聯合航空 (UAL) 2010 Q3 法說會逐字稿

(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 the company's permission.

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

I would now like to turn the presentation over to your hosts for today's call, Nene Foxhall and Tyler Reddien, please go ahead.

Thank you, Chanele.

Good morning everyone and welcome to United Continental holdings third-quarter 2010 earnings conference call.

Joining us here in Chicago to discuss our results are United Continental Holdings President and Chief Executive Officer Jeff Smisek, Executive Vice President and Chief Revenue Officer Jim Compton, Executive Vice President and Chief Financial Officer Zane Rowe, Executive Vice President and Chief Operations Officer, Pete McDonald, and Senior Vice President Finance and Treasurer, Gerry Laderman.

On October 1, 2010, Continental Airlines merged with a wholly subsidiary of UAL Corporation.

And along with United Airlines, became a subsidiary of UAL Corporation.

At the closing of the merger, UAL Corporation changed its name to United Continental Holdings Inc.

As UAL and Continental were separate companies and not affiliated through the end of the third quarter, we will be discussing the two companies' results independently as well as a preliminary estimate of pro forma combined results.

Jeff will begin with some overview comments after which Jim will review both companies' capacity and revenue results.

Zane will follow with a discussion of both companies cost structure and balance sheets.

At that point we will open the call for questions.

Analyst questions will follow the executive comments and then we will take questions from the media.

We would appreciate if you would limit you questions to one with one follow up.

With that I'll turn it over to Tyler.

Thank you, Nene.

Our earnings release and separate investor update were issued this morning are available on our website at ir.unitedcontinentalholdings.

com.

As Nene mentioned, UAL and Continental were separate companies during the third quarter, so we will be discussing the two companies results independently.

A preliminary proforma estimate of the financial results for the combined company including estimates of purchase accounting has been provided in our investor update issued this morning.

In addition, we've provided preliminary proforma quarterly financial statements for the combined company based on the financial information provided in the form S4 filed with the SEC effective August 18.

These preliminary financial statements provide a view of the combined companies' financial performance as if the merger had been completed as of January 1, 2009.

Let me point out that information in this morning's earnings 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 forms 10-Q and other reports filed with the SEC by both United Continental holdings and Continental Airlines for more thorough description of these factors.

Also during the course of our call, we will be discussing several non-GAAP financial measures.

For reconciliation of these non-GAAP measures to GAAP measures please refer to the tables at the end of our earnings release, a copy of which is available on our website at www.unitedcontinentalholdings.com.Unless otherwise noted, as we walk you through our numbers for the quarter we will be excluding special charges, certain other accounting items, merger related expenses and fuel hedged non- cash net mark-to-market gains and losses.

These items are detailed in our earnings release.

And now I'd like to turn the call over to Jeff Smisek, President and CEO of the United Continental holdings.

Thanks Tyler and Nene, and good morning thank you all for joining us on this the first earnings call for the new United.

This is an exciting time for the company as we integrate Continental and United to create the world's leading airline.

I'd like to thank all of my United and Continental coworkers for delivering solid operational and financial performance this quarter.

My coworkers of the new United share my commitment to delivering great customer service and clean, safe, and reliable air transportation.

Their commitment is evident in our results and I thank them all for their hard work.

Pete Macdonald, our Chief Operations Officer is a very experienced hand and he has assembled a superb team from both United and Continental to run our operations going forward.

Today, we reported net income for United a $473 million for the third quarter or $2.12 per dilute share.

This is more than $0.5 billion improvement over the same period last year.

For Continental, we reported a net income of $367 million for the quarter.

Or $2.20 per diluted share.

A $365 million improvement year-over-year.

We continue to see the benefits of capacity discipline as well as the revenue generated by offering a global network enhanced by Star Alliance.

The gradual improvement in the economic environment has also helped drive improved yields.

While we still see good demand particularly as business travelers are coming back we are mindful that general macro economic trends remain uncertain.

And fuel prices have increased considerably lately.

Against this backdrop of factors outside our control, we remain focused on what we can control.

Running a clean, safe and reliable airline, working together as a team so that we can provide great customer service, successfully integrating Continental and United, improving our revenue and maintaining a competitive cost structure.

We ran a good operation in the third quarter.

Continental had a mainline completion factor of 99.8%.

While United had 99%.

That represented United's best quarter in six years.

During the quarter, Continental and United of coworkers earned $20 million in incentive program payouts for on-time performance and at United for customer satisfaction.

As we integrate the two carriers we won't lose sight of the day to day basics of running our airline.

Having closed the merger of Continental and United on October 1st, we are now beginning the integration process.

We expect to deliver between one and $1.2 billion of annual net synergies by 2013 and are forced on harvesting approximately 25% of those synergies next year.

