聯合航空 (UAL) 2010 Q1 法說會逐字稿

Good afternoon, and welcome to UAL Corporation's earnings conference call for the first quarter of 2010.

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

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

At the end of the analysts' Q&A, at approximately three PM Eastern time, we'll 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 recordings of this call.

If you do not agree with these terms, simply drop off the line.

I'd like to turn the presentation over to your host for today's call, Tyler Reddien.

Please go ahead, sir.

Thank you, Javan.

Welcome to UAL's first quarter 2010 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-Q and other reports filed with the SEC for a more thorough description of these factors.

Also during the course of our call we'll 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 non-cash net mark to market gains and losses.

These items are detailed in the table and note for the end of our earnings release.

On Friday, April 23, we issued an 8-K in which we disclosed that based on newly developed information and analysis, we now expect a larger number of miles issued under our frequent flyer program will expire.

We are therefore implementing a change in estimate for expired miles prospectively, beginning in the first quarter of 2010.

As we have indicated in the past, we defer a significant portion of the revenue we received from passenger tickets and sales of miles to third parties, and recognize this deferred revenue when the miles are redeemed.

As a result of this change in estimate of the number of miles expected to expire, we recognized approximately $64 million of passenger revenue for the quarter, reducing the amount of frequent flyer revenue that we otherwise would have deferred to future periods.

We expect that we will see a similar incremental impact in the remaining quarters of the year.

By reducing the net revenue deferred to future periods, we believe our results more closely aligned with those of our peers, as we have historically deferred a higher percentage of the revenue we received compared to other US global carriers.

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

Thanks, Tyler.

Good afternoon and welcome to everyone on the call.

Joining me today, in addition to Tyler and participating on the call are Kathryn Mikells, our Chief Financial Officer, and John Tague, President of United Airlines.

Pete McDonald is also with us and available for questions.

In what has been a traditionally weak quarter for United compared to our peers, we reported an operating profit for the first quarter, our first since 2000.

We narrowed our net loss by nearly $480 million over the first quarter of last year, which reflects our work to drive systemic improvement, delivering results across the Company.

As we have consistently said, we are committed to developing margin leadership, and we have keen sense of urgency across the organization to do so.

Our work to date puts us closer to that goal, having produced the best net margin of the five major US carriers this quarter.

Our unit revenue growth was 11 points, better than the industry average.

And that did not simply happen.

Our decisions on configuration, capacity and revenue management, as well as the great service our employees are delivering, are generating returns, enabling us to leverage the improving demand environment and produce results that are in sharp contrast to our peers.

Results that are evident in Asia, where our unit revenues were up some 30 points compared to the largest US carrier, they reported essentially flat results for the Pacific.

We are encouraged to see early signs of recovery in business and premium demand and then our own PRASM growth performance, which is industry leading.

As with our commitment to revenue improvement and capacity discipline, we also hold ourselves accountable at United for controlling our costs.

Our consolidated CASM was up 4.8% year over year excluding fuel on a capacity reduction of about 3%, which is in line with the guidance we issued in January.

We were able to absorb costs associated with February weather cancellations, and it's our intention to mitigate the cost of April's disruptions in costs associated with our approved revenue.

Therefore, and significantly, we are not adjusting our full-year cost guidance for the year at this time.

We have improved our cash position, closing the first quarter with $3.5 billion in unrestricted cash, up $0.5 billion from the fourth quarter.

We've raised an additional $700 million earlier this month from our Pacific Route secured financing, and today we have approximately $4.5 billion in unrestricted cash.

That's about 27% of trailing 12 months revenue.

One of the strongest liquidity positions among the network carriers.

At the same time we are actively managing our fuel price risk and have arguably one of the industry's strongest hedge books.

And you are all familiar with our very limited fixed obligations.

Operationally, our strong performance continues.

Building on our number one position for 2009, we again took the top spot among the five largest US carriers for the first quarter based on preliminary results.

Our people in the operations are executing against a well developed plan to deliver consistent performance and manage load factors that continue to be high and weather that challenged our hubs.

Our people across the Company, in every department and in every division, are doing great work reflected in the momentum we've established and the results we've announced today.

In the first quarter we also strengthened both our network and our fleet.

We filed an application with the US Department of Transportation to fly from San Francisco to Tokyo's Haneda Airport, an opportunity made available under the open skies with Japan, which will offer customers the opportunity to connect both to flights in the US and also through our longtime partner All Nippon Airways to points beyond their downtown Tokyo hub.

We also launched our new Dulles Madrid service with our partner Aer Lingus, made possible by the USEU Open Sky Agreement, an example of another creative way that we can profitably extend our network reach to meet our customers' travel demands.

We also finalized our aircraft orders with both Boeing and Airbus and expect to begin delivery of a new aircraft in 2016.

As all of us know very well, this industry frequently confronts every challenge imaginable, and sometimes, such as volcanic ash clouds, those that are not perhaps imaginable.

And sometimes such as volcanic ash clouds -- those that are not perhaps imaginable.

The industry must manage for the unexpected.

