聯合航空 (UAL) 2008 Q3 法說會逐字稿

Good morning and welcome to UAL Corporations earnings conference call for the third quarter of 2008.

I'll be your conference facilitator for today.

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

At the end of the analyst Q&A, at approximately noon, Eastern time, questions will be taken from media.

(OPERATOR INSTRUCTIONS) This call is being recorded and is copyrighted.

Please note that it can be recorded, transcribed, 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'd now like to turn the presentation over to your host for today, Ms.

Kathryn Mikells.

Please go ahead, ma'am.

Thank you.

Welcome to UAL's third quarter earnings conference call.

The earnings announcement was released earlier this morning and is available on our website at www.United.Com\IR.

Let me point out that information in the press release and those made during this conference call may contain 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 the call today we'll 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.

Unless otherwise noted as we walk you through the numbers for the quarter, we'll be excluding special charges and the non-cash net mark-to-market fuel hedge losses that I'll discuss later in the call.

These items are detailed on the table on page 17 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.

Thank you, Kathy and good morning and welcome everyone on the call.

Joining me and participating on our call today in addition to Katherine is John Tague, our Chief Operating Officer; Jake Brace and Pete McDonald are also with us and available to take questions.

Earlier today we announced our third quarter 2008 results.

We reported a net loss of $252 million, when excluding the non-cash net mark-to-market losses on fuel hedge contracts that Kathy will walk you through in a few minutes.

Oil prices reached unprecedented levels during the quarter and our results were impacted by a consolidated cash fuel bill that was some $946 million higher than last year, more than a 60% increase.

Today, as we all know, oil prices remain very volatile, and recently have fallen dramatically, approaching 70 to $75 per barrel, about half the historic highs seen just last quarter.

Lower fuel prices may have a significant positive impact on future profitability.

Although the market forces is putting pressure on fuel prices, are also pressuring the global economy.

Failing financial institutions and tight credit markets are impacting all of us across industry, both inside and outside the United States.

It is in this environment of falling oil prices that we at United see opportunity to return to profitability and make our own margin.

We have the flexibility to ensure we are putting the right amount of capacity into the market and we are delivering competitive revenue results while simultaneously reducing our costs.

Against this back drop last month, we had our annual strategic planning session with our Board of Directors.

We discussed the economic, financial and business environment, including of course the cost of fuel, the state of our industry and the domestic and international markets and specifically the opportunities for our Company going forward.

Our long term goal is unchanged to create shareholder value.

First and foremost, that means returning United to profitability, even in an unpredictable and volatile fuel and economic environment.

Our work is focused on strengthening our core business, improving performance and running a very good airline, all of which is necessary to providing a return for our shareholders.

As we have mentioned previously, our plan builds on our safety leadership, and is focused on driving revenue, reducing cost, and getting United to a better competitive position in service and reliability metrics which are important to our customers, our employees and to our profitability.

In this environment, building liquidity is also critical.

On our last call, we announced our $1.2 billion agreement with Chase which we closed during the quarter.

Earlier this month, we announced transactions that generated some $90 million in cash, this quarter was another $185 million in sight by the end of next quarter.

All told, we closed more than $365 million in new aircraft financings during the quarter and we closed with a cash balance of $2.9 billion.

With these transactions in hand we still have some $3 billion in unencumbered hard assets and we have work under way to continue to leverage them.

We are rigorously reducing our costs across the entire Company.

Our current quarter results and forward guidance demonstrates the strong performance despite significant reductions in capacity.

We have reduced our capital spending to $450 million making investments where they can have the greatest impact including rolling out our new first and business class cabins.

We are taking steps to build upon our revenue performance, including capacity reductions which led to strong September core PRASM improvement.

With the capacity reductions we've implemented across the system we expect to produce solid PRASM growth in the fourth quarter.

We continue to optimize our network adding strategic routes such as Washington/Dubai which launches next week, while eliminating or downgauging underperforming routes and upgauging opportunistically markets such Sao Paulo, Brazil.

We continue to pursue new revenue streams and during the quarter increased our second bag fee to $50.

We are seeing benefit from putting more choice in the hands of our customers, both financially and in our customer satisfaction metrics.

Customers who purchased an upgrade to economy plus rated us higher in their satisfaction with our service.

We expect to be rolling out another new product offering to customers in the coming weeks.

We are also continuing to work closely with Continental to ensure their transition to Star is seamless and the teams of leaders from our two companies are meeting on a regular basis to develop, plan and execute new revenue opportunities, cost savings and operational efficiencies made possible by the partnership.

As you all know, Continental along with Air Canada and our existing immunized Star Alliance partners applied for antitrust approval to join our immunized trans-Atlantic 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 for Latin America.

Continental will join the Star Alliance, the world's leading global alliance after exiting Skyteam following the closure of the Delta/Northwest merger, and we continue to grow the strength of the Star Alliance.

Earlier this month, we welcomed TAM, providing a more extensive network to Brazil, Central and South America.

Before I turn the call over to Kathy, I'd like to take a moment to congratulate Graham Atkinson and Dennis Cary, two Senior Vice President with new roles.

Yesterday we named Graham President of Mileage Plus where he will focus on developing our loyalty program into more of a standalone business and thereby leverage our relationship with key partners.

Dennis was named Chief Marketing and Customer Officer and will maintain responsibility for marketing and lead our customer experience work, including a rollout of our new international premium product.

These appointments will enable us to ensure we are well positioned to address the changing landscape of loyalty programs and of course, I'd also like to officially on the call, welcome Kathryn Mikells to her new role.

She begins her job as CFO next week, in a most interesting time.

Kathy has been with United for 14 years and has led significant work during her tenure.

She played a major role during our restructuring, leading the work to resize our fleet and significantly reduce our leasing cost.