While we've only have a few weeks to share full information since we've closed the merger, what we are seeing excites our team and we have many opportunities as we work together.

Over the course of the next few months, you'll start to see us bring home some quick wins.

We are beginning our schedule optimizations to use the combined fleet to better match supply and demand.

And take advantage of the opportunities provided by the scale of the combined company.

We have begun the process of optimizing the network and we've already made several announcements about changes to our flying.

We announced new service to Mexico, adding four new routes to Cancun and Leon, Guanajuato and boosted service to Mexico City from United's hubs.

Solidifying our industry leading service from the 'US' to Mexico.

We are adjusting the schedules of our interhub capacity improving time of the coverage.

In addition, United Express will begin service with 70 seat regional jets for flights out of our Cleveland, Newark, and Houston hub that are currently served by 50 seat regional jets.

The introduction of the 70 seat aircraft to these markets not only allows us to better capture demand it offers customers a great product and the choice of a first class cabin.

I want to be clear that at the new United, we remain committed to capacity discipline and currently expect the consolidated capacity for the combined company will be up just one to 2% year-over-year in 2011.

We will not grow for growth's sake, but only if we can maximize our probability by doing so.

We are analyzing many aspects of the combined operation including aircraft interior configurations and the appropriate array of products and services across the combined company.

We expect to complete this analysis in the coming months and we will revise our capacity guidance as appropriate for any effects our decisions may have.

Both companies expanded ancillary revenues again in the third quarter with United's up 15.5% and Continental's up almost 21% year-over-year.

United generated more than $15 of ancillary revenues per passenger in the quarter and Continental generated over $14 per passenger.

We expect to continue ancillary revenue growth as we expand choices for our customers.

For instance, last week we introduced an enhanced meal offering for purchase in the economy cabin on select Continental flights.

Providing customers with value added products and services for which they're willing to pay, not only benefits the company's bottom line it creates better, more tailored experiences for our customers, improving their satisfaction.

We continue to make great progress on a joint venture strategy.

The Department of Transportation tentatively approved antitrust immunity for us and our partner ANA.

Which, when final, will allow our joint venture across the Pacific.

This will be an addition to improved antitrust immunity Air Canada and Lufthansa which allows our joint venture with them across the Atlantic.

We also entered into a memorandum of understanding with Air Canada to establish a transborder joint venture for flight's between the U.S.

and Canada.

These joint ventures will provide customers with a greater selection of routes, reduce travel times, and enhance service offerings and will help us increase the probability of our international networks.

Beyond our international joint ventures, we continue to broaden our networks through Star Alliance.

This year two new members have joined Star.

Tam in Brazil and Aegean in Greece.

And Star announced that it expects Ethiopian airlines to join Star Alliance in 2011.

Our alliance partnerships are important to our success.

Providing access to the destinations that we do not directly serve and great benefits to our customers through frequent flyer reciprocity.

In the twenty largest premium travel airports worldwide Star has premium traffic share leadership in sixteen.

Star carried 625 million passengers a year, 250 million more than the next largest alliance.

The combination of the new United network which is the best single carrier network in the world with the power of Star Alliance and our existing and planned antitrust immunized joint ventures across the Atlantic, Pacific, and Canadian boarder, creates an unparalleled and non reproducible platform from which to compete for premium customers.

We are also making progress towards achieving a single operating certificate.

Were well along with our discussions with the FAA regarding our single operating certificate transition plan.

Based on those discussion and our own internal work we currently expect to achieve our single operating certificate by the end of 2011.Well ahead of our initial schedule.

We also continue to have good discussions with our labor unions.

We want to reach agreements that are fair to our coworkers and fair to the company.

I have set a goal to have all of our joint collective bargaining agreements in place by the time we receive our single operating certificate.

As negotiations are best left face to face at the bargaining table that's the only comment I intend to make on our labor negotiations.

With that, I'll turn the call over to Jim and Zane to walk through the revenue environment and financial results.

Thanks Jeff.

I join Jeff in thanking our coworkers from both United and Continental for running a very good operation.

Both carriers achieved excellent on-time performance and excellent completion factor.

There were many potential distractions during the quarter and I commend the teams for focusing on running a smooth operation.

Moving on to our third quarter revenue results United and Continental operated as separate companies during the third quarter.

And since United and Continental had different accounting classifications for passenger revenue, the rise in results we are presenting for each carrier are based on each carrier's individual historical presentation.

On a year-over-year basis United's mainline RASM was up 18.9%.

And Continental's mainline RASM was up 20.8%.

RASM results for both carriers were driven primarily by strength in mainline yields.

Both carriers also reported strong improvement in regional RASM for the third-quarter.

With United's regional RASM up 11.1% and Continental's regional RASM up 15.8% year-over-year.

