聯合航空 (UAL) 2009 Q3 法說會逐字稿

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  • Operator

  • Good afternoon and welcome to the UAL Corporation's earnings conference call for the third quarter of 2009.

  • I will be your conference facilitator today.

  • Following the prepared remarks for UALs management, we will open the line for questions for analysts.

  • At the end of the analyst Q&A, at approximately 3:00 p.m.

  • Eastern Time, we will take questions from the media.

  • (Operator Instructions).

  • This call is being recorded and is copyrighted.

  • Please note that no portion of the call may 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, John Gebo.

  • Please go ahead, sir.

  • John Gebo - Managing Director, IR

  • Thank you.

  • Welcome to UAL's third quarter earnings conference call.

  • Our earnings release and separate investor update were issued this morning and are available on our website at www.united.com/IR.

  • Let me point out that information in the press release and the remarks made during this conference call may contain forward-looking statements which represent the Company's current expectations or beliefs, concerning future events and financial performance.

  • 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 measures to GAAP measures, please refer to the tables at the end of our earnings release.

  • Unless otherwise noted as we walk you through our numbers for the quarter we will be excluding impairment charges, certain other accounting charges and fuel hedge noncash net mark to market gains and losses.

  • These items are detailed on the table in note six on page 12 at the end of our earnings release.

  • Now I would like to turn the call over to Glenn Tilton, UAL's Chairman, President, and CEO.

  • Glenn Tilton - Chairman, President, CEO

  • Good afternoon and welcome to everyone on the call.

  • Joining me today in addition to John and participating on the call are Kathryn Michaels, our Chief Financial Officer, and John Tague, President of United Airlines; Peter McDonald, our Chief Administrative Officer is also with us and will be available for questions.

  • This morning we reported a third quarter net loss of $63 million.

  • While we are clearly not happy to be reporting a loss in what is traditionally a strong quarter for Company.

  • We are very pleased with the progress we are making in spite of the challenging macro economic environment that we face.

  • We have narrowed our net loss by more than some $200 million a year over a year, and significantly we have reported a third quarter operating profit of $123 million.

  • These results and the additional progress, that John and Kathryn are going to walk us through reflect the improvements United's people are reporting across the country.

  • In fact, we are reporting progress against all our key metrics from cost and revenue metric to operational performance and customer satisfaction.

  • This progress is well earned.

  • Our management team and our people were aligned and they are focused.

  • While we still face the hurdles we have mentioned to you previously, including the significant drop in travel demand and fuel price volatility, we have turned these challenges to our best advantage, driving improved results across the board.

  • Quarter after quarter, we are outperforming our peers on nonfuel unit cost control and we expect this quarter to be no different.

  • Our main line cost for available seat mile was down more than a point for the third consecutive quarter marking yet another step toward our goal of delivering top tier nonfuel unit cost performance.

  • We are beginning to see signs of encouragement in the revenue environment.

  • While unit revenues continue to be under significant pressure year-over-year, recent trends suggest reason for cautious optimism.

  • As all of you know our network is by design more heavily aligned to corporate and premium customers than the rest of the industry.

  • And with the onset of the recession, and the corresponding dramatic drop in business demand, our network moved from historically outperforming industry unit revenue growth to modest underperformance over the last few quarters.

  • As we see early signs of recovery in business and premium demand, we are also beginning to see our relative performance now improve.

  • And as we move toward a recovery in business demand we expect to see our historic outperformance return.

  • We are also expanding our ancillary revenue program with innovative new products such as our annual premium baggage prescription and our bundled premium service offerings.

  • Our aggressive and creative test and then learn approach to driving revenue growth in this space, has enabled us to learn industry-leading per passenger ancillary revenue performance.

  • We will continue to expand our efforts in this area, creating value for our customers and building loyalty for our brands.

  • Our operational performance continues to improve.

  • Year-to-date, through September we are number two in on time arrivals among the major network carriers, just shy of the number one spot, in September we delivered one of our best on time in the last 20 years.

  • Across this system, United's people are working hard to deliver the industry's best on-time performance.

  • While we may not come out on top in every quarter we are now consistently in a fight for the number one position.

  • We are also improving our customer satisfaction metrics.

  • For the fourth consecutive quarter we saw significant improvement in year-over-year scores from our best customers, across their travel experience.

  • Including cabin cleanliness, seat entertainment workability and employee courtesy.

  • As Kathryn will discuss in further detail we successfully completed several financial initiatives this month.

  • In addition to the steps taken in the third quarter to improve cash position, all together, we raised some $1.5 billion during the third and early fourth quarter.

  • In addition to raising nearly $1 billion in new cash, we expect to considerably reduce our debt payments in 2010 and 2011 as a result of our recent EETC refinancing.

  • We closed the quarter with more than $2.5 billion in unrestricted cash, and with the cash raised early in the fourth quarter, our cash balance has increased to more than $3 billion.

  • And next week, at a joining ceremony in New York City we will be welcoming Continental Airlines into the Star Alliance.

  • We have for many months worked closely with our partners at Continental to insure a smooth transition from our customers as they joined Star and as we begin our Trans Atlantic immunized alliance with Lufthansa, Air Canada and six other Star Alliance member carriers.

  • This is a very significant event for us, and for our partners, our employees, and most importantly our mutual customers.

  • With Continental we add 63 destinations to our network, and we dramatically enhance our presence in New York and Latin America.

  • In the current environment, the role of Alliance takes on even greater importance.

  • No one single carrier can profitably serve every market.

  • We have watched with great interest the discussion and positioning for financially struggling Japan Airlines and we support and look forward to Open Skies treaties with Japan that will facilitate Trans Pacific alliances with our partner and today, the Japanese airline of Joyce, All Nephon Airways.

  • We are moving forward with our labor groups and continue to meet on a regular basis.

  • We have met with the National Mediation Board and have been assigned mediators for the Unions with which we have taken that step.

  • Meetings with our mediators were scheduled next week with Alpha, the FIA and the IAM.

  • We look forward to working with our Unions and the NNB As we continue our negotiation progress with the goal of reaching agreements with our Unions that are good for United Airlines and good for our employees.

  • Today we have the right focus, and we have built great momentum.

  • We have significant improvements in unit cost and operational performance.

  • We have the right network to take advantage of the revenue opportunities an economic recovery will bring, and we have the right team in place to navigate what is still a very difficult environment and keep us on the right track in the months and the years ahead.

  • Having said that I will now turn the call over to Kathryn who will take us through the numbers in greater detail.

  • Kathryn over to you.

  • Kathryn Mikellis - SVP, CFO

  • Thanks very much, Glenn.

  • Good afternoon, everyone.

  • At United we are taking the right actions to manage through this difficult business environment and to give the Company a great shot at out performing financially as the economy recovers.

  • We were disappointed to report a modest loss in what is typically one of our stronger quarters.

  • That said we did see early signs of recovery in the quarter and we are pleased with the progress that we have made relative to last year as well as the first half of 2009.

  • We reported an operating profit of $123 million this quarter, an improvement of $273 million over last year.

  • And we narrowed our net loss to $63 million, more than $200 million better than what we reported last year.

  • This translates to a quarterly loss of $0.43 per share which is about $0.50 better than the Streets consensus on both better revenue and better expense performance.

  • Total revenues for the quarter declined by 20% or about $1.1 billion.

  • At the same time operating expense declined by 25% or about $1.4 billion as we benefit from our capacity reduction, our extremely good cost control, and lower fuel prices.

  • While the overall revenue environment was challenging in the third quarter, trends clearly improved relative to last quarter, suggesting the beginning of a recovery.

  • The year-over-year decline in total revenue improved by 5 percentage points compared to the second quarter.

  • Consolidated passenger unit revenue declined by 14.7% year-over-year or about 2.5 percentage points better than the decline that we saw in the second quarter, and about 1.6 percentage points better than the midpoint of our September guidance.

  • About a third of the guidance beat was due to a bit better volume in yield and close end bookings in late September with the remaining two-thirds of the difference due to the impact of favorable tax adjustments.