We'll continue to make the right decisions and do the right work to return United to profitability from ongoing capacity restraint, to controlling our costs, to growing ancillary revenue.

We'll focus on delivering customers choices that they value, and that they're willing to pay for.

In the last several weeks, much has been written in the press about potential industry consolidation.

And at this time we are thoughtfully considering our options in that regard.

Our position advocating consolidation is one of the transformational changes necessary to move our industry into a position of sustained profitability is well known.

We will not comment any further on this subject, unless and until we have something to announce to all of you.

With that I'll hand the program over to Kathryn, who will take us through the numbers in further detail.

Kathryn, over to you.

Thanks, Glenn.

And good afternoon, everyone.

As we've discussed with you over the past six months, we've made the right decision to position us to outperform as the recovery takes hold.

And as our current results demonstrate, we're well on our way to margin leadership.

We clearly have more work to do to reach sustained profitability.

That said, we're very pleased with our team's effort, both here and on the front line, to deliver improvement in all of our key performance metrics.

For the first quarter of 2010 we earned an operating profit of $58 million.

Our first operating profit in the first quarter in 10 years, and an improvement of $427 million over the first quarter of last year.

We narrowed our net loss for the quarter by $479 million to $92 million, which translates into a quarterly net loss of $0.55 per share, slightly better than the Street consensus of $0.62 a share.

Our net margin of negative 2.2% led our peers and represented a 13 point improvement year over year in what is traditionally one of our weaker quarters.

Total revenues for the first quarter increased by about 15% or $550 million.

At the same time, operating expense increased by only 3% or $123 million, of which $84 million was the result of rising fuel costs.

We saw a sequential improvement in revenue trends throughout the first quarter.

Consolidated passenger unit revenue increased by 19% year over year, and by 6% compared to the first quarter of 2008, as the improving economy, our capacity actions, and reduced loyalty-related revenue deferrals drove substantial improvement in both yield and load factor.

Our total passenger traffic volume, as measured by revenue passenger miles, was up 2.6% compared to the year-ago quarter.

And combined with our 3.3% capacity reduction, drove a 4.7% increase in load factor.

Load factors improved across all entities, but were particularly strong in the Pacific where we gained 11 percentage points year over year.

Cargo and other revenue for the quarter was $375 million, an improvement of about 13% year over year as continued strong signs of recovery in both cargo volume and yield, raised cargo revenues by nearly 27%.

Ancillary revenues per passenger were up 4.5% year over year, as we maintain our momentum on merchandising and unbundling.

This more than offset a reduction in third-party maintenance work.

Moving on to costs, as I mentioned a moment ago, operating expense increased by only 3% or $123 million year over year, including $84 million of fuel expense and $39 million of non-fuel expense.

The impact of our settled fuel hedges was, again, significantly improved year over year.

Our fuel expense reflects $15 million in losses on fuel hedge positions that settled in the first quarter of 2010.

Compared to settled hedge losses of $242 million in the first quarter of 2009, a year-over-year improvement of $227 million.

Average mainline jet fuel price for the quarter was $2.23 a gallon, up from $2.11 a gallon last year, an increase of about 6%.

The impact of our mainline capacity reductions offset these fuel price increases and our resulting mainline fuel expense was about flat year over year.

Consolidated non-fuel expense in the first quarter was up $39 million or about 1.3%.

Our consolidated non-fuel unit costs increased by about 4.8% year over year within our January guidance range on capacity that was a little bit lower than the range that we provided in January .

As we indicated when we issued our initial guidance at the beginning of the year, we're experiencing several inflationary headwinds that are increasing our costs.

With revenue related costs, rents and landing fees, and incentive compensation driving our year-over-year increase.

For the quarter, revenue-related costs accounted for about 1.5 points of our increase, with rents and landing fees and incentive compensation accounting for about an additional 2 points.

In addition, foreign exchange rates drove more than 0.5 point of additional cost pressure in the quarter as the dollar weakened versus most major currencies compared to the first quarter of 2009.

Turning to the balance sheet, we closed the quarter with an unrestricted cash balance of a little more than $3.5 billion, slightly above our guidance.

Last week we received roughly $700 million from the Pacific Route financing that we completed in January.

As of today, we have approximately $4.5 billion in unrestricted cash or about 27% of trailing 12 months revenue, one of the strongest liquidity positions among the US global carriers.

We generated positive operating cash flow of $482 million in the first quarter and $389 million in positive free cash flow.

Excluding the funding and repayment impact from closing our two recent double ATC refinancings early in the first quarter, we made scheduled debt and net capital lease payments of $173 million.

We spent $51 million in non-aircraft capital and funded $42 million in advanced deposits against our wide body aircraft order.

We closed the quarter with $12 billion in total debt, including off balance sheet obligations, and $7.8 billion in net debt, including the Pacific Route financing.

Despite the significant liquidity we raised in response to the high fuel environment of 2008 and the recessionary environment of 2009, our net debt is down nearly 30% since we exited from bankruptcy in 2006.

We've made significant progress across the Company generating industry leading unit revenue growth and operating performance in what was a very challenging quarter.