Consolidated RASM was up 18.3% for United in 19.8% for Continental.

Although not all of our competitors have reported, we are confident the third-quarter consolidated year-over-year RASM growth for both United and Continental will be among the best in industry.

Both United and Continental experienced strength in RASM throughout all regions.

Primarily due to strength in yields with some load factor improvement in certain regions.

Trans-Atlantic businessFirst RASM for Continental was up 35.6% year-over-year.

Due to strong yields and higher load factors.

And United's Trans-Atlantic premium RASM also performed well during the quarter up 18.6%.

Both carriers Trans-Atlantic coach RASM experienced double-digit increases greater than 15%.

Both companies continue to see substantial improvement in Trans-Pacific yield as well as higher load factors in both the front and back cabins.

China continues to be on fire as both United and Continental experience RASM increases in this region of about 50% versus the third quarter last year due to both higher yields and load factors.

Japan is doing quite well, too.

Our Japan RASM including Japan Trans-Pacific routes was up 27% for Continental and 33% for United year-over-year primarily due to higher yields.

Both companies are also seeing a nice rebound in deep South America which help drive strong third quarter year-over-yield improvement in the latin region for both carriers.

In the third quarter, United and Continental had about 2% of its consolidated capacity allocated to Mexico.

And we added eight daily flights to six destinations that will begin in the fourth quarter to backfill the displacement caused by Mexicana seizing operations.

This is a well-timed adjustment and we've seen an uptick in Mexico yield as that region adjusts to new competitive dynamics.

We remain cautiously optimistic about revenue trends heading into the fourth quarter.

We think the trends that we've experienced this year are in line with our belief that this is going to be a long, slow recovery.

Early indications from our corporate accounts indicate that they agree with this characterization.

We are seeing some recovery in fares, but the number of corporate travelers is still lower than we'd like to be.

However, several recent surveys indicate that corporate travel volumes will increase in 2011.

Continental's spool up in Star Alliance is continuing to go very well.

Continental is already connecting more than twice as many passengers with Star Partners at international gateways than it did with its former alliance partners during the peak of its alliance with them.

And on the revenue front, Star Alliance adds tremendous value to Continental.

On a year-over-year basis, Continental's third quarter total passenger revenue was up 20.6%.

But its total partner revenue was up about 83%.

Due primarily to its membership in Star Alliance and implementation of many aspects of its Trans- Atlantic joint ventures with United, Lufthansa, and Air Canada.

Last quarter, we shared that United and Continental had implemented many aspects of its Trans-Atlantic JV, but had not yet implemented the revenue share structure.

We currently expect to implement the revenue share structure in the fourth quarter which will be retroactive to January 1, 2010.

Based on our strong Trans-Atlantic revenue results this year, we expect that we'll have a liability for revenue sharing payments to our joint venture partners.

We estimate that these payments for the combined company will be approximately $100 million for the nine months ended September 30, 2010 and will be accounted for as other operating expense.

Now, turning to the outlook for October RASM.

When we released RASM results in November we will be reporting October RASM on an individual carrier basis based on the respective historical presentation for each carrier.

Once we have completed our review of purchase accounting adjustments and income statement classifications, we will publish historical conformed monthly year-over-year percent changes in RASM.

Based on our current outlook and given that we still have over a week left in the month of October for things to change we estimate United's consolidated RASM will be up about 12% with mainline RASM up about 14% year-over-year.

We estimate Continental's October's consolidated RASM will be up about 16% with mainline RASM up about 17% year-over-year.

Again, these numbers are preliminary estimates based on the data we have for October thus far.

With that, I'll turn the call over to Zane.

Thanks Jim.

I also want to thank both the United and Continental teams for all of their hard work and helping to deliver strong operating and financial results for the quarter.

Both airlines exhibited good cost control in the third quarter and while we still have work to do, we are well-positioned on the path to our goal of sustained probability.

United and Continental faced cost pressure in the quarter due to higher fuel prices year-over-year and higher revenue related costs such as commissions and credit card fees.

I'm going to address each carrier separately.

On a stand-alone basis, United's consolidated operating expenses increased about 11% in the third quarter of which approximately half was due to an increase in fuel expense.

Mainline fuel expense increased a $178 million largely due to a 15% increase in jet fuel prices compared to the third quarter of 2009.

Holding fuel rate and profit sharing constant United third-quarter mainline CASM increased 2.5% year-over-year and its consolidated CASM increased 2.4%.

During the quarter, United faced increased inflationary pressure on revenue related costs and rents and landing fees.

These were partially offset by improvements in productivity.

Continental's consolidated operating expense increased 8% in the third quarter almost half of which was due to an increase in fuel prices year-over-year.