She served as Treasurer and as Vice President of Financial Planning and Analysis, and in addition to her most recent role as Head of Investor Relations, she negotiated the Chase deal that I mentioned earlier.

I can't imagine, and nobody here with me can imagine a more qualified leader to take on the CFO position following Jake's retirement and we all look forward to working with Kathryn in her new capacity.

So with that, Kathryn, with the pressure properly applied, back over to you.

Thanks very much, Glenn.

Our loss for the quarter was driven by record high fuel prices which overshadowed the gains we made in revenue and the good cost control we demonstrated as we began to pull-down capacity.

Furthermore, our GAAP loss was widened by non-cash fuel hedge impacts.

For the quarter, oil prices averaged $118 per barrel and Jet A was over 60% higher versus last year.

As a result our consolidated fuel expense excluding non-cash net mark-to-market losses rose $946 million driving a third quarter operating loss of $150 million, $742 million worse than the same period last year.

Our net loss of $252 million or $1.99 per share came in a bit ahead of the Street consensus.

Our revenue results were solid with third quarter RASM increasing by 5.7% year-over-year and consolidated RASM increasing by 5.3%.

The impact of the Mileage Plus accounting for the quarter was a $27 million reduction in revenue year-over-year or 0.5 point reduction in our main line RASM growth rate.

This was primarily due to the change in our expiration policy from 36 to 18 months for inactive Mileage Plus accounts which added about $50 million of non-cash revenue to the Company's consolidated passenger revenue for the third quarter of 2007.

Excluding the impact of Mileage Plus accounting, main line RASM was up 6.2%.

You may recall that in the fourth quarter of last year, the change in the Mileage Plus expiration added about $120 million of non-cash revenue, creating a headwind of roughly 2.5 percentage points for passenger unit revenue growth in the fourth quarter of this year.

Cargo and other revenue of $451 million was up 3%.

We again saw very strong performance in cargo revenues which grew a little over 10% this quarter, helped by higher yields.

We expect to record cargo and other revenue of approximately 415 million to $425 million for the fourth quarter of 2008.

In terms of costs, because we currently do not qualify for hedge accounting, the drop in oil prices at the end of the quarter required us to book large mark-to-market losses which we flagged in our investor update last month.

Both our operating and non-operating expenses were impacted by the $519 million net non-cash mark-to-market expense we booked, with $336 million hitting the fuel line and $183 million being booked below the operating line.

In stark contrast, the higher oil prices we experienced on average throughout the quarter resulted in a net cash gain of $17 million on fuel hedge contracts that actually settled during the quarter.

Excluding the net non-cash mark-to-market losses, our operating expenses increased by 16.9% in the third quarter due to the higher cash fuel expense.

We are actively pursuing true hedge accounting which would enable us to simply book the cash gains and losses on settled contracts in the quarter.

Excluding the $519 million non-cash net mark-to-market loss, essentially removes the non-cash out of period impacts from our financial results.

On this basis, average main line cash jet fuel expense for the quarter was $3.77 per gallon, up from $2.22 a year ago.

We are delivering good non-fuel cost performance even as we significantly take down capacity.

For the quarter, main line CASM excluding fuel was flat on a 4% decline in main line capacity.

We came in better than the cost guidance we provided just last month and are demonstrating our ability to shed both fixed and variable costs as we reduce capacity significantly.

As I'll discuss later in the call, our strong numbers this quarter and the expectation of pretty good performance in the fourth have enabled us to modestly reduce our full year guidance from what we provided at the beginning of the year.

Again, despite much lower mainline capacity.

Now let me walk you through some of the expense line items where we saw significant year-over-year changes in the quarter.

Salaries decreased $25 million as a result of reduced profit-sharing expenses in 2008 and the effects of our management and staff reductions.

Regional affiliate expense increased $131 million year-over-year due to a $142 million increase in regional fuel expense.

Aircraft maintenance materials and outside repairs decreased $39 million primarily due to lower volumes year-over-year.

Landing fees and rent increased $21 million as a rut of the timing of an annual credit that we mentioned on our last quarter conference call.

Distribution expenses decreased $30 million as a result of our cost reduction efforts, and aircraft rent expense increased $13 million primarily as a result of a one-time non-cash rent adjustment.

Excluding the $183 million net non-cash fuel hedge loss that fell below the line, total non-operating expense was $104 million, $13 million higher than last year.

Debt reduction and refinancing efforts continue to contribute to lower interest expense year-over-year, with interest expense for the quarter down $30 million or about 19%.

This was offset by a $47 million decline in our interest income due to both lower yields on cash as well as a lower average cash balance compared to last year.

With the financial markets in a state of turmoil, liquidity takes on a heightened importance.

We're pleased with the progress we've made having completed a number of critical transactions this quarter including an aircraft financing for $125 million just a few weeks ago.

All told, since the beginning of the third quarter, we closed deals worth roughly $1.5 billion with about $1.4 billion coming in the door in the third quarter.

The largest cash infusion came from closing the amendments to our Mileage Plus credit card agreement and our credit card processing agreement.

The closing provided us just short of $1 billion in cash this quarter and will improve our cash flow by about $200 million over the next two years.

We also completed two separate aircraft financing transactions that added an additional $300 million in cash this quarter and will provide an additional $65 million in the fourth quarter.

In addition to the deals that we have previously announced, this week, we signed a letter of intent for an additional aircraft financing worth $150 million that we expect to close in the fourth quarter.

We closed a number of asset sale agreements in the quarter generating proceeds of approximately $43 million this quarter with another $40 million to follow in the next few months.

We were also able to raise about $50 million in the quarter by replacing restricted cash with letters of credit.