While we still have more work to do, we're pleased with the improvements that we've made that have put us solidly on the path to profitability.

And with that I'll turn it over to

Thanks, Kathy.

Two years ago we laid out for you a performance agenda built around bringing our Company to industry leadership with a clear sense of urgency.

Whether it majored in on time performance, revenue management or margin improvement, we are clearly delivering against that agenda.

Operationally, as Glenn noted, we're number one in on time performance again for the first quarter, and, in fact, March was the fifth consecutive month that we led the industry in this metric.

Our cost control over the last few years leads the industry, and we are continuing that discipline today maintaining our cost guidance for the full year.

Our customer satisfaction scores are improving quarter after quarter, and, in fact, April domestic customer satisfaction scores are the best ever recorded at United.

Whether measured on a year over year, year over two years or a premium relative to the industry, we are delivering unmatched revenue results.

During the quarter our consolidated unit revenue year over year was up 19%, significantly outpacing each of our peers, and it was, in fact, 11 points better than the industry.

Most importantly our year over two improvement was up 6%, and we were the only major network carrier to grow unit revenues versus 2008.

We outperformed in every geographic entity, even before the impact of the deferred revenue adjustment that Tyler mentioned earlier.

As Glenn noted, this is not solely a reflection of demand returning.

It is also a design outcome reflective of the work and the actions we have taken.

And I want to thank the people who are responsible for delivering these industry leading results.

Internationally we have seen impressive increases in unit revenues across all entities.

In total, international unit revenue was up nearly 30%.

One of the key areas driving the strong growth was improvement in both load factor and yields in our premium cabins as corporate travel begins to return.

The paid load factor in our international premium cabins was up 16 points year over year with yields up nearly 20%, driving and international premium cabin unit revenue improvement of over 40%.

This strong performance was aided by our new first and fully lie-flat business configurations that we recently completed on our entire 747 and 767 international wide body fleet.

In the first quarter of this year we began reconfiguring the 777 aircraft, which will include not only our award-winning first and business class product, but also a significant investment in the coach cabin, which will now include on demand audio and video as well as in-seat power for our customers.

In the Pacific, we saw the biggest increase in unit revenue with a year-over-year improvement of over 30%, when our two largest competitors reported results that were either flat or negative.

Our Pacific performance was driven by a double-digit increase in load factor along with a 13% improvement in yields.

We saw strong results in mainland China, where unit revenue improved almost 50% year over year.

Last year we took significant capacity actions in China reducing our service out of Washington, DC along with down gauging other flights to China.

These actions are now serving us well as traffic is beginning to recover in China.

Recognizing that our competitors networks are more concentrated in Japan, I wanted to shed some light on our performance there, as it is more directly comparable.

United's unit revenue in the first quarter in Japan improved by 20%, Australia also achieved similar improvements.

In the Atlantic, we saw a unit revenue increase of just over 25% on a 6 point increase in load factor and a 17% increase in yield.

We hit May's strategic adjustments to our network in Europe, including down gauging our service to London utilizing 767s.

This led to a 40% unit revenue increase year over year in Heathrow.

We have also made substantial changes to expand the breadth of our Atlantic network.

In the last year we have launched service from Dulles to Moscow and Geneva, while also introducing Chicago-Brussels service, and last week we added service to Bahrain from Dallas.

Next month we will begin service from Chicago to Rome, and in June we will begin service from Dulles to Accra.

Domestically our consolidated unit revenue performance was up 14%, driven by a load factor increase of 2 points and a yield improvement of 11%, as capacity fell by 1%.

In addition to passenger revenues, cargo revenues also posted healthy year-over-year revenue improvements in the first quarter.

These improvements are primarily the result of a volume rebound, coupled with better industry capacity discipline in the cargo market as well.

The volume rebound is worldwide, though Europe is improving at a slower rate than the rest of our system.

In the first quarter our freight volumes are up 45% year over year and 38% overall for cargo.

We are beginning to see pricing firm up in most areas of the world, and we have implemented rate actions in both March and April in virtually all of the major geographies we serve.

We're also delivering industry-leading ancillary revenue per passenger of over $14.

And we have committed to continue to take smart risk, changing the revenue model in ways that we believe will be necessary to generate profits on a sustained basis.

All of this puts us in the position to be responsibly optimistic about the future.

As we look ahead, we expect to see further improvements in revenue.

In fact, for the month of April we are expecting a passenger unit revenue increase of 23% to 25% year over year.

Similar to our peers, our second quarter results will be impacted by the shutdown of European airspace during the volcanic ash event.

I want to thank our employees who worked together as one team leading to a successful restart of our entire trans-Atlantic operations and the smooth reaccommodation of our customers as well.

Their efforts are made even more impressive given that the volcano was perceived by some of the most severe winter weather we've seen.

Their dedication, hard work and effectiveness is truly appreciated.

In terms of impact, we canceled about 325 flights to Europe, and, as a result, we expect capacity for the month of April to be 2.6 lower than we originally anticipated.

We also expect us to have a revenue impact of $30 million to $35 million, which is already included in the outlook for April.