  • Cargo and other revenue was $322 million, down about 29% from last year, driven by a 43% decline in cargo revenue.

  • In a few minutes John will take you through our passenger and cargo revenue results in a little bit more detail.

  • Turning now to costs, as I mentioned a moment ago, we reduced total operating expense by about $1.4 billion year-over-year for the third quarter.

  • Of this, about $1.2 billion came from lower fuel costs and $214 million from lower nonfuel costs.

  • While fuel prices climbed relative to what we saw in the first half of 2009, they were substantially lower than the third quarter of last year when jet A prices peaked at about $170 a barrel.

  • Lower spot prices coupled with volume reductions driven by our capacity cuts brought our consolidated fuel expense down by $1.2 billion, or about 48% including the impact of settled hedges that we report in fuel expense.

  • Average main line jet fuel price for the quarter was $2.13 a gallon down from $3.70 a gallon last year a reduction of about 44%.

  • We also recorded $39 million in settled hedge losses and nonoperating expense.

  • With the passing of the third quarter, nearly all of our legacy hedge positions have now rolled off, leaving us with only about $60 million in collateral posted with counterparties at quarter end.

  • For yet another quarter United's people have turned in what we believe will be industry leading nonfuel unit cost control.

  • We are committed to further improving our relative cost performance and this quarter's results brings us one step closer to our goal of top tier nonfuel unit costs performance.

  • Consolidated nonfuel expense was down $214 million this quarter or about 6.7%, a decrease of about 1 percentage point more than our capacity reduction.

  • Our third quarter mainline nonfuel unit costs was down 1.6% year-over-year on 8.2% lower capacity.

  • While our consolidated nonfuel unit costs was down about a percent year-over-year, on 5.7% lower capacity.

  • This performance represents an improvement of nearly a percentage point compared to our September guidance and an improvement of almost 2 percentage points from the early third quarter that guidance we provided back in July.

  • Moving now to the balance sheet, unrestricted cash balance of $2.53 billion, just under as one transaction that we have forecast in September ended up closing in the first half of October.

  • During the quarter, we raised about $270 million in new liquidity including the $155 million spare parts transaction that we had announced in July, several aircraft secured financings totaling about $70 million, the completion of the last $27 million of the dribble out equity offering that we had initiated last December.

  • And about $20 million in asset sales.

  • In the first few weeks of October, we completed nearly $1.3 billion in transactions which added about $700 million in new liquidity for a total of just under $1 billion in new cash rates to date in the second half of the year.

  • Our October transactions include the issuance of $345 million in convertible bonds, and about $138 million of common equity, a $659 million double ETC aircraft refinancing that brings in about $90 million in new liquidity, and a secured financing with Sky West, one of our regional flying partners for $129 million.

  • As Glenn mentioned, today our cash balance is more than $3.1 billion, and this is despite about $125 million in debt payments that we have already made so far in October as well as the fact that about $90 million from the transactions that I just talked about a moment ago have yet to hit our cash account.

  • Our recent liquidity enhancements are also improving our financing flexibility.

  • S&P yesterday affirmed their corporate ratings for United removing us from credit watch, and as our unrestricted cash balance is comfortably above the threshold in our credit card processing agreement we have recently notified our largest processor, Chase Payment Tech, that we will be terminating our collateral agreement with them, which will add about $800 million of aircraft collateral to our total pool of unencumbered assets.

  • We generated positive operating cash flow of about $56 million in the third quarter and essentially broke even with respect to free cash flow.

  • We made scheduled debt payments and net capital lease payments of $264 million during the third quarter, and spent $60 million in nonaircraft capital focused on customer facing projects.

  • We closed the quarter with $10.7 billion in total debt including off balance sheet obligations, and $8.1 billion in net debt.

  • Despite the challenge of high fuel prices last year and the impact of the recession that we felt this year, our net debt is roughly the same as it was in the fourth quarter of 2007.

  • We have consistently demonstrated our ability to raise cash and maintain a strong liquidity position.

  • The steps we have taken recently insure that we are solidly competitive on liquidity, with more than $600 million in unencumbered assets today and $800 million of additional assets coming back to us during the quarter we have significant flexibility to raise additional cash if needed.

  • With further refinancing opportunities available to us as we continue to amortize our existing debt, we are confident in our ability to insure that we have the liquidity that we need to manage our business as we move into 2010.

  • And with that, I will turn it over to John.

  • John Tague - EVP, COO

  • Thanks, Kathy.

  • In 2008, we laid out a clear and simple strategy to deliver performance in the areas that are most important to our competitiveness.

  • Planes that are clean and run on time, courteous and caring service, industry leading revenues, and competitive costs, all built on a foundation of safety.

  • We call this performance agenda Focus on Five.

  • And our people are really rallied behind it.

  • While we are encouraged by what we have accomplished together over the last 18 months, we also know there is much more to do.

  • Prior to the onset of the recession in the fourth quarter of 2008, United enjoyed five quarters of industry out performance on unit revenue growth.

  • In the fourth quarter of last year, as the effects of the recession intensified, we began to see modest underperformance.

  • The sources of this underperformance are clear, our large Pacific presence has been particularly vulnerable in this recession and a high exposure to business and premium traffic made us more susceptible to reductions in corporate travel spending.

  • While our absolute performance this quarter is clearly not yet where we want it to be, we are closing the gap in our relative performance.

  • Our traditional areas of strength are beginning to recover.

  • Business and premium traffic are coming off the lows we saw earlier this year, and we are seeing gradual improvements in our corporate portfolio performance.

  • In the Pacific, premium cabin bookings were down 21% year-over-year in September, off prior declines of nearly 50% earlier in the year.

  • While the Atlantic saw similar improvement from lows down 34% in April, to about 14% in September, corporate revenues have begun to pick up as well.

  • Now down about 25% versus over 40% earlier in the year.

  • While demand improvement is an encouraging sign it will clearly take yield improvement particularly in the premium cabins to drive a real turn around in revenue.

  • On the cargo side, we saw a welcome positive trend in September with some recovery in freight volumes and improved freight pricing primarily in key Pacific markets, cargo loads from Europe and some US markets have also begun to tighten up.

  • That's helping us with fourth quarter pricing power.

  • While it is still too early to tell if the strength is associated with the inventory rebuild or a true return of cargo demand driven by an improving economy we are cautiously encouraged by what we see.

  • Third quarter year-over-year revenue results saw modest improvements from the second quarter.

  • Our consolidated passenger unit revenue declined by 14.7% driven by a load factor increase of 2.5 points, offset by a yield decline of 17.1%.

  • Our domestic entity continues to produce better year over year unit revenue performance compared to international.

  • This is supported by more aggressive industry capacity cuts in the domestic market.

  • Consolidated domestic PRASM for the quarter was down 11.8% year-over-year on a 13.7% drop in yields.

  • An improvement of about 1 point versus the first quarter, second quarter excuse me.

  • Next week we will complete an important milestone in our domestic capacity reduction plan as we retire the last 737 from United's fleet: a fleet type that we have operated for nearly 32 years.

  • Internationally our unit revenue decline was 5 points better than the second quarter, as load factors were up 3.5 points from a year ago.

  • PRASM was down 20% for the quarter as continued industry overcapacity and reduced premium cabin traffic weighed on results.

  • Our Atlantic entity is out performing the industry and we are beginning to see improvements in China though the rest of Asia remains challenging.

  • We are not however just sitting on the sidelines waiting for a recovery.

  • We are actively taking steps to improve our revenue performance.

  • Maintaining capacity discipline, completing the announced aircraft retirements, and executing our additional post the Labor Day international reduction optimizing our network, maintaining its breadth and redeploying assets where necessary.

  • Shrinking our cabins by almost 20% as we upgrade our international first and business class cabins with fully lie flat seats resulting in the market leading among US carriers.

  • We are driving growth in ancillary revenue streams, we lead the revenue, the industry in this area, generating about $13 per passenger compared to about $10 on average for the industry.