Finally, we announced agreements in principal to sell additional assets for about $80 million.

The bulk of the asset sales are 737s that we are retiring.

Based on the work to date we've circled about $330 million in incremental liquidity for the fourth quarter.

We've covered quite a bit of ground improving our liquidity over a relatively short period of time and as you can see, we have more activities under way which are progressing, even in this tough market.

Our $3 billion in unencumbered assets provides us with more financial and operational flexibility as we navigate through this volatile environment.

During the quarter we generated negative operating cash flow of $387 million which includes the $600 million in cash we received from Chase from a one-time bonus and advanced purchase of miles.

This was offset by $378 million in collateral we posted with our fuel hedge counterparties.

Free cash flow, which we define as operating cash flow less capital expenditures, came in at negative $490 million this quarter.

We ended the quarter with $2.9 billion of unrestricted cash in line with our previous guidance and about $250 million in restricted cash.

I'd note that our restricted cash was about $350 million lower than the guidance we previously provided as a result of our fuel hedge deposits being recorded as the receivable on our balance sheet versus being included in restricted cash as we had anticipated earlier.

And with that, I'll hand the call over to John.

Thanks, Kathy.

As I mentioned on the call last quarter, we are pursuing an aggressive agenda focused on the basics of running a good airline.

Industry leading revenues, achieving a competitive cost structure, driving top tier operational performance, improving the cleanliness and workability of our products, all in support of a courteous, caring and respectful service culture.

Our focus is clearly set on the areas that are arguably important in our pursuit of industry leading performance.

First, on the revenue front, we produced an absolute consolidated PRASM of $0.1302, which when adjusted for length of haul continues to produce a significant premium to the industry and enabled us to generate solid passenger revenue growth of 1.4%, despite capacity reductions of 3.6% while our absolute PRASM was better than the industry, PRASM growth was below our own expectations driven by several factors.

First, a tough comp.

Last years strong third quarter consolidated PRASM growth of almost 9% led the industry.

Second, regional weakness in international areas where United has a significant presence relative to the industry.

Overall, third quarter mainline PRASM was up 5.4% year-over-year and consolidated PRASM was up 5.2%.

Our consolidated results were driven by a 7.1% increase in yield, partially offset by a drop of 1.6 points in load factor.

Similarly our mainline results were driven by a yield improvement of 7.5% year-over-year on a 1.5 point decline in load factor.

Domestic market performance was solid, benefiting from a 6.2% reduction in mainline capacity.

Mainline domestic PRASM was up 6.5% driven by a strong yield increase of 7%.

Domestic performance improved significantly in September as a result of the capacity reductions.

Domestic PRASM growth in September was double digit, a significant improvement on the mid single digit in July and August.

International PRASM was up 4.2% year-over-year on capacity decline of 0.8.

Latin America continues to see very strong PRASM growth, up 9.7% this quarter.

In order to capitalize on this growing market in September, we've added service from Washington D.C.

to Rio de Janeiro.

We also upgauged our flight from Washington to Sao Paulo from a 767 to a 777.

Overall our limited exposure to the strong Latin American market has hurt our PRASM growth relative to some of our peers who have a much stronger presence in that region.

In the Pacific region, China including Hong Kong experienced year-over-year unit revenue growth this quarter but was hurt by recent industry capacity additions of 15% and a tightening of the business and visitor visa issuance by the Chinese government before, during, and after the Olympics.

All indications are these visa restrictions are now being eased.

Our Pacific entity which historically has been a real strength for the Company is unique among our competitors with 40% of our Pacific capacity in China and Hong Kong.

In response to the slower unit revenue growth in China, we have downgauged a number of flights from the US to China from 747s to 777s and starting this winter we will reduce the frequency of our Washington D.C.

to Beijing flight to less than daily.

Also, as previously announced starting this month, we are discontinuing service between Los Angeles and Hong Kong.

Other carriers have also begun to reduce capacity at China and Hong Kong.

I would point out though that our PRASM growth in Tokyo and points beyond continues to be very strong, producing double digit PRASM growth during the quarter.

In total, United specific PRASM grew 4.2% for the quarter.

In the Atlantic Region we've seen significant capacity growth of 12% in London Heathrow in Germany on a combined basis.

A large component of the increased capacity at Germany was a result of our own growth as well as Lufthansa.

London and German markets represent three quarters of our Atlantic capacity and produced a lower passenger unit revenue growth rate versus the rest of Europe which produced PRASM gains of 7%.

Combined United Atlantic PRASM growth was 1.9% for the quarter.

This month, we have also begun to take actions to take capacity out of the Atlantic to address these oversupply issues.

In Germany as previously announced we will be discontinuing service this month from Los Angeles to Frankfurt and we will be reducing from two flights to one flight per day in the San Francisco to Frankfurt market.

Lufthansa is also taking steps to reduce its capacity from the US to Germany.

In London we are reducing capacity as previously announced by discontinuing service from Denver to London Heathrow this month.

We are redeploying some of this capacity by adding our second destination in the Middle East, with daily service from Washington D.C.

to Dubai which begins next week.

In addition to Dubai, we expect to begin service to Moscow from Washington D.C.

in March of 2009.

These new cities will continue to help expand United's breadth in the Atlantic.

All in with these international capacity changes we will be eliminating 7 to 8% of our international capacity in 2009.

We believe that this aggressive capacity action will help United return to profitability and is an appropriate response to the softening of international demand.

We also believe that capacity actions alone cannot return United to profitability.

We must find new revenue streams.

To that end United has been an industry leader.

We have announced several new initiatives this quarter that we believe will provide value to the consumer as well as our own bottom line.

In early August we announced our Award Accelerator product.

This product allows customers to purchase extra Mileage Plus miles every time they fly.