Holding fuel rate and profit sharing constant, Continental's third quarter mainline CASM increased 3.1% year-over-year and consolidated increased 2.7%.

Similar to United third quarter results unit costs for Continental were also negatively impacted by increased revenue related expenses.

While both companies are experiencing some cost pressure, we continue to look for efficiencies and cost savings in every area of the business.

Both companies generated significant margin improvement in the third quarter.

United's pre-tax margin for the quarter 8.8% in more than ten point improvement from 2009.

Continental's pre-tax margin for the third quarter was 9.3%.

While these results are good, we are heading to a seasonally weaker period and oil prices have increased.

So the next couple of quarters will be more challenging.

Moving onto the balance sheet.

United and Continental ended the third quarter with a combined unrestricted cash and short-term investment balance of $9.1 billion.

During the quarter, United and Continental generated combined operating cash flow of $750 million.

Combining capital expenditures were $186 million.

The companies made $295 million in scheduled debt and lease payments in the quarter.

Additionally, United prepaid a $140 million of debt in the quarter.

Continental issued $800 million of 6.75% senior secured notes during the quarter.

And used approximately $350 million of the proceeds to prepay a secured term loan facility.

During the third quarter, Continental contributed $79 million to its defined benefits pension plan bringing year-to-date contributions through the third quarter to $153 million.

In addition, United and Continental contributed $61 million this quarter to their 401K plans totaling over a $190 million in contributions year-to-date.

The combined company expects to make approximately $540 million of scheduled debt payments in the fourth quarter and, has combined capital expenditures of about $260 million for the quarter.

We will be conservative in managing our liquidity levels as we work to integrate the two carriers.

We will use our cash wisely.

Whether it's continuing to invest in the business or taking opportunities to manage the balance sheet.

Currently we expect to end the year with a combined unrestricted cash and short-term investment balance of approximately $8.4 billion.

Our combined fleet is one of the most fuel-efficient in the industry.

And we're working to optimize the new United fleet in order to have the right aircraft in the right markets to meet demand.

We ended the third quarter with a combined fleet of 708 mainline aircraft in service.

During the fourth quarter we will remove one Boeing 747 that has been serving as an operational spare and add two Boeing 737 900-ERs to the fleet.

On the regional side, we ended the third quarter with a combined 547 regional aircraft flown on our behalf under capacity purchase agreements.

During the fourth quarter, we plan to add five Q-400 aircraft to the fleet.

In the fourth quarter we expect the combined company's consolidated and mainline capacity to increase between 3% and 4% year-over-year.

The primary driver is the restoration of service mostly international that was temporarily suspended last year during the depths of the recession.

Jet fuel prices have increased more than 11% since mid-August.

In the fourth quarter, we expect our consolidated fuel price to be $2.40 per gallon for the combined company, an increase of nearly 17% from last year.

We've hedged approximately 74% of fourth quarter fuel needs and about 44% for the first half of 2011.

We continue to hedge through a mixture of calls, swaps, and collars in order to mitigate fuel price volatility.

You can find details of our hedges in our investor update published today.

Our fuel-efficient aircraft and operating procedures continue to be our most effective hedge against rising fuel prices.

As Jeff mentioned, we are hard at work to capture the one to $1.2 billion in annual synergies.

Working together over the past two years as alliance and joint venture partners Continental and United have both a solid foundation for driving a successful integration and achieving our synergy targets.

Over all for the fourth quarter, we expect consolidated unit cost excluding field and profit sharing expense for the combined company to be up between 0.5% and 1.5% year-over-year before the impact of the Trans-Atlantic JV true up that Jim spoke of earlier.

This adds about two points of year-over-year increase for the quarter.

In the future, adjustments tied to our performance in the JV will be recorded in passenger revenue.

This year-over-year guidance is based on the preliminary pro forma financials that were produced for the S4 filed in August.

And assumes purchase accounting as effective as of January 1st, 2009.

In mid-November, will provide a final presentation of the October 1, 2010 purchase accounting valuation and line item reclassification for proforma, quarterly results for 2009 and the first nine months of 2010.

At that time, we will also update our guidance to reflect the final valuations and presentation.

In conclusion, oil prices have risen and continue to be volatile.

And the pace of the global economic recovery is uncertain.

However, we're bringing together two of the world's best airlines and are committed to improving our cost performance and increasing our revenue.

Our entire team is working together to run a clean, safe, and reliable operation and achieve our goal of sustained probability.

This quarter's results demonstrate another step in the right direction.

With that, I'll turn the call back over to Jeff.

Thanks, Zane.

We are just beginning to unlock the full potential of the new United.

I've spent a lot of time traveling around the system over the past few weeks and I can tell you my coworkers are both Continental and United are very enthusiastic about this merger.

And what we can accomplish by working together.