  • As Glenn said, we have been agressive and creative in this area and we are working to maximize our opportunity to deliver our customers the right product at the right price and at the right time.

  • Our new unbundled premium offerings delivering value at multiple touch points throughout the travel experience are another example of our innovation in this space.

  • We have also announced significant new steps to enhance our mileage plus program improving the value proposition for the most loyal customers.

  • Beginning this quarter mileage plus members may redeem their miles for hotel stays worldwide and car rentals in the US and Canada.

  • We are the only airline to offer this redemption option which not only improves our competitive position amongst airline loyalty programs but also raises the bar against hotel and other nonairline programs.

  • In addition, starting in the second quarter of 2010, we will begin offering all mileage plus members with elite status automatic unlimited domestic upgrades.

  • We made the commitment to run an on time airline and we have delivered this year with a very significant improvement in our performance.

  • In 2008 we were fourth among the network carriers and this year we are essentially in a dead heat with US Airways for the number one spot.

  • It is a credit to our team for making this happen.

  • And I want to thank all of our employees for their great work getting our customers where they need to go on time and with excellent service along the way.

  • Running an on time airline really benefits our customers and sets our employees up for success.

  • While rewarding them for their performance through our ontime incentive program.

  • While we still have much more work to do improvements in areas such as on-time performance, cabin workability and cleanliness, employee courtesy and helpfulness are resulting in improved customer satisfaction scores across the Board.

  • Importantly, we are making these improvements while delivering industry-leading unit costs control.

  • We have established a performance culture around accountability and cost discipline.

  • We are changing the way we do things from extending business planning process to employee enhanced performance management systems.

  • Importantly, while also bringing on board the right leadership talent to achieve these objectives.

  • We are making tough choices, cutting our distribution costs which are now industry leading, reducing our salary and management headcount which is down by almost 25%, from late 2007 levels.

  • This helped to improve overall employee productivity by over 3% this quarter.

  • We are partnering with suppliers to improve efficiency and effectiveness while driving out savings in our maintenance organization through improved supply chain management.

  • Just a few examples of a very broad and sustainable cost management program.

  • We are also working collaboratively with a number of our Unions to seek opportunities to meet the Company's objectives as well as our employees.

  • By competing work and keeping it in house when the economics are fully competitive.

  • For example, this quarter we successfully worked with our IAM leadership to develop a competitive solution to retain in house the ground handling work we do at O'Hare for our United Express flights.

  • The result met the Company's financial and operational objectives and importantly secured more than 700 jobs for our employees.

  • In another example, our maintenance team working cooperatively with the teamsters was able to bring the international cabin reconfiguration work on 46 777 aircraft in house after winning a head to head competition with outside providers.

  • This work in the maintenance area comes on the heels of winning the reconfiguration of 56 Airbus narrow bodies from our prior Ted configuration to a domestic two cabin configuration.

  • Work with the team is finishing ahead of schedule and below cost estimates.

  • Going forward, we are continuing to look for ways to partner with our labor groups, with the goal of achieving mutually beneficial agreements.

  • United's team has made solid progress across the Company, identifying and importantly realizing the work that will lead to improved performance.

  • We have made excellent progress across our agenda and we are building on this momentum as we set very tough goals for 2010 and beyond.

  • We have a long way to go to achieve our full potential.

  • But we have the right plan and the right people to get the job done.

  • Now, back to you, Kathy.

  • Kathryn Mikellis - SVP, CFO

  • Thanks, John.

  • Moving now to guidance for the fourth quarter we expect mainline capacity to be down 6 to 7% year-over-year and consolidated capacity to be down 3.2 to 4.2%.

  • For the full year we expect mainline capacity to be down 9.7 to 10.2% year-over-year, and consolidated capacity to be down 7.5 to 8%.

  • This reflects the post Labor Day reduction in international flying, that we announced to you on the second quarter.

  • We have long been an advocate for capacity discipline and our 2010 capacity outlook is reflective of that stance.

  • We expect main line capacity to be be down 0.5 to 1.5% year-over-year and consolidated capacity to be down 0.5 to up 1.5% year-over-year for 2010.

  • We have again lowered our full year 2009 outlook for main line unit costs excluding fuel and profit sharing.

  • We are now expecting main line unit costs to be approximately flat to down 0.5% against a main line capacity reduction of about 10%.

  • This represents a savings of more than $350 million for the full year guidance we provided at the beginning of the year and $50 million more than what we told you on our second quarter conference call as we close the third quarter about 2 percentage points better than what we guided at the time of our second quarter conference call.

  • Full year 2009 consolidated unit costs excluding fuel and profit sharing is expected to be flat to up 0.5% year-over-year.

  • For the fourth quarter we expect both main line and consolidated unit costs excluding fuel and profit sharing to be up 1 to 2% year-over-year.

  • Based on October 14, forward closing prices main line jet fuel prices are expected to be $2.06 per gallon for the quarter.

  • This price includes taxes as well as the impact of hedges that settle in the quarter and are recorded in fuel expense.

  • For the fourth quarter, we are about 55% hedged at an average crude price of $75 a barrel.

  • Excluding the legacy positions that we put in place in 2008, we are about 43% hedged at a little over $63 a barrel, using a combination of calls and swaps.

  • For 2010, we are about 16% hedged at an average crude price of $74 a barrel.

  • Including the first quarter of 2010 where we have about 43% coverage at $74 a barrel.

  • As of yesterday's close, our hedge book is in the money by about $145 million.

  • You can find additional information about our hedge positions, our detailed fuel price outlook and other guidance in the investor update that we issued this morning.

  • We remain on plan to spend about $300 million in nonaircraft capital in 2009 with about $70 million remaining to be spent in the fourth quarter.

  • We continue to enjoy relatively modest debt obligations with only about $215 million in debt and net capital lease payments due in the fourth quarter.

  • As I mentioned earlier we have already made about $125 million of payments in the first half of October.

  • We have no large bullet payments coming due and our recent double ETC refinancing lowered our debt amortization by about $215 million in 2010, and $100 million in 2011.

  • As a result, our full year 2010 debt and net capital lease obligations now stand at about $900 million relatively low compared to our peers.

  • While the environment continues to be a very challenging one we are beginning to see signs of improvement and the work that we've done puts us in a good position to outperform our peers and improve our relative margin as we move into the recovery.

  • With that, we're ready to open up the call for questions.

  • Operator

  • Thank you.

  • We will first take questions from the analyst communities and then we will take questions from the media.

  • (Operator Instructions).

  • Please hold for a moment while we assemble our queue.

  • We will take our first question from Mike Linenberg with Bank of America.

  • Mike Linenberg - Analyst

  • Good morning or good afternoon, everybody.

  • Kathryn Mikellis - SVP, CFO

  • Hi, Mike.

  • Mike Linenberg - Analyst

  • Just two questions and this is Glenn or John can answer.

  • With Continental coming online into Star, can you give us a sense of the opportunity there, maybe the revenue opportunity and how quickly will it take to ramp up, to really get into that full JV?

  • Can we be there in six months, twelve months?

  • Any color on that would be great.

  • Glenn Tilton - Chairman, President, CEO

  • We are looking at that to be about $100 million opportunity.

  • I think most of which will be able to realize next year, but the steady state will be 2011.

  • Mike Linenberg - Analyst

  • Okay.

  • And then my second question, and this may be to Kathy, the SkyWest financing, it definitely looks, to be somewhat innovative.

  • It looked like that part of the deal included the addition of 13 RJs operated by ASA.

  • Now, is that incremental, is that, is that growth to your system, or is that replacement of another carrier.

  • John Tague - EVP, COO

  • Hey John here Mike.

  • We certain slay no plans for that to be growth.

  • We haven't decided exactly where we are going to offset that in the system.

  • We have a number of RFPs out, we're achieving very attractive bids, so we're confident the replacement economics will be quite favorable but we do not plan on those aircraft being expansion aircraft and consequently they're not in our guidance as expansion aircraft.

  • Mike Linenberg - Analyst

  • Great.

  • Glenn Tilton - Chairman, President, CEO

  • Mike.