Award Accelerator has exceeded our expectations since its launch as customers appreciate the ability to design their travel rewards in new ways.

Award Accelerator is part of a growing suite of travel options by United, a product portfolio which includes Economy Plus, red carpet one-time passes, travel insurance, currency exchange, and upgrade kits.

We believe that these travel options include the customer experience by giving our customers more flexibility and control while improving our own bottom line.

In September we announced that we would increase the fee for second check bagged from 25 to $50.

We believe that these unbundling initiatives are resettling the value proposition for both non-elite and elites, giving price sensitive customers new relevant options to purchase, the value they want while reinforcing our elite Frequent Flier travelers with the value we place on their loyalty.

Combined, we expect these new revenue streams to generate well over $1 billion in 2009, a $400 million increase relative to 2008.

Moving to our revenue outlook, despite concerns about the economy and its effect on demand, we expect solid unit revenue growth in the fourth quarter, driven however almost entirely by our capacity reductions.

As Kathryn mentioned our cost performance for the quarter underscores the sustainable progress we are making and taking costs out of our business.

We are changing our culture and processes around cost management at United, driving alignment and accountability for cost competitiveness throughout the management team.

This change in how we approach cost control is certainly demonstrated in our ex-fuel CASM performance in the quarter and the reduction in our ex-fuel CASM performance as well as for the guidance period in the fourth quarter.

We are building our capability around cost control, doing real work and getting real results.

We are seeing particular improvements in the area of maintenance and cost of sales.

We continue to be very disciplined with how we manage corporate accounts, to ensure contract compliance and that we are getting a return on our investment from the discounts and the commissions provided.

As we mentioned last quarter we are executing on a reduction to commissions of some $80 million annually.

Fully realizing our opportunity to improve costs continues to be amongst our highest priorities.

Moving to the operational side, our performance improved this quarter, however it is still not at an acceptable level.

Our on time arrival for 14 minutes for the third quarter was the best arrival performance United has experienced since the fourth quarter of 2006.

This quarter was also the first quarter in 2008 where we have seen year-over-year improvements in on time performance.

We've also seen improvement in our completion rates with the third quarter having the highest completion rate of the year.

Like the improvements we are seeing in on time performance we were also seeing better baggage performance.

This is partially due to the improvement in on time but it is also due to execution improvements across the system.

These improvements in the third quarter are against our own performance but also that of the industry, and they were particularly evident in September and we are bringing even more momentum in October where we are seeing significant year-over-year increases in both on time arrivals and baggage handling.

For the first half of October, we had a completion rate of 99.4, up 1.1 points from last year and an arrival 14 rate of 86 up over 8 points from last year.

In addition to improvements in our operating statistics we are also seeing improvements in our customer satisfaction ratings.

During the third quarter we saw a steady increase in our customer satisfaction ratings.

One of the major areas of ongoing focus is our newly configured international premium cabin aircraft.

These aircraft with new first and business class seats have also been a prime contributor to the increase of our customer satisfaction ratings.

Customer surveys show that customer satisfaction has doubled on board the new international premium product versus the product it replaces.

By the end of 2008 we will have 15 747s and 14 767s in the new configuration representing almost a third of our international fleet.

Other initiatives to improve the cleanliness and workability of our product are also beginning to show dividends.

Recent results show a positive trend that we expect will escalate into October as planned initiatives are being executed.

All in all, recent customer satisfaction measurements are up 35% from our Summer levels.

We ran a better airline this quarter and have both the opportunity and the necessity to do more.

I want to thank my fellow employees for their efforts to restore United's performance and now I'll turn it back to Kathy.

Thanks, John.

Moving to guidance, for the fourth quarter we expect main line domestic capacity to be down by 14.5 to 15.5% while international capacity is expected to be down 8 to 9%.

Overall, fourth quarter mainline capacity is expected to be down 11.5 to 12.5%.

Express capacity is expected to be down 1.5 to 2.5% resulting in fourth quarter consolidated capacity down 10.5 to 11.5%.

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

I'd like to note that we continue to have significant room to adjust capacity with 43 owned and unencumbered aircraft in our fleet, after announced retirements and the transactions I discussed earlier in the call.

We have led the industry in taking necessary actions to reduce capacity, retiring 100 aircraft from our fleet and are already pulling down international capacity.

We'll continue to take appropriate actions to respond to changing market conditions.

We estimate that mainline CASM, excluding fuel and special charges, will be up 2.5 to 3.5% in the fourth quarter despite removing roughly 12% of our mainline capacity and clearly reflecting our ability to remove cost as we shed that capacity.

For the full year we expect mainline CASM excluding fuel and special items to be up between 1.5 and 2%, a little lower than the guidance we provided back in January reflecting the additional cost reductions we've been implementing throughout the year.

We estimate fourth quarter mainline unhedged fuel price including taxes will be $2.88 per gallon, assuming oil will be at about $80 a barrel.

Including the cash impact of our hedges that will settle in the fourth quarter, we estimate our mainline price will be $3.01 per gallon.

For the fourth quarter we have 49% of our consolidated consumption hedged at $112 per barrel.

For 2009, we have 28% of our consolidation -- of our consolidated consumption hedged at $114 a barrel.

You can find additional details about our hedge position in our earnings release.

We continue to hold the line on capital costs with our non-aircraft capital budget of $450 million for 2008, $200 million less than originally planned.

We expect roughly the same level of capital expenditures next year.

As you know, last quarter, we amended our credit agreement, financial covenants.

As we look out to 2009 we are confident that we will be in compliance with all of our covenants.

While we're too early in our planning process to provide specific cost guidance for next year, our performance this year should be viewed as indicative of what we can accomplish and now, operator, we're ready to open the call for questions.