We are committed to becoming the airline customers want to fly, coworkers want to work for and shareholders want to own.

To do that we must deliver sustained profitability across the business cycle.

We have the right people, the right network, the right fleet, and the right products and services.

And working together we will create the world's leading airline's.

With that I'll turn it over to Tyler to open up for questions.

Thank you, Jeff.

First we will take questions from the analyst community that will take questions from the media.

Please limit yourself to one question and if needed, one follow-up question.

Chanel, please describe the procedure to ask a question.

(operator instructions) The first question comes from Hunter Keay of Stifel Nicolaus

The you very much, good morning guys.

Zane, a couple of follow-ups for you on the cash deployment.

I guess as you move through the integration process in 2011 what are going to be your priorities between taking out the secured stuff and the converse and if you're going to be conservative with cash during the integration are you thinking about staying above a certain target metric for cash?

Hunter, yeah there's obviously a number of metrics that we are closely monitoring and continue to evaluate our cash position through the integration.

I think we've always been thoughtful and conservative as it relates to our cash deployments as well as how we manage the balance sheet.

Jerry has numerous ideas I'll let him weigh in on some of the thoughts he has, but you know we're being thoughtful through this business cycle in the integration.

And also looking at the maturities that we have.

Hunter this is Jerry.

It's a little too early to talk about a cash target as Zane said, between the integration investments we'd like to make in the business and managing debt maturities we see over the next few years we will maintain a relatively conservative view on cash.

Okay.

I appreciate that.

This is a similar question, to questions I asked US Airways yesterday.

I'd love to get your opinion now.

Given your size and market leadership.

I'm not asking you whether or not you're going to do international first bag fee, but I guess as you think about the revenue issues Jeff touched on in your opening comment, how should we think about that given your size?

Do you think you're going to be in a position to spearhead maybe unpopular but very popular initiatives like that going forward?

Well, Hunter, I won't go down that trail because the lawyers will spank me, I guarantee you that.

But what I will tell you is that we have been successful at Continental and United in ancillary revenues.

We think they're actually good for customers because they let companies pick and pay for the product attributes that they want to consume and not pick and pay for product attributes they don't want to consume.

So you will see us continue to grow our ancillary revenues.

Great.

Thank you, I really appreciate the comments and particularly capacity guidance.

Thanks a lot, guys.

Thanks Hunter.

Your next question comes from the line of Jamie Baker.

Hey, good morning everybody.

You know, Jeff, I guess you may have had some time to think about it hoping you would also take a stab at what discipline actually means to you and the new team and one reason I want to ask the question is we've got some good answers from your peers.

But I have yet to hear a management team address return on invested capital as one of the defining parameters.

Any thoughts on that?

Jamie, as we've said we are a demand driven business.

And I assume by discipline you don't mean discipline to used to get from my dad, but capacity discipline.

And we're going to be responsive demand over to grow only where we can make money doing it and we won't delude ourselves in that growth.

I think it's very important for this industry and for the new United to be profitable and provide appropriate return on the capital investment in the business and we're going to be very focused on that.

You spoke to 70 seat jets before which of course the predecessor company had considerable flexibility in operating whereas your prior employer did not.

When we think about wage differences between pilots a lot of that is easy to work through, I know you don't want to comment on labor, but I'm can't --I'm struggling to find an easy fix on scope.

I assume that none of the regional contracts that you as a prior Continental employee inherited have any change of control provisions that would offer you any early outs if scope negotiations don't go smoothly.

Is that correct?

We have various contracts, at the new United we have contracts with many regional providers and those contracts are binding on us.

But in any event, we're able at the new United we're able to offer 70 seat regional jets as we discussed but we will be flying them out of the old Continental, the legacy Continental hubs.

And that's a great product that we're going to be offering as a result of this merger.

And just as a customer when can we expect some decisions to be made on stuff like two class versus three class, global services, et cetera.

We're working through that right now.

There was a lot of data we couldn't get to before October 1st because the lawyers wouldn't let us see it.

Now we get to see it and were working our way through that and when we're ready to announce something we'll do so.

Excellent.

Thanks a lot and good luck.

Bye bye.

Your next question comes from the line of Bill Green.

Hi yeah good morning.

Jeff, I'm curious what you think about the competitive landscape.

Small carriers in this industry have had an ability to affect pricing.

Do you think we've had enough MNA to make this a more sort of sustainable investable business or do you think there's more to go to get to that point?

Well, I don't know the answer to that.

I really don't know the answer to that question.

I think that we've always been price competitive with low-cost carriers.

We'll continue to be price competitive with them.

Whether they'll be additional consolidation in this business will there be additional international consolidation clearly there has been a number of transactions and there may be more coming in the pipe but there's no way for me to do that.

Okay.