  • Mike Linenberg - Analyst

  • Thanks.

  • Glenn Tilton - Chairman, President, CEO

  • Sure, no worries.

  • I just want to follow up a little bit on the Continental question, I wanted John to say the specific answer to the question you posed, relative to incremental revenue.

  • And I think the thing you are going to hear us talk about in New York City the beginning of next week is the multiplier effect we think the relationship is going to provide the Company as we take full advantage of A+ plus.

  • As I said in my remarks, we actually talk to partners about the possibility of P+ plus, and use it to secure open skies with Japan.

  • But I think as we look at Continental coming into Star the way that we look at it is as very significant option value.

  • Mike Linenberg - Analyst

  • Very good.

  • Thank you, Glenn.

  • Glenn Tilton - Chairman, President, CEO

  • You bet.

  • Kathryn Mikellis - SVP, CFO

  • Thanks, Mike.

  • Glenn Tilton - Chairman, President, CEO

  • Next.

  • Operator

  • We will move next to Gary Chase with Barclays Capital.

  • Gary Chase - Analyst

  • Good afternoon, everybody.

  • Glenn Tilton - Chairman, President, CEO

  • Good afternoon.

  • Gary Chase - Analyst

  • Just a couple here.

  • Kathryn, wondered if you can just comment on the sustainability of what we have seen on the cost side looks relatively broad, and across a lot of different line items.

  • What is the sustainability of that looking forward?

  • Should we assume that this is all run rate savings, or are there things that you have sort of been able to get out of the equation in a tough year like this that you are going to have to offset next year with some incremental expense, or at some point down the road?

  • Kathryn Mikellis - SVP, CFO

  • So I think the only thing that I would point to that impacts us, and impacts everyone is obviously on the cost side, with respect to revenue related costs, everyone has gotten some kind of wind on their back as a result of that.

  • We are obviously very hopeful and optimistic and would be happy to phase kind of the wind coming forward on that as we head into 2010.

  • But I think your question is actually in part my answer.

  • As you look at our income statement, but for a few line items like rents and landing fees which candidly restruggle with and the rest of the industry struggles with.

  • Those tend to increase both at a greater rate than inflation and even when we reduced capacity it just puts kind of more pressure on rates and charges at airports.

  • If you look across the Board on the income statement I think you see very good cost performance across the board, and while we can point to certain line items as performing extraordinarily well, salaries would be one of those line items, purchase services would be one of those line items.

  • John mentioned in his talking points distribution being another one of those line items what we have really seen has been very good control across the Board, and as John mentioned we've started our planning processes much earlier, we really based on improved accountability, starting this progress much earlier, constantly setting ourselves up for it.

  • Here is our plan and now we are working on our plan to beat the plan.

  • We are just nuts and bolts going at this everyday and I think are clearly delivering a very good result.

  • Gary Chase - Analyst

  • Okay.

  • You had given and I apologize if I missed this.

  • You said the capacity outlook for the main line in 2010 was going to be down 50 basis points to down 150.

  • Was that accurate?

  • Kathryn Mikellis - SVP, CFO

  • Yes, that was accurate.

  • Gary Chase - Analyst

  • Obviously the consolidated guidance is basically for flat.

  • Two questions relating to that.

  • First, John, I think it was in fact last quarters conference call you said -- I think you noted the likelihood that more capacity was going to need to come out of the industry to deal with the issue.

  • So, I am assuming that you believe the revenue environment has improved enough where that is no longer the case based on that guidance and second and perhaps I would argue much more importantly, with all the volatility of fuel, understanding that your hedge book is only a small portion of your exposure for next year, and even if you could do all of next year would only be next year.

  • And in an environment where fuel is moving with such huge volatility, how are you thinking about how you're going to manage the business because obviously capacity is something you are going to have to evaluate every month, I mean how should we think about what you are going to do to deal with these huge dollar changes in energy everyday?

  • Glenn Tilton - Chairman, President, CEO

  • Let me start with the capacity side.

  • So we obviously had significant reductions last year, and we are increasing those lists this year.

  • We are at the top end of industry capacity reductions.

  • I think we have demonstrated quarter-over-quarter that if we need to iterate from that and remove more capacity we will.

  • Frankly, I have a greater degree of confidence around our ability to do that because of the success we've had in getting out the costs.

  • We will move on that aggressively should we need to, but we are beginning to see certainly moderate improvements.

  • The next big signal we are really looking for is how to incorporate travel budgets and get reset for 2010 and hopefully there's more resource and capacity being diverted back to this expense item.

  • If there isn't and we don't see a continued steep improvement as we move through the next quarter or two we are clearly going to have to reassess.

  • I'll leave the fuel risk management--.

  • Gary Chase - Analyst

  • Is there something about the way you run the business that demands more flexibility in this kind of environment, that's really what I am after?

  • And is that possible?

  • Or--?

  • Glenn Tilton - Chairman, President, CEO

  • Well, I think it has demanded more flexibility in the environment for gosh I don't know how long.

  • Be it SARS or the fuel shock of last year and I think we have demonstrated our ability to capitalize on that, and frankly be better than most, be it the efforts Kathy has underway around raising liquidity, our nonfuel costs management, our capacity discipline, all of these I think are improving indications of our willingness and ability to be flexible against the face of almost any challenge over the last several years and all I can indicate to you if we face another challenge and I am sure we will, we will be equally flexible and position the Company for success.

  • Kathryn Mikellis - SVP, CFO

  • And the other thing that I would add to that, Gary is I, I concur with your assessment that the industry has got to be more flexible as a result of being exposed to a higher degree of volatility in your specific case referencing fuel and we have clearly seen a fair amount of volatility just over the course of the cycle.

  • That clearly suggests that as we think about fleet plans we have got to maintain that flexibility.

  • As we think about collected bargaining agreements like we have today, we need the flexibility to make the changes in the business to respond to the business environment which is going to continue to change.

  • As we look at our regional fleet, as we look at our main line fleet, clearly we have over time aircraft financings and leases where planes will come off of those and we think about those and make decisions about them incrementally.

  • I tell you about a month ago we made a decision no to the release one of our 757s, and we looked at kind of the costs associated with that and relative kind of market conditions and what we wanted to do and we decided to turn that aircraft back to the lessor.

  • We are constantly monitoring that.

  • As we move forward on incremental financing like the recent double ETC refinancing that we did, even within those transactions we are looking to actually build ourselves the flexibility that we need over time which is, I think exactly spot on.

  • Glenn Tilton - Chairman, President, CEO

  • I think Gary the only thing I would add is I would go back to the point we made relative to partnership structures.

  • We think about our partnership structures with our express carriers.

  • We think about partnerships structures that contractual flexibilities that Kathryn referenced relative to our CDA but I think that the alliance structures are being put in place, with the premise that if there has to be a response on a global basis beyond that which currently exists then the option exists for us.

  • We haven't yet seen them mature but I think the opportunity may well be there.

  • But both, in both components of the income statement.

  • Gary Chase - Analyst

  • Okay, guys, thank you.

  • Kathryn Mikellis - SVP, CFO

  • Thank you, Gary.

  • Operator

  • We will take our next question from Kevin Crissey with UBS.

  • Kevin Crissey - Analyst

  • Good afternoon.

  • Kathryn Mikellis - SVP, CFO

  • Hi, Kevin.

  • Kevin Crissey - Analyst

  • I struggle with and I am sure a lot of people in the industry are struggling with kind of defining improvement in revenue, and you guys have been made it pretty clear you are seeing some improvement and it sounds like for there to be a step change hopefully next year with corporate budgets but when you are looking at improvement and just being down 25% versus being down 40% earlier in the year doesn't necessarily mean improvement because the comparison to the year before would be impacted.

  • Can you talk about how you think about that, are you looking at it versus sequential trends versus a normal period and maybe a 2007 or a historical sequential trend, how do you look at to know that you are actually seeing improvement and not just that last year it got worse?

  • Glenn Tilton - Chairman, President, CEO

  • I think that's a much more valid point is when we enter the fourth quarter.