While the revenue environment is improving, we remain committed to capacity discipline.

As we have said before, we firmly believe that the only way the industry can fully recover and meet its financial targets is through capacity discipline.

Capacity simply must be at a level that allows for compensatory pricing.

We have, and will continue to be transparent about the performance commitment we make to you, our shareholders, while also be clear about our accountability to achieve these commitments, and to do so with a great sense of urgency.

It would be a mistake to come to the conclusion that given the level of improvement United has accomplished over the last few years, that what remains to be achieved is small in comparison .

To the contrary, the view of this management team is there is much more work to do and much more potential to be realized.

Said simply, the Company that does the best work wins.

More and more we are that Company, and more and more we realize just how much is left to be done.

Our relentless pursuit of United's full potential will not simply be borne of necessity, but rather of the opportunities that are available to us.

Now back to

Thanks, John.

Moving on to guidance, for the second quarter we expect mainline capacity to be down 1.4% to 2.4% year over year and consolidated capacity to be up 0.3% to 1.3%, including the impact of the recent disruption of service across the North Atlantic.

For the full year 2010, as John mentioned, we're reaffirming our prior capacity guidance and continue to expect mainline capacity to be down 1.1% to 2.1% year over year, and consolidated capacity to be down 0.5% to up 0.5%.

For the second quarter we expect mainline unit costs, excluding fuel and profit sharing, to be up 5% to 6% and consolidated unit costs, excluding fuel and profit sharing, to be up 3.8% to 4.8% year over year.

We continue to see similar cost pressure from revenue-related costs, rents and landing fees, and incentive compensation, as we saw in the first quarter, as well as the impact of reduced capacity due to the schedule disruption in Europe.

For the full year 2010 we are reaffirming our prior guidance for unit costs, excluding fuel and profit sharing, to be up 2% to 3% on both the mainline and consolidated basis.

We're sticking to our guidance despite continued cost pressure from the improving revenue environment and irregular operations driven by storm activity in the first quarter and the impact of the recent volcanic activity in the North Atlantic.

We continue to be pleased with our cost control performance and our success in mitigating the impacts of these events.

Turning to fuel, we continue to systematically hedge our fuel price risk.

We have about 72% of expected consumption for the second quarter hedged at an average crude equivalent cap of $76 a barrel.

And we have about 54% of our expected consumption for the remainder of the year hedged, with an average crude equivalent cap of $79 a barrel.

Our conservative hedge book consists of about 50% calls and 50% swaps, primarily in heating oil providing solid hedge coverage in the event of rising fuel prices, while allowing for about 75% downside participation for the remainder of the year if fuel prices fall.

At the end of the quarter our book was about $175 million in the money.

Based on April 22 closing-forward prices, mainline jet fuel prices are expected to be $2.29 per gallon for the second quarter.

This price reflects taxes and the impact of hedges that settle on the quarter, including hedge premiums on those positions.

Effective April 1, 2010, the Company adopted cash flow fuel hedge accounting.

This change is like the one Tyler mentioned earlier, as it also better aligns with accounting policies of our peers.

Going forward the effective changes in market value of our designated hedge portfolio will be accounted for through the balance sheet until these positions settle, rather than through the income statement under our previous mark-to-market accounting.

Over time this will eliminate the non-cash mark-to-market gains or losses, and thereby reduce the volatility in our GAAP results.

The transition will take about a year as we'll continue to recognize the non-cash impact of our hedged position that existed at March 31 in our GAAP earnings, reversing the $70 million positive mark-to-market over the next four quarters net of premium.

We'll continue to provide our fuel price guidance on both an economic and GAAP basis until the non-cash mark-to-market has rolled off, at which time these two numbers will converge.

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

In closing, we're encouraged by the improved results being delivered by everyone across the Company.

We're well on our way to profitability and margin leadership.

The solid -- the solid performance platform that we've created opens up more options to the Company.

As Glenn mentioned, we're actively considering how we might participate in industry consolidation.

While I know that recent media coverage has spurred even greater interest in the topic, I trust that you'll understand we cannot comment on that.

And with that, Javan, we're ready to open up the call for questions.

Thank you.

First we'll take questions from the analyst community.

Then we will take questions from the media.

The question and answer session will be conducted electronically.

(Operator Instructions) And the first question comes from Hunter Keay from Stifel Nicolaus.

Thanks very much.

Appreciate it.

I know you are not going to talk about consolidation specifically.

If you don't mind, I'd like to discuss it at a high level.

Is there anything that we should know about that would make it undesirable for you to actually acquire a competitor, like wage snapbacks and a labor agreement or any other sort of change in control clauses?

.

Hunter, this is Kathryn.

We're not going to specifically comment on that.

Ultimately the kinds of things that you're talking about would have to be evaluated at both companies.

And so it doesn't make sense for us to comment on that.

Okay.

I'm just going to give this another shot, and if you can't comment, that's fine.

Hi, Hunter, say something nice about the quarter, will you, then maybe --.

Great quarter.

Congratulations.

Thanks very much.