If we look at your synergy estimates as Delta went through the process they got more.

Your process is already kind of going faster here, but you've not sort of updated those numbers.

Is it reasonable to think that as you kind of get into the guts here they'll be more opportunities than you expect?

You being conservative?

Or how do I think about how that sort of evolves?

We're very comfortable with the numbers that we published in a leave it at that.

So no?

There's no opportunity for more?

I didn't say that.

I just said that I don't want to comment on that.

You know as we go back a long way and we tend to under promise and over deliver as a management team.

Clearly we'll want to try to exceed those numbers but we're very comfortable with the numbers that we got.

Okay, got it.

thank you.

Hey Bill, this is Zane, We are also obviously focused on running the underlying business and there's always that balance between what you call it a synergy due to the merger and just managing the underlying business of the combination, so we're mindful of that.

And obviously our focus is on results here.

Your next question comes from the phone line of Kevin Crissey of UBS.

Good morning everybody.

Morning.

Jim, some of the RASM commentary I think has been surprising to me and others as well in terms of the progression from October to November to December.

Not being maybe as steep of a falloff as we would have expected in year-over-year.

Do the comps look more difficult apparently than they really are?

Maybe it's the year-over-two-year issue or something like that?

Can you speak to how United and Continental's RASM might progress, all things normal, if you will?

Well, Kevin it's Jim.

We'll only talk about October which I did so I wouldn't talk about the progression but just to remind you about some of the past when you mention two years ago.

Some of the early falloff with the financial market was clearly to New York to London and things like that.

Different geographic regions had different things happening to it particularly on a year over a two-year basis.

But you are right.

Last year the recovery began in and began to take some hold the Fourth Quarter there are some more difficult comps as you go through the Fourth Quarter.

I guess this would go to Zane then, I'm not sure whoever wants to handle this.

Have you guys been able to identify the Delta 1.5 billion synergies and you're asking investors to believe in these net synergy numbers and I guess the frustrating thing is that net from what starting point which you clearly don't want to provide for lots of different competitive reasons.

So we're trying to figure out we can't necessarily identify their 1.5 billion.

Will try to identify the 1.2 million or more if you get that and then would you be willing, if you're so confident in it to tie management pay to its achievement?

Kevin, this is Jeff, a couple things.

We're very comfortable with the synergy numbers.

We are going to be as transparent as possible with the Street, with our own employees on the achievement of those numbers.

Fundamentally it's all about the results and in the answer to your question yes.

We're more than willing to tie management instead of achievement of these synergies in fact we are going to do so.

Okay.

How about your net Cap Ex.

I was hoping that that would go away.

It's a nice way to keep Cap Ex looking low, but any chance to go-forward basis we get a gross Cap Ex number?

Kevin we've actually debated this internally.

We like the way we presented today and I think we'll continue doing that for some period of time here.

I thought you were going to criticize the actual amounts of Net CapEx.

No, I mean, who cares what the amount is if you can get off financing to a gazillion dollars?

That's the problem with it, right?

That's exactly right.

We obviously gave you the net amount in the forecast and then we're transparent on the delivery.

So we will let you assume the financing portion.

Ok.

Thank you.

Your next question comes from the line of Gary Chase.

Good morning, everybody.

Congratulations on the closing.

Well two questions, one when is it that you think will be able to see sort of the new network, when we have sort of a more final schedule that we can look to to see the optimization process that you're describing presumably it's going to take a few months and I realize that you've done some work on it already.

Then we kind of go into the peak season is it something where the new network structure will be in place for fall, or do you think were going to see it sooner?

This is Jeff, Gary.

I think we will have -- you'll have a good complete view over the course of about 18 months.

It will take a number of schedule loads to do that and optimize it.

There's a lot of complexity involved in moving the aircraft around especially there involved with work groups and servicing the aircraft, et cetera.

So there's quite a bit of work to be done.

But we've already started and we're very focused on capturing as many opportunities as early as we can.

Is it fair to say that the bulk of those will be in place by the end of the year.

I'm just trying to think about that one to 2% capacity guidance.

Think about how far through this process you will have been what we're seeing those kind of numbers.

By the end of 2011 you mean?

Yes.

2011.

Sorry.

We'll have a lot of it done but again I think it's safer for me to say that it will be the course of the next 18 months or so.

Okay, and then, If I could, I wanted to clarify this cost issue and the revenue true up.

Presumably the bulk of that is coming out of Continental and its revenue that you had reported thus year-to-date that you're going to be reversing.

Is that the right way to think about it and that instead of it being accounted for in the revenue line it's a cost offset because of the structure that you've got in place presently?

Gary, you're right.

It's mostly Continental.

About 60% of that number is Continental and think of it as a catch up that is accounted for in OOE but it's a catch up from all the out performance of the year with our JV partners.