  • It really wasn't evident for us significantly in the third quarter of last year.

  • But clearly, bad comps are going to make these numbers shrink all on their own as we move forward.

  • We are not happy with the absolutes as I mentioned to you earlier, there's no opportunity here for a full revenue recovery until we get premium cabin pricing back.

  • And it is not clear as to how long that will take.

  • But we are seeing progress which is quite encouraging from where we were just really three, four, five months ago.

  • So I think the indication that this has bottomed and not only are we getting progress since the spring we are sort of seeing it sequentially month after month.

  • So there's not a lot of volatility all of the inputs are improving month after month and that appears to continue to be the case in October.

  • But I take your point.

  • We have got a long ways to go even to be moderately comfortable let alone pleased.

  • Kathryn Mikellis - SVP, CFO

  • And the one thing I would add to that though, clearly we also look at sequential improvement we look at year over year numbers, kind of everything that you would expect.

  • When you look at the sequential numbers second quarter to third quarter, the improvement that we saw was, you know clearly greater than what we seen in past years.

  • That is another indicator for us that we are beyond the bottom and seeing trends improve.

  • Kevin Crissey - Analyst

  • Would that be more domestic or international or just a combination of both?

  • Kathryn Mikellis - SVP, CFO

  • A combination of both.

  • Kevin Crissey - Analyst

  • Can you talk about what FX impact has been on your financials on maybe on your (inaudible)?

  • Glenn Tilton - Chairman, President, CEO

  • FX was -- I'm sorry, 1.6% in terms of international unit revenue.

  • Kevin Crissey - Analyst

  • A good guide to 1.6%?

  • Glenn Tilton - Chairman, President, CEO

  • No, it was a bad guide year-over-year.

  • Kevin Crissey - Analyst

  • Okay.

  • And last, kind of more, I guess more of a strategic type of question, you have highlighted you have a network designed to be, have more business traffic kind of by design.

  • Why structurally does that make sense when it seems that corporations are getting better at pulling down, pulling down their spend and effectively maybe that we are getting more cyclical rather than less cyclical on the business side of things?

  • John Tague - EVP, COO

  • I think every time we go through one of these experiences we are convinced that there's going to be a long-term volume reduction of corporate travel.

  • That often has proven not to be the case.

  • I think corporations are clearly focused on this line item.

  • But while the premium to leisure traffic is compressing, it still is very, very significant.

  • Now we continue to broaden the network, I think we're broadening our appeal on the leisure market.

  • I think that as we move forward and get greater progress around ancillary revenues we could very well see an environment where the top end of the leisure passenger market who's choosing a lot of optional sales could surpass the value of the low end of the business market.

  • That's going to cause us to reassess our decision support similars and revenue management and possibly reassess some network things on the margin.

  • But we really think that, clearly we are very well positioned and I think that internationally, importantly, this is a sustainable value proposition for corporations.

  • You don't do business in China very effectively over the telephone.

  • Kevin Crissey - Analyst

  • Thank you very much.

  • Operator

  • We will take our next question from Hunter Keay with Stifel Nicolaus.

  • Hunter Keay - Analyst

  • Good afternoon.

  • John, can you give a little more color, just to follow up on Kevin's question, how is FX a bad guy in the quarter given how weak the US dollar is?

  • What are some of the moving parts there?

  • John Tague - EVP, COO

  • Let me get you the component pieces.

  • The -- pound we had off 22, euro 12, yen plus 10, Australian dollar minus 18 and the real and the peso minus 25 it was a neutral impact in the Pacific quite negative in Latin, moderately negative in the Atlantic.

  • Kathryn Mikellis - SVP, CFO

  • Looking at that on a, basically on a year-over-year basis.

  • Hunter Keay - Analyst

  • Fair enough.

  • I was wondering if we can maybe -- if you guys can provide a little more specifics on the exposure to China.

  • A lot of people tend to think about you guys as being obviously heavy Pacific focused and Chinese focused and playing it that way, playing obviously the emerging market strategy and whatnot.

  • How specifically do you serve China what are the industries in China?

  • What are the demographics in China you are most exposed to?

  • Is it the growing middle class play, is it a play on construction or agriculture, how specific when we think about the Chinese market to US back and forth.

  • How specific does that impact you guys?

  • John Tague - EVP, COO

  • We are very, very largely US source of sale.

  • So when people talk about the dynamic of more disposable income in China, and those kinds of things it is interesting and it is encouraging but you really couldn't see that move our numbers.

  • We are sourced to sale US.

  • Glenn Tilton - Chairman, President, CEO

  • I think that one thing that we had this call with our management team this morning and it goes longer and it actually is a bit more detailed.

  • One of the things that we discussed this morning is how important to us Caterpillar's announcement was this morning.

  • So for you guys, I would think you would be triangulating us back to CAT because in many ways as they go and they had a blow out quarter, we go.

  • As John just said a moment ago.

  • And I think we are really a mirror of their confidence, when they start telling their analysts on their call that they see in the coming quarters, a economic recovery and they did this morning, that obviously has implications for us.

  • At the same time, as I said on the call that we had relative to the equity issuance.

  • I have just returned from China and Visa issuance is up in China, a good part of the back part of the cabin is now, frankly, Chinese travel to the United States of that Visa issuance a good bit of it is business and a good bit of it is loan student Visas for long stage in the US.

  • Hunter Keay - Analyst

  • Great.

  • I think CAT did talk about 9% GDP growth in China next year, which was obviously a good thing too.

  • I appreciate that color, Glenn.

  • Thanks, guys.

  • Operator

  • Our next question comes from Helane Becker with Jesup and Lamont.

  • Helane Becker - Analyst

  • Thanks very much, operator.

  • Hi everybody.

  • This is my question, when I think about the debt, the capital rate for this year, what should I think about the weighted average interest rate of the debt now at this point in time?

  • Kathryn Mikellis - SVP, CFO

  • If you look at the debt we raised most recently, Helane, relative to what we have on our balance sheet it pales in comparison.

  • If you go back to say what was our average debt cost previously, largely driven by I would say kind of legacy double ETC transactions those rates are relatively low compared to what we are seeing today probably closer to the 7% range.

  • So that gives you kind of a little bit of guidance overall, if you look out into 2010, and just talk about what we are going to see below the line, and you look at the recent transactions that we've done it is probably going to put interest expense kind of all else held equal up about $25 million or so.

  • Helane Becker - Analyst

  • Up $25 million over what it otherwise would have been?

  • Kathryn Mikellis - SVP, CFO

  • Up $25 million year-over-year.

  • Helane Becker - Analyst

  • Okay.

  • And then on the fare increases, that have been announced recently, can you say if they're holding or not?

  • Glenn Tilton - Chairman, President, CEO

  • Well, as you know, that's always a mixed bag.

  • I would say in general, the last six to eight weeks we have seen more positive momentum and transaction and obviously that needs to continue because as we have talked about, we really need to see not only an improvement in demand.

  • We need to see an improvement in the quality of demand to work our way out of this.

  • Helane Becker - Analyst

  • Okay.

  • Thanks very much for your help.

  • Glenn Tilton - Chairman, President, CEO

  • Thanks, Helane.

  • Operator

  • Our next question comes from Jamie Baker with JPMorgan.

  • Jamie Baker - Analyst

  • Hey, everybody.

  • John, a question on demand recovery, you gave us plenty of average September data, I am wondering however if you can compare the final week to the first week of the month, obviously I am looking for a little more clarity on how demand might have recovered throughout the month, and whether it is actual recovery or simply that late Labor Day return that might have deferred the natural September demand that was going to occur anyway and condensed it into a shorter period of time?

  • John Tague - EVP, COO

  • I think that we did see improvement throughout the month and that has continued into October.

  • Although I think the steepness of the improvement was clearly in the third quarter.

  • We are continuing to see month over month improvements.

  • As I mentioned, I fully expect that look we are headed into the holidays, the budgets haven't been reset yet for 2010.

  • I think we are going to need some of that structural change to get the next real cost and unit revenue performance.