It was a good quarter.

I'd like to come at it from another angle if you'd entertain the question.

We all know you're a major advocate of M&A.

In our opinion, your stock is significantly undervalued compared to any other airline using almost any metric, particularly one related to cash flow.

Should we be concerned that any kind of consolidation desire would result in selling the Company far below what many in the market believe is probably fair value?

You mentioned the sense of urgency three times in your prepared remarks.

Looking at your balance sheet, revenue acceleration, holding all things equal, would you think it's difficult to justify selling right here at current levels, given the evaluation relative to other stocks?

.

So Hunter, at a very high hypothetical level?

Yes.

Only.

What I would tell you is the quality of the work that the three of us have spoken to this morning would not be any different from the quality of the work that we would bring to the issue of consolidation and the contemplation that I think Kathryn and I have both said we are undertaking.

Okay.

Very good.

I appreciate that.

Thank you.

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

Hi, good afternoon, everybody.

Hi, Jamie.

And I won't start off by asking is that all you've got, because we too are impressed with the quarter.

A question, though, picking up where Hunter left off, I want to ask in a way that we remain in the hypothetical, Glenn, in hopes that you can answer.

Could you describe what some of the key criteria are in potentially choosing whether to merge?

I'm basically just trying to understand whether you personally believe that value is best created by, for example, combining overlapping networks versus end to end, whether the majority of value needs to accrue to your shareholders or not, where you think integration risk might be most significant.

I'm just asking in the hypothetical.

It doesn't even have to involve United.

Just sort of schematically, how do you think about these issues?

.

Hi, Jamie, in the -- one of your colleagues not too long ago in the pieces that you're all putting out on the issue in a conceptual context without actually addressing combinations of any two particular companies, suggested that given the risks associated with consolidation that are perhaps even more problematic in this industry, as many of you mentioned to me when I joined the industry.

So that there are dyssynergies as well as synergies to be considered by any management team at any board.

The stars have to be aligned across the full spectrum of consideration for any two companies that are considering going down this road together.

Yes.

And in that regard, Jamie, it's no different from any other industry.

The fact is, however, that in this industry there are perhaps some unique considerations to this industry that management teams and boards need to consider.

For most of all of that there are solutions.

And those solutions, in my view, are created by the value that can be ascribed to any particular deal or any combination of two companies.

And at the end of the day what we're talking to one another about, were there to be a combination is net synergies, net of complexity, net of dyssynergy, net of breakage, a net of a whole suite of other things that you are very familiar with.

That's a philosophical, conceptual, theoretical level, Jamie.

I appreciate that answer.

A quick followup just on the subject of alliances, US Air did publicly state -- you're obviously aware that a United deal appears off the table.

But they added today that the strength in Alliance is, of course, a possibility.

Might I ask you if you believe that United is already -- are you already squeezing all of the potential value out of US Airways participation within Star?

I think in all probability, Jamie, there is more value to be extracted from every single Alliance relationship that we have, every single one of the .

Would you care to expand on that?

I think that they're relatively immature constructs with ATI across the Atlantic and the Pacific now.

We're just embarking on some of the opportunities that we know to be available to us.

So I'll go back to what John said a moment ago.

The better work you do, the more potential you uncover.

The more work you do with a partner, the more the two partners come together to realize they could do things together they didn't previously imagine.

Excellent.

Thank you for the thoughtful answers, Glenn.

I appreciate it.

My pleasure.

Our next question comes from Gary Chase from Barclays Capital.

Good afternoon, everybody.

Good afternoon.

If you don't mind, I'll change tactics and ask you something that you can hopefully literally and, not just in a hypothetical.

That would be good.

I wanted to talk a little bit about something with John.

Can you walk us through -- you said what the storm impact was going to be on capacity relative to what you had scheduled.

How does the quarter look?

We thought you were going to be flattish in April .

Does this now mean you're going to be down 2 to 3?

And then how does that progress through the quarter?

It feels like June is going to be up 1 to

Let me pull that for you right now.

And maybe while you're pulling, that related to it, I'm wondering that the revenue performance that you're suggesting for April would certainly point to some acceleration in the revenue trend measured against just about any metric I think.

I'm wondering if there is an incremental contribution that's coming from fees that maybe we don't understand, some parts of the revenue stream that maybe other carriers might consider to be non-passenger revenue.

So we've typically provided transparency around that.

It's becoming a much smaller issue as time goes on.

So I can't recall what the differential is, but I think it's close to maybe a point at this stage.

And that's simply because we're maturing in terms of the year over year comps.

So I don't think it's appreciably affecting how we compare to other carriers.

In terms of the capacity guidance for the second quarter, as you know, we relayed 0.3 to 1.3, those are up figures.

You're correct in sort of viewing June as being relatively flat in that guidance.

June was flat?

Yes.

We're looking at June being relatively flat.

Okay.

I'll follow up with you offline.

And then I guess the other question would just be for Kathryn on the cost side.

You had what I think was a really defining year in 2009 where you took a lot of costs out of the structure.

It looks like that's carrying well across 2010.