Thank you, first we'll take questions from the analyst community and then we'll take questions from the media.

(OPERATOR INSTRUCTIONS) We'll take our first question from Mike Linenberg, Merrill Lynch.

Yes.

I guess two questions, the first one, I guess to John when you were talking about the Pacific and talking about reduction by competitor capacity, you gave some color on at least what one of your partners was doing on the Atlantic.

What are we seeing in the Pacific and maybe more specifically trans-Pacific markets, sort of the head-to-head competitive capacity outlook, what the cafes (inaudible) and what you're seeing they are doing, the pulldown?

Yes, we're not seeing much change in terms of the foreign flag competitive capacity.

We are seeing US carriers elect to defer their start-ups to China which is a relatively remarkable event and unfortunately a signal of where the market is currently.

Okay, and then just my second question on the announcement I think it was a day or two ago on the promotions for Graham and Dennis.

There was a follow-up article out on Cranes indicating that those moves were really indicative of a spinoff or getting ready for a spinoff of Mileage Plus.

Can you comment on that or at least can you just give us an update on where that's headed?

So Michael, it's Glenn.

We are, we haven't changed our perspective on the opportunity that we think Mileage Plus may eventually provide the Company.

We see it now of course in the context of other work that we're doing such as our alliance work and we'll have to see it through those lens as we go forward, but Mike, regardless of the current credit market environment, which is clearly inhibiting, we continue to create a business unit within our portfolio that will be ready for whatever disposition we think is most accretive to the Company when that moment comes, and that's what Graham's work is going to be for the next little while.

I'll tell you, Mike, the other thing I think is Graham will have the opportunity to develop Mileage Plus into a world class loyalty scheme program and leave it to myself and others to decide when it is that we might change its disposition.

Okay.

Very good.

Thank you, Glenn.

Okay.

We'll go next to Gary Chase, Barclays Capital.

Good morning, everybody.

Hi, Gary.

Just a, well two for John.

A quick one first.

Looks like there is a little bit of capacity reallocation.

You noted some into Dubai and Moscow, but it also looks like there's some into domestic for the fourth quarter.

I note that 2009 is unchanged so maybe just a little perspective on how we should think about that as you take down international, are you seeing better opportunities domestically than you anticipated and might the '09 guidance change in that way as we look forward?

I think at this stage all you're seeing is real schedules versus how we estimated that that particular point in time in the Spring, I wouldn't detect a strategic change in our outlook.

Okay.

And then this morning it happened to be something out of the NBTA, we see these things periodically now where there's talk of businesses tightening up, changing the rules on premium fares, limiting travel to necessary trips and things like that.

Have you seen anything yet that suggests anything out of the ordinary given the economic circumstances we're in?

I mean, you normally expect this to happen, recessions usually impact the airline business.

Is there anything that leads you to believe it would be larger than what we've seen historically?

I'm going to give John the question here but let me just speak to the obvious with respect to the positioning of our hubs.

I spend a lot of time as you might imagine, Gary, with my colleagues here in Chicago as an example, and one of the benefits of a Chicago market for us, over time anyway, not to diminish for a moment the current compression that everybody is experiencing, but McDonald's, as you know, is generating a significant amount of its work, a significant Chicago Company of its value overseas and in a global economy, those corporate clients that we have, and you can go from hub to hub and imagine who they all are, they're going to have to pursue their growth opportunities in our overseas markets so over time, as people recalibrate, we think that's a resilient asset for us that Jeff Bolen and his team manage very effectively, rather than candidly, with no disrespect to anybody on the call, financial services companies.

We don't have a big presence in the--.

We've taken a lot of arrows this year, Glenn.

That one is slight by comparison.

So thanks, Gary.

So specifically, Gary, we've seen a corresponding drop off in our corporate ticketed revenues, basically a direct match for our decline in capacity.

So right now, we feel pretty good about where we set the capacity in the system but we'll monitor that very closely over the next few months.

I guess the point I'm driving at is you always see this kind of behavior pattern start to emerge as you move into tougher economic times, you haven't seen anything yet that suggests that it's going to be any worse than what we've seen historically?

Well, certainly, no indication and as we said our original capacity plans we were planning for a weaker economy albeit not this week but it's certainly, as I mentioned we have not seen a level of decline that suggests that our current capacity plans are not appropriate for the market.

Okay.

Thanks guys.

Thank you, Gary.

Our next question comes from William Greene, Morgan Stanley.

Yes, hi.

Two quick questions on liquidity.

Kathryn, can you tell us what the cash outlay would be if you closed your hedges at todays prices?

And also, can you go through a little bit on the unencumbered assets because it seems like you've had the $3 billion or so in unencumbered assets for some time so as you've levered them up how is it that the value stayed around that $3 billion level?

Sure.

I'm happy to answer both of those.

I don't have the number in front of me for whatever oil is trading at across Bloomberg right now.

If we use the $80 price which is what we used for our fuel guidance, on that basis for our entire portfolio settlement would be about a $600 million loss and obviously that would occur over time.

I think it's really important to kind of frame this issue and I think for a lot of folks on the call, you've articulated in some of the reports that we've seen that this is a pretty high class problem with respect to oil.

We're highly leveraged as an industry against oil prices and United is obviously highly leveraged as well $1.00 a barrel in terms of our annual fuel cost is worth just a little under $60 million to us, so as I think about it, using that $80 oil price, another way to look at it is to say okay, at the end of the quarter, we closed with oil at about $100 a barrel and if we think about it at $80, when do we actually see our physical purchases and the benefit we get on our physical purchases kind of offsetting the losses we would take against settled contracts and so as we look at that, we would see that offset basically over 100% by the time we would get to April of next year and again that reference point is $100 versus $80, so from our perspective and I think for a lot of other people on the call we view this as a pretty high class problem.