  • Jamie Baker - Analyst

  • Sure.

  • Understood.

  • And second question for Glenn or Kathryn, following up somewhere where you seem to be going before on capacity, doesn't committing capital for new aircraft actually decrease your flexibility to adapt to higher fuel, I mean it seems that one reason you could be so flexible this past year was that you had a efficient number of classics, that were fairly easily punted, and I think this is one reason Continental might have been among the sort of capacity cut laggards given they had a newer, more expensive fleet, I am just wondering if that flexibility you spoke to is standing somewhere in contrast to what you hope to do on the aircraft order front?

  • Kathryn Mikellis - SVP, CFO

  • Not at all.

  • Clearly we are moving forward, looking for our long-term replacement decision associated with our fleet, as you know, we are the only folks who have kept their powder dry in that regard, we think this is a great time to be in the market and at particularly opportunistic time to be in the market.

  • That's all about long-term fleet replacement and as we go through that exercise, clearly we are going to be mindful of what does that mean, how many aircraft are we talking about, in order to continue to maintain the flexibility that we know we need over a long period of time to be responsive to what we know will be changing market conditions over a long period of time.

  • Glenn Tilton - Chairman, President, CEO

  • I would also reiterate the RJ capacity flexibility we talked about earlier and I think a little bit more than most Jamie we have pushed these aircraft out of the fleet entirely and we've permanently retired them.

  • Our scheduled aircraft utilization levels are actually quite high right now and that gives us the ability to down flex utilization as well from a flexibility perspective.

  • Jamie Baker - Analyst

  • Okay.

  • All good points.

  • Thank you very much.

  • Kathryn Mikellis - SVP, CFO

  • All right.

  • Thanks, Jamie.

  • Glenn Tilton - Chairman, President, CEO

  • Thank you.

  • Operator

  • We will move to Bill Greene with Morgan Stanley.

  • Bill Greene - Analyst

  • Can I just ask a clarification on the exchange rate, as you look to the fourth quarter if we straight lined where exchange rates are, I think this should flip to a positive for you in the fourth quarter.

  • How significant could that be?

  • Glenn Tilton - Chairman, President, CEO

  • We haven't estimated it but we agree with your general indication but we don't have an estimate right now.

  • Bill Greene - Analyst

  • How big of a negative was it last year, do you remember?

  • Kathryn Mikellis - SVP, CFO

  • I don't recall off the top of my head.

  • I will have John follow up with you and give you that detail.

  • Bill Greene - Analyst

  • On the second question then, if you look in places like Denver, where you compete with southwest, have you noticed any share shift related to the bag fees?

  • Can you see any difference in your performance there versus other markets where you compete less head to head with them?

  • John Tague - EVP, COO

  • We can't anywhere.

  • We are very very happy with the revenue stream we're getting off of that, and I think this is the same old same old argument for the last 15 years in this business, are you going to try and win on share or are you going to try and do something that improves total revenue production in the industry.

  • We are not remotely regretful of our competitive positioning or our decision.

  • I think that having been said and acknowledged, one of the things that's clearly playing out here is two companies and two competitors in occasionally the same markets that are offering a different value prop.

  • I think you're actually going to see that that's even going to be extended.

  • That's probably good for both value propositions.

  • Glenn Tilton - Chairman, President, CEO

  • One of my colleagues just pointed out to me for the 12 months ending June United's load factor in Denver was 85% and Southwest with 69.

  • Operator

  • The next question comes from Dan McKenzie.

  • with Next Generation Equity Research.

  • Dan McKenzie - Analyst

  • Good afternoon, guys.

  • Kathryn Mikellis - SVP, CFO

  • Good afternoon.

  • How are you.

  • Glenn Tilton - Chairman, President, CEO

  • Good afternoon.

  • Dan McKenzie - Analyst

  • Kathryn, I know it is really early but investors, with the one-year time frame are already asking me what United's strategy is going to be for handling the convertible debt puttable to the Company in 2011, I am just wondering if you have any early thoughts on that?

  • Kathryn Mikellis - SVP, CFO

  • So Dan, I think the good news is you referenced one year time frame and they don't actually become relevant within that one year time frame.

  • We look across our capital structure as we are trying to improve our balance sheet give ourselves the flexibility we need, the liquidity we need, if you look out until 2011 we have two convertible issuances, one is relatively small and that is the one that comes up as the put call provisions relatively early on in the year the large one doesn't actually come up until later on in 2011.

  • We will continue to look at that between now and then, and we have got tools in our tool box, that we certainly can use to try and deal with those before 2011, and it is absolutely on our radar screen, but first and foremost, insuring that we have got the liquidity that we need to manage the business, which we have clearly made lots and lots of progress on was first and foremost in our list of priorities.

  • Dan McKenzie - Analyst

  • Understood.

  • The second question, Glenn, you have talked in the past about exploring all of United's strategic options and one option I am sure ranks pardon me, at the bottom but nonetheless begs the question since it is a strategic option, is not a carve up of the Company but exploring whether the parts are worth more than the whole and in particular, if profits elude domestic flying, could value be found by selling domestic or I guess even parts of domestic and keeping international, with an alliance with a stronger domestic partner?

  • Glenn Tilton - Chairman, President, CEO

  • We continue taking your position, your question with respect to seeking the right partners.

  • We're constantly pressing on the nature of our relationships with our various partners and as the competitive landscape changes, as it recently did in Denver, we explore our flexibilities that Kathryn referenced a little while ago with respect to our relationship with existing partners that might morph into something else.

  • So we are constantly looking at that as the landscape evolved.

  • So we can make certain as we look into the three year plans and the five year plans, we build on strength to strength.

  • Whatever role we play within this network of partnerships and we'll always do that?

  • Dan McKenzie - Analyst

  • Thanks very much.

  • Kathryn Mikellis - SVP, CFO

  • Thank you, Dan.

  • Operator

  • Our next question comes from Michael Derchin with FTN Equity Capital.

  • Michael Derchin - Analyst

  • Hi, everyone.

  • Your capacity has been shrinking at a greater rate domestically than international, looking at your 2010 plans, is that going to change, is that -- is it going to be a more balanced change, or a continuation of what's been going on the last year or so?

  • John Tague - EVP, COO

  • One sec and I will get you the component pieces of that for 2010.

  • Kathryn Mikellis - SVP, CFO

  • One pieces of that as we look forward we had mentioned that we are in the process of reconfiguring our entire international fleet.

  • As we put in our new live flat bed new entertainment system, that reconfiguration I think John had actually mentioned in his prepared remarks shrinks our upper class cabin but overall we actually add about 3% to total seats on the aircraft.

  • So that is one component as we look year-over-year, that probably adds about a little less than 0.5 point to ASMs on its own, obviously no change in count.

  • Michael Derchin - Analyst

  • Thanks, guys.

  • John Tague - EVP, COO

  • The main line domestic number is down 6.4 year-over-year.

  • The main line domestic number is down 5.1 year-over-year, the main line international is up 2.3 and then you have the consolidated and what Kathy gave you.

  • Operator

  • We will take our next question from Bob McAdoo with Avondale Partners.

  • Bob McAdoo - Analyst

  • Most everything has been asked.

  • Just one quick question, Kathy, early in your comments you made a comment about the RASM being down 14% and you said something about two-thirds of the change that you have seen in last month or so is related to a tax adjustment?

  • Could you go--?

  • Kathryn Mikellis - SVP, CFO

  • I will just sort of clarify.

  • I had made two comments, one was that relative to the third quarter, we, the decline number was actually better by 2.5 points.

  • The reference that you are referring to is as we had beat guidance by about 1.6 percentage points.

  • Of that, less than tow-thirds of that beat was a result of tax reserves in the quarter.

  • Bob McAdoo - Analyst

  • Okay.

  • That's all I had.

  • Kathryn Mikellis - SVP, CFO

  • Thanks very much.

  • Operator

  • We will take our next question from Basili Alukos with Morningstar.

  • Basili Alukos - Analyst

  • Hi, how are you?