I'm curious for your thoughts on the sustainability of where you are.

And if there are any major pieces of what you accomplished that -- where you feel material pressure.

And I'm obviously not referring to anything revenue related.

Thanks.

Appreciate that .

Look, when we look at our costs and where we're seeing pressure, where we're seeing pressure is pretty consistent overall with where the industry tends to see pressure in areas like rents and landing fees.

Obviously if you look at the course of 2010 and the way our capacity spreads across the year, our expectation is for a little better performance in the second half relative to the first half where we'll see a little bit more capacity relative to the first half.

Beyond that what I'd say is it isn't as if we're facing a lot of low-hanging fruit, nor were we facing really low-hanging fruit in 2010.

This is much more a complete change in the practice of how we manage the Company with regard to cost.

And our expectation with regard to this being a book of work that is continuously in play and underway by everyone across the Company.

So I would not point to necessarily any low-hanging fruit, but I would certainly suggest to you that the expectation of our management team across the board and every single person at this Company, is we've got to continue to plug away at this because it is necessary to our competitive and long-term

Okay.

Thanks, everybody.

Thank you.

Thank you.

Our next question comes from Bill Greene from Morgan Stanley.

Hi, Bill.

Yes, good afternoon.

I wanted to touch upon labor costs.

If -- given that you're in section six negotiations with a number of your unions, I know you offered I think just to give the flight attendants a very similar contract to that which Continental has.

Do you have a sense for what the impact would be if they agreed to that offer in terms of the labor cost differential?

I think Continental pays quite a bit more than you currently pay your flight attendants.

Yes, I'll take that from a little different angle, because I have a little -- slightly different number kind of offhand available to me.

Many times the contrast in terms of labor costs comes between our selves and American.

And so I actually looked at the first quarter to say what if United had American's contracts?

What would that derive?

And how would our result change relative to?

And that was worth about 1.5 margin points.

So I think that gives you sort of a law of order of magnitude estimate.

And that's obviously kind of across the board for all labor groups.

We're in, as you know, negotiations with all of our labor groups now, certainly with a desire to reach a conclusion with them as soon as possible, but in a way that works for us, and obviously works for them.

Yes.

As I think about it, one of the things I'm often told about your labor contracts is there are productivity opportunities, so that one and a half points on margin that you mentioned, is there a way to offset that or that includes an assumption about productivity?

.

That again is just looking at one of our competitors and saying what if we had something that looked more similar to that.

Certainly as we -- as we enter these negotiations and progress these negotiations with our union, a big part of that conversation is about our clear willingness to pay our people more, but our need for improved productivity.

And I would add onto that our need to address medical and dental costs as well.

Okay.

And then just one question on your fleet.

You've got a pretty big wide body order on the books now, but it's pretty far into the future.

So obviously it's a volatile industry.

So how much flexibility would you have to cancel that order at any point between now and then -- or downsize it or upsize it?

What kind of flexibility do you have to change it?

.

We have a fair amount of flexibility with regard to deferral rights.

We clearly have plenty of flexibility to upsize the order if we desire to upsize the order.

We don't -- we don't have necessarily flexibility to simply quote/unquote cancel the order, nor would we actually consider that to be advantageous to us.

We've worked long and hard to get an order put in place that we thought was both very competitive and that worked very well for the Company.

And right now we feel very good about the timing of those aircrafts.

They're great replacement aircrafts for us.

We have, as you know, several years before those deliveries will start to come.

And that really gives us the time that we need to further strengthen our balance sheets.

Are you still on track for a narrow body order by year end?

That -- that certainly is where we're still at today on track for that.

Thank you.

I think it's important to remember that this was justified on a replacement basis, and it also offers a substantial opportunity to down gauge relative to the existing fleet.

So there's some real strength in the logic to this, both in good times and bad times.

Okay.

Thank you.

Our next question comes from Kevin Crissey from UBS Research.

Hi, real nice revenue quarter.

I wanted to talk to you about your regional -- regional costs.

You're growing the regional capacity around 11% for the year, but the unit costs there are down one and a halfish percent.

Is that the same cost issues as you were expressing on the mainline with it being revenue related being the primary driver there or how should we think about that?

Yes, a little bit of a change in stage length and mix going on.

Okay.

Generate higher utilization out of the fleet as well.

Okay.

2011 hedge book, do you have meaningful amount of hedges in 2011?

.

We're just beginning to hedge into the first quarter in 2011, and we have about 15% of the first quarter hedged.

Okay.

And maybe you could just talk about the performance in different hubs.

I think you talked about the regions pretty well.

How about from a hub perspective?

.

From a domestic perspective, the hubs are actually relatively balanced and in a fairly tight range.

If you're allocating capacity correctly, that's obviously the outcome you're looking for.

So we're very pleased with the way the domestic operation is recovering.

And that recovery is throughout the system.

Internationally, as you can see with numbers like these, you've got to have very good international numbers in all of the hubs.

We're particularly pleased with our continuing development of Dulles and the access to what I would characterize it as breadth markets that it brings to us.