With respect to liquidity overall, and the unencumbered aircraft when we started with that number, it was fairly well North of $3 billion which is part of the reason that we haven't changed it over time.

We have sold several aircraft but not a significant number of aircraft yet within that $3 billion, we had again, kind of well North of $2 billion in terms of the aircraft number that was comprised in the number overall, so that's why you haven't seen us yet move the $3 billion number.

Okay, got you, and just one quick follow-up for John.

Can you go through with us sort of how domestic and international RASM is trending in the month to date?

Well, we don't typically provide that information or guidance in terms of current month.

As I mentioned, September was double digit on the domestic side.

I think it's particularly difficult and I know it's frustrating to provide a tremendous amount of clarity over the next few months but we do expect and I have every indication that we'll have a solid revenue performance in the fourth quarter.

It will take a little more time probably for the network changes we've made to fully mature and be as strong as an influence of improvement on the international side.

Well, I guess what I'm trying to get at was there was an expectation or a view that since mid September things have slowed dramatically.

Are you seeing that in the actual numbers?

Not so much your forward outlook but what you've seen, what you have flown so far have things slowed?

Well, I think we have seen probably over the last three to four weeks some moderate softening at this stage.

I know that some carriers who gave guidance previously have felt the need to adjust it over the last three to four weeks.

I think we're seeing the same thing.

There's a modest slowing in demand each successive week over the last two or three weeks.

Thanks for your help.

We'll now go to Kevin Crissey, UBS.

Good morning everybody.

Hi, Kevin.

When will we see the Mileage Plus profitability broken out?

I know you talked about the spinoff as one thing.

Markets may dictate that to some extent but how about the detailed financials?

So, Kevin, this is Kathryn, we haven't made a decision in terms of when we might disclose that information.

As we mentioned earlier this year, we started reporting that internally at the beginning of the year based on the contractual arrangements that we had worked through and were really what I'd call kind of test driving that and we'll adjust that appropriately.

So we don't think it would be helpful to actually disclose information as we're test driving how well it's working, so no decision has been made on that.

Okay.

Can you talk about the, I guess a question for you I guess Kathy since you negotiated the agreement.

Kind of what was gained versus what was lost in the new credit card agreement?

I mean, you've got cash and you said I think 200 million or something of increased liquidity.

Was there seat availability that you provided, additional Frequent Flier seat availability or are they paying a lower price per mile?

What was the downside of your negotiation?

Because there usually is one side or two sides to it.

So that's a terrific question.

I agree there's always give and takes in a negotiation and I'm going to be careful to not disclose what I'd consider to be confidential aspects of the negotiation but if you look overall, obviously it was a big help to the Company from a liquidity perspective.

We received $600 million, $100 million bonus in advance purchase of miles and also changed our credit card processing relationship which enabled us to free up a reserve that we previously had.

If I look at this from Chase's perspective, we actually pledged a little bit of collateral, collateral that we didn't view as something that was going to be relevant for other transactions but that was helpful from Chase's perspective.

They have a second lean against our credit agreement assets and we effectively pledged our Mileage Plus database to them as part of this arrangement, and so I think that was helpful to them.

They have always had a number of what I'd call protections in the agreement with respect to how the Company manages this portfolio and those continue to be in place but they've never been something that infringes upon the way we actually manage the portfolio.

So from our perspective, it was clearly a win-win.

I think they perceive it that way.

We've always had a very good and a very strong relationship with JPMorgan, and they have always been very helpful in working through issues with us creatively and I think that bodes very well for the Company.

The program business people who supported Kathy in the negotiation are very happy with the outcome and it would be wrong to have any impression that the current opportunity or the future opportunity around the program has been in any way degraded by this.

Okay, thanks and one last one if I could.

I mean, your share price is up a bit off of what I consider to be very low bottom but in terms of say the stock goes up a bit more, kind of one easier way to raise capital than maybe trying to do an aircraft deal or something would be just a straight equity offering.

At what price would you think about doing something like that?

So we don't look at it in terms of at what price.

We really look at it from the perspective of very prudently managing our liquidity.

Obviously, we have a lot of unencumbered assets and we've been using those in order to enhance our liquidity as well as the Chase transaction that we closed last quarter so we continue to look at this holistically and we will continue to do what we think is prudent.

Okay, thank you.

Thank you.

We'll take our next question from Ray Neidl, Calyon Securities.

Hi, Ray.

Hi, how you doing?

We're doing good.

One on the cost side, one on the revenue side.

As far as the cost goes, you're closing down ASMs pretty quickly and shrinking the system.

How quickly are you able to get the fixed costs out?

Some say it takes a long time and others say they can do it right away.

So I think you've already seen this in terms of our results.

I mean this quarter we pulled down capacity by 4% mainline and our CASM year-over-year was relatively flat as we gave you the guidance for next quarter, you can see that we're up year-over-year but only modestly so.

I think that's pretty reflective of us pulling the fixed cost out of the system relatively quickly.

Now, there are some costs, rents and landing fees would be a primary one that I would flag while everyone pulls down capacity in the industry effectively all that happens is you trade that in terms of higher rate because at the end of the day, the airports are largely kind of a zero cost sum game and they are going to flow those costs over the industry but even in that situation, we're working very hard to look at our footprint at airports and as we reduce capacity, we're trying to shrink our footprints as quickly as possible to get out a little bit ahead of that curve and I think as you've looked at our rents and landing fees and as we've talked about that over time, we've been doing a pretty good job in controlling them.

We clearly have targeted several other areas in terms of looking at our overall cost program but where we think there's significant opportunity, purchasing overall strategic sourcing is an area that is producing a lot of value for us and as we look out to next year, we expect it to continue to do so.

