United but as you point out, an airline that's running on time generates more revenues and I believe lowers its cost.

Okay.

And -- and then the follow-up, can you say whether or not we're -- we're getting indication there might have been to some degree, I don't want to overstate it, but to some degree a slowdown among your A320 pilots?

No.

I mean, we've seen periodically increases in our sick rate performance and I think we've seen a bit of that recently, concentrating on our narrow-bodied fleet but we are managing the system with the interest of our customers in mind and I would not call it yet notable.

Okay.

Thank you.

Your next question comes from Julie Johnson with the Chicago Tribune.

Hi, guys.

Hi, Julie.

Hey, I've got a quick question for John on the network for next year.

It looks like Express is going to be growing 6.5 to 7.5%.

And that's a little less than the guidance you gave last month.

But I'm just wondering where this growth is coming and is this -- is -- you see this as a replacement for 737 flying and also sort of what is the economic case to -- to be made for that level of increase in this environment?

Well, let me start by saying those commitments existed prior to $147 and as I believe Glenn said $0.22.

You know, having said that, we're having good success with the 70-seaters.

Shedding some PROPs.

But the cost of the 70-seaters in this environment is actually very favorable on the network.

We have, I believe at this point in time, more 70-seat first-class configured aircraft than any other carrier in the country and so this is largely the continued influence of bringing those aircraft onboard.

But as I mentioned, we are looking for every opportunity to reduce the footprint particularly of the 50-seaters and currently we're most certainly acting on the props.

Okay.

One other question, are you potentially looking at dehubbing LAX, I mean especially given the 20% year-over-year cut for the fourth quarter?

Of those cuts that we indicated would not result in that impact.

And we're really not in a position to speculate what may or may not be necessary in the future.

This -- this schedule reduction remains -- retains our commitment to the five hubs.

Okay.

All right.

Great.

Thanks, Julie.

Okay.

Thank you, everybody.

Thank you Theresa.

We're done with the call now.

Thank you, ladies and gentlemen.

Thanks very much for your help, operator, bye-bye.

Thank you ladies and gentlemen.

This concludes our call today.

You may disconnect your lines at this time.