So we're pretty happy overall with the system performance.

And I think the results are evidence of not just capacity discipline on a systematic level, but also capacity allocation within that system.

And I think the team is doing a very good job with that.

Thank you.

Next in line we have Dan McKenzie from Hudson Securities.

Kathryn, It looks like United is poised to generate close to $2 billion in cash flow from operations this year, just reverting back to your first quarter cash flow from ops.

I'm wondering if you can help us understand how much of this might be used to continue building your liquidity versus capital expenditures with the payoff of more debt?

Sure.

I'll talk just overall in terms of our cash flow performance.

We had roughly about $500 million in cash flow in the quarter, cash flow from operations.

If you just try to translate that into exactly how much of that cash were we able to put in the bank, that's roughly about $250 million.

We had mentioned earlier that the closing of the financing of our double ECC generated about $250 million in the quarter as well.

So if I try and think about that just in terms of cash flow thrown off from the business less capital expenditures less regularly scheduled debt payments, we put about $250 million in the bank.

Overall as we look forward to the year, historically we are a pretty strong first and second quarter cash flow generating company just because of the seasonal pattern that we have.

Okay.

Understood.

And I guess for my follow-up question this ties back to Bill's question, but what kind of fleet flexibility does United have?

And I guess more specifically -- I appreciate you probably like the fleet plan as it is over the next one or two years.

But what I'm getting at is how many RJs, as well as mainline jets could United park, say, over the next two years without incurring expense?

That isn't a number that we would typically respond to.

When we've talked about fleet flexibility previously, we're really mindful in terms of the way we finance our fleet to ensure that in any given year we have a number of aircrafts that are coming off operating leases and coming out of financing.

So that if we actually need it to make a change as a result of the significant change in the environment, we would be in a very good position to do so.

I think if you look over the course of the last couple of years, we very well demonstrated our ability to do that, and we will continue to have that flexibility, but we're not going to give specific guidance around that.

And clearly in terms of the environment that we're seeing today and the results that we just shared with you today, the revenue performance that we're seeing is very good, and we're continuing to pick up momentum.

So while we're always watching the demand environment, certainly everything that we're seeing today is continuing to move in a positive direction.

Another thing I think that's worth noting, and my perception is unlike some of our competitors, our utilization on both the express fleet and the mainline fleet is running at or close to all-time highs.

So we can clearly economically moderate United utilization as a first lever.

Okay.

Understood.

That will do it for me.

Appreciate it.

Thanks.

Thank you.

Our next question comes from Helane Becker from Jesup Lamont.

Thank you very much operator.

Hi, everybody.

Just two quick questions.

One, Kathryn, could you say what net debt in the quarter was or when will you be filing your Q so that we can get that?

Yes, so net debt was about $7.7 billion.

That's reflecting -- also reflecting the Japanese route authority transaction where we just received the cash in the last week.

The debt would have been put on our books earlier than that.

Okay.

And then my other question is can you say what the impact last year from H1N1 virus was?

Because as I recall, the impact was greater in the Pacific than it was kind of in other markets.

And you were more exposed to that than the peer groups.

So how much of your improvement in the second quarter is related to -- due to that?

Can you spec that number out for us?

.

I can't do that Helane, but, look, there was some impact in the Pacific, but, as you'll recall, the biggest impacts were in Mexico.

And that's not a terribly big market for United.

So I don't think there's an appreciable here year over year.

When you look at the variables around how we're managing the network and down gauging capacity, I think you'll find to the extent there is an effect there, it's quite, quite small.

Okay.

You'll recall, Helane, that effect really didn't show up until May of last year.

And at this point All we've guided to is revenue for April, so that is a pretty clean number.

Okay.

Great.

Thank you very much.

That's it.

Next in line we have Bill Mastoris from Broadpoint Capital.

Thank you.

Kathy, 27% of LTM revenues, just in terms of a liquidity position, is the highest I can ever remember for United at any point.

I'm just wondering what is kind of a new run rate metric, or it may be even a range where you feel comfortable?

I assume it's not going to be 27%, but something a little bit lower than that.

So maybe you could provide some perspective on that going forward.

Yes, Bill, I'm not actually a big believer in trailing 12-month revenue and a percentage of trailing 12-month revenue as being a great indicator for what is quote/unquote adequate liquidity to run the business.

I only quote the number because it seems like a benchmark that folks use predominantly externally.

The way we actually look at adequate liquidity is by looking forward and looking forward both at the environment and looking forward at what kind of obligations do we see on the horizon.

Certainly for us in the near term as we look out to next year, we have some convertible securities that we have purposefully ensured that we have a lot of flexibility in terms of managing them.

And that's one of the things that we were considering as we bolstered our liquidity position.

But I don't actually think there's a perfect and to say based on 12-month past revenue, what's the right liquidity amount for you to hold.

I think it's really on the basis of what are you seeing in the environment?

What do you see when you look forward at obligations of the Company?

And, as a result, what do you view as adequate liquidity?

Now, clearly given the volatility that the industry has seen over the last couple of years, I think folks are generally be more conservative as they've been in the past, and I think you've seen us do that.