Going forward, it will be accounted for in the revenue line.

Than the revenue guidance that you gave for October presumably reflects no change in that dynamic, right.

It actually is included in the October guidance, so it's assuming that the JV is signed in October, which may or may not be the case but we have assumed it in the October guidance.

Gary, this is Jeff.

Recognize that the base in which the sharing payments are made adjust and so the directionality of that, of those sets of payments can change over time.

We anticipate it changing over time.

That's right.

We clearly outperformed over the summer period which is why that number has grown a little bit on the Continental side.

You may recall from the last call we talked about the Continental piece being $40 million through the Second Quarter.

Hey Gary, this is Jim again.

Again so that strength be mentioned in the Third Quarter with partner revenue being up 83% vs that 20.

A lot of that is within the JV markets like Houston/Frankfurt and Newark/Munich are doing extremely well.

Quite frankly without the JV wouldn't be doing would be performing at those levels, so that's just an example of how that JV works very well for the Continental side.

Okay thank you very much.

Your next question comes from the line of Duane Pfenningwerth of Raymond James.

Hi, good morning, thanks for taking the question.

Hi Duane.

Just with respect to you capacity growth guidance for next year, can you give us any perspective on domestic versus international.

It seems like it implies domestic down and then wondering how you might look at sort of mainline versus regional domestically.

Thanks.

I wouldn't give you specific numbers, but clearly it's weighted towards the international versus domestic.

The growth would be more in the international side.

But to fine tune it to a exact number would be too early in terms of guidance.

It's clearly more focused on international growth for instance are recently announced LA to Shanghai route that begins in May.

Great thank you, and maybe I missed it in the filings, but have you updated us on 2011 fleet plan and specifically the number of 787s are taking?

Duane, we have not yet.

Can you provide an update now?

Sure, as soon as Boeing provides update, we will update you.

Thanks for taking the question.

Your next question comes from the line of Will Randow of Citigroup.

Good morning.

Good morning.

A couple questions.

You talk about capacity discipline complemented by fleet flexibility in the past.

This is kind of a carryover from the last question but how should we think about the pace of gross CapEx 2011 and go beyond that as well as fleet retirements.

We haven't guided into 2011 yet with our growth CapEx numbers you can take a number of the last Continental filing on what our fleet order book looks like an obviously adjust accordingly but we have not given guidance yet for 2011.

Okay fair enough.

I know you guys didn't want to address updating your synergy targets but when you think about one-time costs given that your teams have gotten a chance to work together -- how should we think about the cadence of one-time costs.

Is that all going to be spent very quickly over the next twelve months and or- and also, is there a capitalized portion or that's all expense.

The one time costs, you will actually see that move ahead.

It will be a little bit more front end loaded we're still comfortable with the range we gave that we did some time ago at the $1.2 billion mark.

I think that will be a little bit more front end loaded.

Both capital and expense items.

Thanks guys.

Your next question comes from the line of Michael Linenberg of Deutsche Bank.

Good morning.

Couple questions here, Zane, I apologize if you brought this up, but what's the NOL position post the merger and are you in a pretty good shape to preserve the majority of the NOLs at both companies.

We've not yet established whether or not United had a change of control.

We believe it did.

Prior to the merger the NOL balance would have been around the $9 billion mark.

We're still confident that we have sufficient NOLs an obviously will work to utilize those as much as we can.

And we'll give further guidance on that once we've done all the work on the 380, too.

Ok, and just my second question and this is either to Jeff and Zane and it's a bit of a follow-up on some of the earlier questions about returns.

When you think about sort of the response from investors in their view towards this group and I think that Jeff, you talked about United the new United being a stock that shareholders want to own and historically one of the arguments is that we talk about discipline and we talk about metrics out there in some of your commentary you haven't indicated that there is a metric out there or metrics that you will focus on some of that may be for competitive reasons, some of that may be that you don't want to corner yourself.

That said, if airlines were somewhat more transparent and I realize this is actually somewhat of an overkill question for you when I'm looking at an investor update that's like 16 pages but if you had return metrics other in the public domain that people could at least look to one could argue that ultimately that could result in an lower equity risk premium and therefore lower your cost of capital.

So I realize this is a mouthful of a question here.

But, are you -- how do you look at it and is that something that you would consider as the companies come together getting metrics out there in the public domain that both act as somewhat as a disciplinarian on the business but it also provides more transparency for the investors.

Michael I understand your question I will tell you that we're focused on making money throughout this cycle and making an adequate amount.

It's tough times.

Nonetheless making some money and in good times making quite a bit of money.

And you'll see that in the results as we go forward.

I'm not going to put out a single metric clearly we have a lot of internal targets but I'm not going to be in a position today to give you the metric.