  • Glenn Tilton - Chairman, President, CEO

  • Good afternoon.

  • Basili Alukos - Analyst

  • Thank you for taking my call.

  • A question about pricing, mostly talking about the business travelers.

  • In the call I believe John mentioned there has been a better trend amongst business travelers and even Kathy said this this morning on CNBC I am just wondering if there has been a change in preference from those business travelers, they're now becoming more cost conscious.

  • Is that something that is playing out and that you -- I mean, ultimately you can go back and look historically like someone said in all the other cycle, everyone starts to cut costs and people forget about it when times are good.

  • Is it your opinion or do you think you have seen a permanent destruction in those premium passenger business travelers?

  • John Tague - EVP, COO

  • I don't think we have any evidence to suggest it is permanent.

  • We are seeing some buy down from premium cabins into economy cabins, reconfiguration is really designed to get at that issue, and move our premium cabins over time even the best of cabins to be more pure revenue cabins as opposed to loyalty cabins, but look I think it would be impossible for us to call what the final state outcome is of demand recovery.

  • But we don't see any reason as to why we won't get there.

  • It will be a matter of time.

  • Kathryn Mikellis - SVP, CFO

  • And the other thing I would just add to that, is first you've got to see traffic recovery and ultimately traffic recovery is what puts the industry in a position to get yields to recover and I think what we are telling you is we are clearly seeing signs of traffic recovery.

  • We are not yet seeing what we would like to see in terms of yield but it puts us as an industry certainly in a better position.

  • John Tague - EVP, COO

  • I will continue to re-emphasize as has been a topic on this call without the level of capacity discipline that we have led and most people in the industry have participated in, this would be a very, very dire time.

  • So we are going to have to keep our lid on capacity going forward, and we certainly maintain our commitment to be extremely responsible in that area.

  • And that's going to be essential.

  • Glenn Tilton - Chairman, President, CEO

  • I think having spent more years, many more years on the other side of this equation than on this side of the equation, what happens is when the economy recovers and comes out of a trough where travel managers have made the decisions that they have made, and controllers have made the decisions they have made in our corporate accounts, we get to the intersection of supply and demand as both Kathryn and John have just said, and what they're looking for is good value for money.

  • If the price point for a front cabin asset or a valuable manager on his or her way to Japan or to China, is good value for money so we are going to see that take up by our corporate customers.

  • Basili Alukos - Analyst

  • Right.

  • I would agree with the comments, echo as far as capacity constraints, restraint amongst the whole industry.

  • Any other time I would imagine without discipline there may have been numerous bankruptcies.

  • I am just wondering bringing that over to international flights and I think it was mentioned on the call the decision for United to go more towards and bringing the more premium offerings to the international flights, if it is not just opening up the same problem that's happening domestically now you are in the recession and United is being more affected by the premium passenger downturn especially as Open Skies agreements start to proliferate internationally.

  • John Tague - EVP, COO

  • We are actually increasing our mix of economy cabin seats internationally.

  • But while producing a market leading product and we think that that's the right outcome.

  • I will also add that each system has it own opportunities and while we have aggressively cut international capacity, we have also enjoyed tremendous success, for example into our recent entries into the Middle East.

  • So obviously absolute capacity numbers are important but distribution is equally as important.

  • Kathryn Mikellis - SVP, CFO

  • Overall if you look year-on-year, in terms of the number of destinations that we serve in our system they're roughly equivalent which is clearly reflective of us being mindful of maintaining a very, very strong network that we have even as we take those capacity reductions.

  • Basili Alukos - Analyst

  • Great.

  • Thanks for taking my questions.

  • Operator

  • Thank you, ladies and gentlemen.

  • This concludes our analysts and investor portion of our call today.

  • Before we take questions from the media I would like to turn the call back to Mr.

  • Tipton for closing comments.

  • Glenn Tilton - Chairman, President, CEO

  • Thanks very much.

  • We've had a good thorough discussion, we appreciate the questions and we know the industry continues to confront challenges.

  • Having said that and acknowledging that, we want to return just for a moment before we turn the call over to questions from the media to what it is that we at United are focused on.

  • We've grown new ancillary revenue streams by offering more choice to our customers, we continue to both expand and improve our focus on our mileage plus loyalty program.

  • With significant enhancements that make the program more valuable, to mileage plus members.

  • We moved to the top tier in on time performance among our network carriers, we've improved customer satisfaction scores across the board, we're providing better products and better service to our customers than we have in many, many years.

  • We are doing so while we are delivering the industry's best unit cost control.

  • We are taking the right actions to successfully navigate the challenging environment that you and we have discussed on the call and we're trying to position this Company for long term success in the face of challenges that we don't yet see.

  • The improving economic environment is beginning to bring back the business traveler, as our CFO said on CNBC this morning.

  • United is in an excellent position to reap the benefits of high yield traffic returns when they do in fact materialize.

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

  • Thank you, sir.

  • We will now take calls from the media.

  • (Operator Instructions).

  • We will take your firings question from Suzanne Kerry with the Wall Street Journal.

  • Suzanne Kerry - Media

  • Good afternoon, everybody.

  • I just want to come back to I think it was John on the question of the Continental incremental revenue gain to United, I want to make absolutely sure I understood what you said.

  • Glenn Tilton - Chairman, President, CEO

  • We are estimating that to be about $100 million a year annualized, we'll probably be moderately below that for 2010..

  • Suzanne Kerry - Media

  • $100 million a year in revenue to United.

  • Glenn Tilton - Chairman, President, CEO

  • Correct.

  • Suzanne Kerry - Media

  • That would come into full bloom in 2011, and is that only from the at Atlantic + plus or is that also including the United Continental domestic code share?

  • Glenn Tilton - Chairman, President, CEO

  • It is both.

  • Suzanne Kerry - Media

  • Okay.

  • Because the domestic code share is going to start off slow next week?

  • Yes.

  • Not on a full organization basis but it will begin to start next week.

  • My second question is you all haven't said anything except very euphemistically about where you stand on the airplane order.

  • Is there any new news on how that is going?

  • Glenn Tilton - Chairman, President, CEO

  • We didn't really think that Kathryn was euphemistic at all.

  • We will give her another try.

  • Kathryn Mikellis - SVP, CFO

  • We are very close to wrapping this up and making a decision, we think we will have it completely buttoned down to the extent that decision is to put an order in before that end of the year in terms of dotting our I's and crossing our Ts but we are very close to a decision and as we we've talked before, both of these manufacturers offer very good products in terms of their potential fit into our long term fleet strategy.

  • It is really about the deal on the economics of the aircraft and that's what we are pressing on right now but we are confident that they're going to continue to be responsive in this competition and we look forward to bringing it to a close.

  • Suzanne Kerry - Media

  • Again, Kathy, just to make sure I understand, you are close to wrapping up before year end, whether you are going to walk away for now or you are going to make a decision to place an order?

  • Kathryn Mikellis - SVP, CFO

  • We will make an announcement and you are absolutely correct and that announcement would either be, we have decided the economics they put on the table are not compelling or we're making an order and here's what it is.

  • Suzanne Kerry - Media

  • Okay.

  • Thank you.

  • Operator

  • Our next question comes from [Josh Freed] with the Associated Press.

  • Josh Freed - Media

  • Hi there.

  • Looking at the $289 billion or $289 million number for the ancillary revenue for the quarter.

  • Glenn Tilton - Chairman, President, CEO

  • Really got Kathy going there for a second.

  • Josh Freed - Media

  • The billion would be a very exciting number, I'm sure.

  • Kathryn Mikellis - SVP, CFO

  • Ill take it any day.

  • Glenn Tilton - Chairman, President, CEO

  • Different analysts call.

  • Josh Freed - Media

  • Is that a, is that sort of roughly where you expect that number to sit for a while or do you expect it to get bigger, and if so, how?

  • Glenn Tilton - Chairman, President, CEO

  • We are going to continue to roll out obviously more added value options for our customers, and experiment not only with the bundling but also how we offer.