Okay.

Can I safely assume that any excess liquidity that you might perceive just in terms of forward obligations and maybe anticipated future free cash flow are all going to be applied towards debt reduction?

I think you've hinted at that in the future, but is that a safe assumption going forward?

.

It is a safe assumption that we clearly have a goal to strengthen our balance sheet, and that we are going to use a fair amount of our excess cash flow to do so.

Okay.

Thank you.

Thank you, ladies and gentlemen.

This concludes the analyst investor portion of our call today.

Before we take questions from the media, I would now like to turn the call back to Mr Tilton for closing comments.

Thanks and thanks to all of you for joining us on the call this afternoon and for your very good both hypothetical and non-hypothetical questions.

At United we do have a keen sense of urgency.

We're making significant improvements all across the Company, and in many instances our answers to your questions spoke to those improvements.

Our revenue improvement is very strong.

We are account regenerating, just as Kathryn said a moment ago, competitive cash flows from operations.

We've controlled our costs.

And we're going to continue to do so, and we're going to find new ways to do so.

We are, as John said, the top network carrier on on time performance and the business is continuing to provide us with opportunities to do even better.

We're expanding our network even as we reduce our capacity, serving more destinations today than we did two years ago.

And as one of the questions posed, we continue to explore creative partnerships and alliances to extend our reach even further.

The United team is aligned on the goals that we've shared with you.

Our people are executing against a solid plan and we are well positioned to the creed and continue on the path toward sustained profitability.

With that operator, we will open up the call to questions from the media.

Thanks.

We will now take calls from the media.

(Operator Instructions) The first question is Mary Jane Credeur from Bloomberg News.

Hi, folks.

I have another hypothetical for you.

Mary Jane, are you sitting here in the room with us?

No, sir.

What makes consolidation so pressing and desirable right now, and do you think others in the industry feel it's as urgent right now as you do?

I don't know, Mary Jane, that anyone -- I've ever said or anyone here ever said that it's pressing and urgent now.

What I said in answer to the hypothetical question was this is an industry where the stars have to be aligned, and when they're aligned, management teams and boards need to make a determination as to whether or not to take advantage of opportunities as they're presented or, as I said, hypothetically not.

And do you think that others in the industry are on the same page and feel the same way?

Haven't a clue.

Okay.

Follow-up question, are you worried that US Airways might consider leaving Star, and how do you plan to keep them satisfied so that they don't look around?

I'm not worried about that, and I'll quote Doug Parker.

When Continental joined Star in New York, I remember somebody begged the question Doug, anything that's good for Star is good for US Airways.

Thank you very much.

Thank you.

Our next question comes from the line of Julie Johnsson from the Chicago Tribune.

Hi.

Great quarter.

I've got a non-hypothetical question.

I'm wondering, Kathryn, where unencumbered assets stand at this point.

The 10-K indicated you'd be down to about $200 million by April .

And I'm just wondering, given that this is an industry where you expect the unexpected, what's the contingency plan if airlines head into another extremely volatile situation where cash is drained?

So I'm going to start the response it that question by saying the way in which we manage the business actually seeks to protect us from the situation that you just mentioned.

So be it capacity discipline, be it ensuring that we have a good fuel hedge book, be it ensuring on a go-forward basis that we have flexibility with regard to our fleet, looking at the various actions that we have and can continue to take in terms of merchandising and generating ancillary revenue strains, are all meant to bring us back to profitability and sustained profitability.

If I then go to turn to -- not to mention our now sitting on $4.5 billion in unrestricted cash, if I then go to turn to, so what flexibility do you have beyond that, the number that you mentioned in terms of unencumbered assets is relatively current.

I think I've previously mentioned that with regard to our large credit facility, it is over collateralized by about $300 million.

And we have the flexibility to take collateral out of that facility and do something with it if we so chose.

And then I would point to over time we clearly manage our financing so that we have aircraft financings that roll off over the course of time which both gives us on hand, a fleet flexibility and it also gives us, in the future, assets that will become unencumbered and other assets that will become, I'll call it under encumbered and could be a refinance if need be.

We are very comfortable today with our liquidity position.

Okay.

Great.

Thank you.

(Operator Instructions) And next in line we have Jena Moreno from the Houston Chronicle.

Hi.

I'm wondering if Chicago has offered United any other incentives.

Can you speak up a little bit?

Yes.

Has Chicago offered, or the state of Illinois offered United any other incentives to stay in Chicago?

.

We have incentives associated with the move that we're making from our Elk Grove facility to the Willis Tower here in the city.

We're very pleased with the arrangement that we were able to make, both with the city and with the landlord there, very much looking forward to that move beginning later this year.

So if you didn't move --

We can't hear you, Jena.

Sorry.

I don't know what's wrong with my phone.

If you did not make that move to the Willis Tower, would you have to repay as an incentive?

.

We have absolutely every intention of making that move.

Okay.

Thank you.

You're welcome.

Thank you.

And thank you, ladies and gentlemen.

This concludes our call today.

You may disconnect your lines at this time.