Distribution costs which John specifically referenced in his speaking point have been an area of opportunity and a place where I think we continue to lead the industry in reducing cost.

Two things to add Ray, if I could.

It isn't of course limited to the operational footprint either.

Pete McDonald is leading an overhead reduction initiative which is also contributing significantly regardless of the ASMs to the effort.

Simultaneously one of the things we're really trying to do is rack up an experience in something, I'll take Kathryn's point, such as procurement, so that we can leverage that with partners when we then get to the opportunity to be able to do so, so if we can take a procurement success, offer our learnings either in procurement or perhaps in IT, to partners, perhaps you think in the context of the A plus plus partners, the immunized partners post-approval then we can take that a step further.

So in many ways what John referred to as a cost conscious culture at United, which is not how we perhaps historically have been perceived, gives us a very good opportunity to leverage it.

Ray, we are all over this, and we are all over it in the weeds and we're meeting each and every week measuring all of the committment, all of the opportunity realization, the status of the programs relative to our budgets, and it's also frankly enabled by a leadership change too.

We've put a new team out in our maintenance organization.

They're partnering with the existing management team that was in San Francisco.

They're seeing the opportunities that we've seen.

They're taking accountability for it and they are taking down the opportunities while also improving quality.

Our deferred maintenance count is substantially lower than it's been in some time.

Our out of service aircraft have improved in the morning by 50, 60%, so we have a big opportunity to take out costs at United and we are operationalizing that opportunity, certainly using benchmarking with the fundamental belief that if somebody else can get it done better than we can, we've got to step up and find a way to do it.

We aren't going to argue about why we're unique, so I think you saw it in the second quarter, you saw it again in the third, clearly you see it in Kathy's guidance, it is a fraction of the capacity reduction.

We are going to turn this into a point of strength for United and we are going to get this Company competitive from a cost perspective and we're not going to do it at the expense of quality and you're seeing that in our results.

Okay, and then on the other side of the equation, you said you can't do it on the cost reduction side or the capacity shrinkage side by itself.

You have to do revenues, and you like other airlines are being very aggressive in trying to generate extra revenues such as baggage fees.

What kind of resistance are you seeing in that area and I guess you had some resistance when you tried to charge for international meals?

You could call it that.

I was talking with the team about six months ago and I said when we look back and look at every risk we've taken we wouldn't have done it any other way.

Well, I managed to pull that one off.

That's one I would have done another way.

So, I think that we're seeing, I would say very moderate friction on the fees in the unbundling.

They are ubiquitous amongst the legacy carriers now.

Certainly customers are frustrated in becoming accommodated to this but at the end of the day, we've got to run this business to make a real margin, and the revenue model has been broken around contributing an appropriate amount to the margin.

And if that means the business has to be smaller in order to drive to that outcome, so be it.

So I mean, these are just things that are going to be necessary if we're going to be a real industry.

Great.

Thank you.

Our last question will be from Jamie Baker, JPMorgan.

Hi, good morning everybody.

Good morning Jamie.

John, I don't want to put words in your mouth but given the response to gave to Ray's question on costs, is it fair then to extrapolate the ex-fuel cost performance that you're guiding to in Q4 into the 2009 full year given the capacity cuts are roughly similar or are there some additional pressures that let you prevent you from repeating the Q4 accomplishment?

I think it's premature at this point, Ray, that I could tell you in addition to driving the improvement in current year 2008.

We've been working on 2009 for six months, so I think that, as we move forward, we're very very focused in that context but it would be premature for us to give guidance for 2009.

And Jamie, this is Kathryn.

The only thing I would add to that is this year, we have been getting out in front of our planning process earlier than we have in past years and that is enabling us to kind of get out in front of the implementation curve in terms of what we want to do next year.

Obviously, this years performance I think is indicative of what this Company can accomplish but we're not at a point yet to give specific guidance for 2009.

So Jamie, it's Glenn.

So let me take John's comment.

John was about to say this.

I have no doubt.

So let me say that despite what John and Kathryn said, the pressure is going to be on in 2009.

It's not lost on our folks that beating your own expectations every month in '08 is only making that challenge a little more difficult, but we are real focused on getting this done, Jamie, and we're focused in the weeds.

Good.

And Glenn, thank you for the input.

We have challenged you in the past on this topic and to your credit you appear to be delivering.

A follow-up on the Pacific though for John?

Jamie we'll give you some credit.

Oh, okay.

Fair enough.

A follow-up just on the Pacific for John.

You outlined obviously earlier in the call the pressures you're seeing, the capacity steps you're taking.

I'll guess that you would agree that the ATA Pacific revenue for September that came out last night was a bit of a disappointment.

Did the steps you outlined suggest that for United your Pacific RASM gets a little better from here or simply that the steps can arrest some of the pressures that we've seen in recent weeks and months?

Well, I think it establishes the foundation for improvement, having said that, we do have obviously issues across the global economy and the winter has never been kind to China but look, I think we're taking the appropriate steps.

As I said we had fabulous performance in Japan.

As you know, we weighed down the ATA statistics in this region pretty heavily, so I think that's, as we've come forward a pretty clear picture as to why that occurred, but I think it's premature, again, let me point out, non-Japan Pacific improved year-over-year.

It was just at a disappointing rate.

Got it.

Well, that will do it for us.

Thank you very much.

Thank you, Jamie.

Thank you, ladies and gentlemen.

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

Before we take questions from the media, I'd now like to turn the call back to Mr.

Tilton for closing comments.

Thanks very much and thanks to everybody on the call.

As we've all discussed and we appreciate the questions, and as you heard from John and Kathy, we have a very solid business plan and we're executing against it.