  • Candidly right now we need to do quite a bit of IT optimization, around getting the right offers to the right customers as opposed to retire those offerings to the same customers.

  • So we think we have an optimization revenue opportunity within the existing suite of products and we have a lot of products coming online in the pipeline as well.

  • Josh Freed - Media

  • Are you able to say anymore about what's coming online or an example or two of what we might see coming up?

  • Glenn Tilton - Chairman, President, CEO

  • No.

  • Josh Freed - Media

  • Okay.

  • The new offering with the, we can use miles to get to -- for hotels rooms and cars, does that feed into that $289 million or does that come in somewhere separate?

  • Glenn Tilton - Chairman, President, CEO

  • No.

  • It doesn't.

  • That's in the other revenue category.

  • Josh Freed - Media

  • Are those miles sort of sold the same way most frequent flier miles are or is that a somewhat unique arrangement?

  • How do those miles get sold and is it different than the usual way that you sell them?

  • Glenn Tilton - Chairman, President, CEO

  • We obviously -- we provide redemption opportunities for our customers being onboard our airplanes or in hotels and car rentals, and we in effect negotiate the exchange ratios for those.

  • And then offer the product up to the customer in the face value price.

  • Josh Freed - Media

  • All right.

  • Thank you.

  • Glenn Tilton - Chairman, President, CEO

  • You bet.

  • Operator

  • Our next question comes from [Dan Reed] with USA Today.

  • Glenn Tilton - Chairman, President, CEO

  • Hey Dan, how are you?

  • Dan Reed - Media

  • Doing good.

  • Hope you all are doing fine.

  • The negotiations stop and start negotiations underway in Tokyo between JAL and both American and Delta present, if a deal grows there, they present a, perhaps a somewhat stronger or a much stronger competitor for United than the Trans Pacific markets do you guys have a view on those negotiations and on the general notion of antitrust alliances -- antitrust endorsed alliances across the Pacific?

  • Glenn Tilton - Chairman, President, CEO

  • Dan, taking the back end of your question, we are enthusiastically supportive of antitrust immunized alliance as you might suspect.

  • And as I said in my remarks, in Open Skies treaty with Japan would put us in a position to advance the possibility of antitrust immunized venture with (inaudible) Airways.

  • So we are really focused on our own partner and own alliance opportunities structure that we have across the Atlantic.

  • So that is United's book of business.

  • The only thing that I would offer you to think about with respect to the apparent competition or the is we are very mindful of how difficult it is for an airline to exit alliances and join another and it has been a real -- if you well know, a real significant work for Continental to do so.

  • So you really need to think hard as a carrier before you make that decision.

  • Then of course, if they don't exit the current alliances stand then the competitive reality for us is unchanged.

  • They are in one world today.

  • John Tague - EVP, COO

  • I think in any of these outcomes conceive a smaller JAL which is obviously accrues to us and our partner A&A.

  • Dan Reed - Media

  • Okay.

  • It does sound though, Glenn, like a little hint of a preference, that they're going to all have if they stay with American and obviously Delta through the Northwest purchase is a major competitor in that market, and adding JAL would -- would you agree that that makes the Delta JAL combination a stronger competitor than what you are seeing today?

  • Glenn Tilton - Chairman, President, CEO

  • What I actually prefer is that one of them is going to end up with no partner at all.

  • Dan Reed - Media

  • Okay.

  • Thanks.

  • Glenn Tilton - Chairman, President, CEO

  • You bet.

  • Operator

  • We will take our next question from [Mary Slingenschtein] with Bloomberg News.

  • Mary Slingenschtein - Media

  • Good afternoon.

  • You've taken about 100 aircraft out of your fleet the last couple of years, how many of those have you been able to settle and how mu many have you returned to the lessors that they were leased and how many are you still making payments on?

  • Kathryn Mikellis - SVP, CFO

  • I don't have the exact figures right in front of me.

  • I will give you kind of rough order of magnitude we owned a fair number of those aircraft.

  • We have probably at this point sold I will call it a couple of dozen aircraft, we have got a number of 737s that we retired that we have not yet sold.

  • Overall between the ones that we owned and what naturally came off lease given the size of that fleet, we have relatively few planes that actually are unleased beyond the end of this year.

  • We have been working with those lessors and have actually closed deals on some of those planes but we don't have that many remaining that continue to be on lease beyond the end of this year.

  • Mary Slingenschtein - Media

  • Okay.

  • If you do place an order for new aircraft when is the earliest that you think you'd begin taking delivery of those planes?

  • Kathryn Mikellis - SVP, CFO

  • That is not something we are willing to comment on at this time.

  • Mary Slingenschtein - Media

  • Okay.

  • Thank you.

  • Operator

  • Our next question will come from [Ted Reed] with Thestreet.com.

  • Glenn Tilton - Chairman, President, CEO

  • Hello, Ted.

  • How are you?

  • Dan Reed - Media

  • Very good.

  • Thank you.

  • First thing I was on the Southwest call the other day and they see a continued decline in business travel, continuing decline in business travel and you see an uptick, and I wonder why do you think that is?

  • Do you think you have a better view of business travel, or are they looking at something different?

  • Glenn Tilton - Chairman, President, CEO

  • I would offer what I said to one of the analysts that our value propositions and our client bases and our customer bases are certainly very different, but beyond that maybe Kathy and John would like to add to that.

  • Kathryn Mikellis - SVP, CFO

  • The only other thing that I would add to that is clearly what you have heard us say is that we have seen traffic pick up considerably with regard to what the pressure that we saw in the second quarter we are seeing very good trends in that the declines in things like corporate sales have greatly abated.

  • I certainly think you've got to really compare the stark contrast between these two carriers, we are a carrier very heavily focused towards the business traveler both in terms of our network, in terms of how we configure our aircraft, in terms of the large corporate sales portfolio that we have.

  • So I don't think it actually would be unusual that you would see us see different trends than low cost carriers.

  • Dan Reed - Media

  • All right.

  • Thank you.

  • Second thing, given the trouble that JAL is having and the reporting of it is there any benefit you are seeing to A&A from that?

  • Glenn Tilton - Chairman, President, CEO

  • I think the best way, Ted for me to answer that is to say I guess for the third time on the analyst call and today we are very, very pleased to have A&A as our partner, and the conversations that we're having with them relative to our relationship across the Pacific, is very encouraging to us.

  • Dan Reed - Media

  • It is benefiting?

  • Glenn Tilton - Chairman, President, CEO

  • I am not A&A, Ted.

  • I mean, you would have to ask A&A the extent to which they are benefiting from JALs problems, but suffice it -- I think you can probably make the deduction yourself.

  • Kathryn Mikellis - SVP, CFO

  • Clearly in what JAL has said publicly as part of their restructuring there's an expectation that they are going to be a smaller carrier, and I think it is fair to connect the dots and suggest that that should, ascribe to the benefit of A&A and secondarily to us as their partner.

  • Dan Reed - Media

  • Thank you.

  • Glenn Tilton - Chairman, President, CEO

  • You bet.

  • Thank you, Ted.

  • Operator

  • Our next question comes from [Darren Shannon] with Aviation Daily.

  • Darren Shannon - Media

  • You guys issued an express RFP a few months back.

  • I wanted to know if you can give me an update on that?

  • And secondly have you made a decision on the Mesa-8 and COJ-200 contracts?

  • Glenn Tilton - Chairman, President, CEO

  • Yes, we did issue a RFP, no I can't give you an update, it is still open and no we have not made a decision regarding Mesa.

  • Darren Shannon - Media

  • That has to be made this month though, isn't that correct?

  • Glenn Tilton - Chairman, President, CEO

  • We wouldn't want to disclose those terms I don't believe that they're publicly.

  • Darren Shannon - Media

  • I think Mesa has it in their quarterly.

  • Glenn Tilton - Chairman, President, CEO

  • Thank you very much.

  • Operator

  • Ladies and gentlemen this concludes our call today.

  • You may disconnect your lines at this time.

  • Glenn Tilton - Chairman, President, CEO

  • Thank you.