We're focused on the work that will improve the fundamentals of our Operations, strengthen our performance and deliver the results that we want for United and that our customers and indeed our shareholders expect of us.

That said, before I open the call to questions from the media and close this segment, I'd like to take a moment on behalf of all of us here in the room and the Board of Directors to thank Jake for his 20 years of service to the Company.

As our Chief Restructuring Officer, Jake led our $23 billion restructuring.

Beyond his role as Chief Restructuring Officer and Chief Financial Officer he has been a valued counselor to us all and to the Board and we're pleased he's agreed to maintain an advisory role to the Company and to the Board.

Jake?

Thanks very much on behalf of all of us.

With that, Operator, we'll open the call to questions from the media.

Thank you.

We'll now take calls from the media.

(OPERATOR INSTRUCTIONS) We'll go to [David Jannes], Pro Media.

Yes, good afternoon everybody.

Just two quick questions.

Regarding the fees, John, you had mentioned some very moderate friction that you're seeing and I'm wondering if specifically on the first bag fee, if that has translated to a loss of passengers to those competitors that do not charge first bag fees?

John here.

Yes, we can't see anything measurable.

Granted, it's hard to discern some of these changes but nothing measurable and nothing that would have caused us to have made the decision differently.

Okay, great.

Secondly, regarding the distribution cost savings, it was I believe $30 million for the quarter which is 14% down.

What specifically was done to achieve that and what else needs to be done to reach the annualized target?

Well, we're driving tough distribution cost discussions throughout the world, certainly a significant contributor to that reduction was in a number of international markets.

I believe it's now public information that we've gone to a zero commission in Japan and competitors have followed with that.

We simply can't continue to be the only guys sitting in the room that isn't making any money off of people flying so we're going to have to have more responsible discussions with all of our suppliers throughout the chain and we intend to continue to do that.

Okay, great.

Thanks guys.

Thank you.

Next we'll go to [Julie Johnson], Chicago Tribune.

Good morning guys.

Hi, Julie.

Hi.

Glenn, quick question.

Yes?

If the recession turns out to be as steep as some people are predicting for next year, are you prepared to take down additional capacity beyond what you guided today?

Well, as John has already indicated, we have the flexibility, John and Kathy both, Julie, we have the flexibility to do so if necessary but frankly, we think we've got it pegged just about right but we do have the ability to be responsive to it if the economy is different than we expect.

I think as Kathy indicated Julie this industry is much more leveraged to fuel right now given the change than necessarily a change in the economy.

Right.

For now, anyway.

And one quick follow-up.

As you reduce your footprint at O'Hare, I'm wondering if you are mulling the possibility of leasing gates to other carriers?

We continue to be fully utilizing all of our facility at O'Hare.

As you know, there's some peak in the operation but we continue to have what we think is very good gate utilization at O'Hare.

So for now, that's a no?

We'll evaluate everything on a case-by-case basis.

We're not fixed and firm around what the outcome would be.

We would have to look at the circumstance.

Julie this is Kathryn.

The other thing I would point out is this is obviously one of the opportunities that we anticipate we will be pursuing with Continental as we move forward with our alliance with them and so in the future, we expect not with respect to O'Hare necessarily but across the system to be looking for how we can mutually reduce our footprint.

Right.

And Julie, I would also add we do have the highest gate utilization at the airport which is unusual for the largest player.

Okay, all right great.

Thank you.

Thank you, Julie.

(OPERATOR INSTRUCTIONS) We'll go to [Josh Frey] with the Associated Press.

Good morning.

Can you say anything more about how much of the $3 billion worth of unencumbered fleet assets you're looking to finance?

Are you looking to do half of it?

All of it?

What are you shooting for there?

Again we're going to do what we feel is prudent and part of that is all about what kinds of terms and conditions we're able to achieve through the financing so I'm not going to be specific in terms of what we expect to achieve but I think based on what we've previously announced and I mentioned the new letter of intent that we signed this week with respect to an incremental $150 million, I think we clearly are continuing to demonstrate our ability to raise additional liquidity off these assets.

All right, and can you say anything, kind of update us on Denver?

Is that a market, I'm curious where Denver fits in light of the, on the one hand obviously the effort to improve revenue and at the same time with the competitive situation there.

Is Denver, do you see that as a growing hub or a shrinking one?

Well, it fits right between San Francisco and Chicago and it holds a place very dear in our heart.

No, it's a critical component of our system and will continue to be so and actually performed relatively well when we look at the whole system level of performance over the last several years, so we're happy there and we're staying there.

All right, thank you.

We'll go to [Ted Reed], thestreet.com.

Thank you.

I'd like to ask about Americans order last week for new aircraft.

American is taking--?

Ted could you speak up?

Sorry.

I'd like to ask about American's order last week for new aircraft.

American is taking lots of new narrow bodies and now has one of the largest wide body order for 787 orders in the world.

Does this increase the pressure on you to renew your fleet and to spend some of these unencumbered assets on new aircraft?

Ted, as I'm sure you're aware, we announced that we're retiring 100 aircraft from our fleet very significantly included in that retirement are all of our 737s.

Those were by far the oldest aircraft in our fleet so in fact that retirement will both reduce the average age of the fleet with respect to the remaining fleet and it takes off the table what would have been a pretty significant future replacement cost associated with those aircraft.

So as we look out and in this environment we're pretty happy that we're not currently taking deliveries, and we will certainly put an order in when we're confident that that order is going to produce value for our shareholders and earn a good return.

Ted, American has a very large number of 767s that they have to find a way to resolve much more than we do as well.

Okay, thank you.

Thank you, Ted.

Thank you, ladies and gentlemen.

This concludes our call today.

You may disconnect your lines at this time.

Thank you very much, Operator.