We are focused however on the de-risking the business.

We understand that there are issues in the business and certainly to the degree of leverage that we carry in this business.

Is an issue for us.

And we'll take opportunities over time as we are successful and I believe to be United will be to de-risk the business and I think that will show a good result one in our cost capital and secondly in our stock, in our stock price.

I think we've done a pretty good job so far and I think you'll see improvements over time.

I would definitely agree you guys are off to a good start.

All right, thanks Jeff.

Your next question comes from the line of Glenn Engel of Bank of America/Merrill Lynch.

Good morning.

Good morning.

Two questions, If I looked at Continental alone at their domestic presence it just was like 16% versus 10 for the industry.

Why such huge gains in which of the hubs really led the way.

Glenn, this is Jim.

First of all across the Continental network very strong results across the geographic whether its the hubs or the transcon and so forth.

Now I'd go back to what we talked about through the year is that the teams very much focused on understanding kind of what's happening in the booking curve and this year we looked at a booking curve that was much more what I would say fitting in line with more of the business traffic that we saw slowly improving, so we took risks.

And we took risks on closer in booking and were very happy with the results, so great job by the team in terms of the schedule that's out there and managing to that schedule.

And we saw that strength across all of the regions.

Do you have corporate sales numbers for the Third Quarter?

I don't have specific but again as I mentioned we saw the continued improvement in corporate business versus last year you are starting to see some of the growth beginning last year but very strong revenue growth.

I will say as I said in my comments we're seeing it more on the average fare.

We like to see the volumes be even stronger.

The surveys that I referred to talk about most of those surveys talk that the corporations looked to increase business travel in 2011.

But it's been driven more on the average fare which again ties in with my earlier comments of kind of managing that close in booking and taking the risks for the close in booking to drive that yield.

Finally I'm still a bit confused on the $100 JV.

Why would you be benefiting so much more than your partners.

Why would the revenues and profits go to you rather than them from the JV?

Why would I would assume that equal.

I think it's a very complicated to kind of dig into each carrier's performance and so forth.

As I mentioned a couple questions ago some of the markets were new to us.

Our entry into the JV in and into Star allowed us with the JV to take advantage of a lot of opportunities at the margins so whether it's Houston/Frankfurt, or Newark/ Munich.

So we benefited from that.

I would say the second thing is from a JV perspective, United and Lufthansa were in an A+ JV.

So we're the new one into it.

So in our a plus Venture I think it's pretty understandable that we perform better than our partners.

As Jeff mentioned there is a historical period adjust.

The JV continues to work very well for us.

Does this imply that your margins are just much higher on the routes than your partners and you're having to make payments to equalize those margins.

I think the trans- Atlantic's been strong for everybody so the difference in margins I wouldn't comment to, but clearly and also the JV people have different strengths in different markets around the world and so forth.

This is Jim We also have different bases.

This is really off of a base measurement period.

Our performance compared to our base measurement so our performance compared to a base measure ment period was better than our partners' performance compared to their base measurement period.

That base measurement appears to adjust every year and so is that base adjusts and there are different movements of money back and forth but we can't lose sight of is the tremendous benefit that this joint venture, the Trans-Atlantic joint venture brings to United, because these payments are modest compared to the benefits that we are receiving.

Going forward with the joint venture with ANA and our joint venture with Air Canada we think we are really on a roll here in terms of our strategy and our joint venture strategy to get our international networks even more (inaudible).

Thank you.

(operator instructions) Your first question comes from the line of Josh Free of Associated Press.

Good morning.

With a 3 to 4% capacity increase in the Fourth Quarter.

My question is are you going to be able to do that and still keep loads and yields at the level that you saw recently where did you get ahead of yourselves a little bit with the capacity coming back in.

This is Jim.

The capacity growth is driven mainly by some of the markets that we pulled down given the recession last year.

Given the demand that we've seen in the improvement that we've seen in the marketplace to the year.

We're really comfortable with where the bookings are at relative to that 3 to 4% capacity growth so year-over-year Houston/Frankfort began November 1st last year.

Newark/Munich year-over-year run rate on the Continental side and there's some markets on the United side also that given where we been at a run rate and given that the capacity is really a result of what was pulled down last year we're very comfortable with where we're at.

Okay.

Real quick on the fleet.

Is there a point where you have to reevaluate the orders that United had out there and that Continental had out there and when might we find out more about where you're headed with those fleet additions?

Josh, this is Jeff.

We each bring a lot of value in the merger in our respective fleets.

Continental we were widebody constrained.

Now we have widebodies that we can use across the best network in the world.

United didn't have a narrowbody order Continental has very good narrowbody order.

Continental had 25 787s on order as does United and United has 25 8350s as well.

We have a very good order book.

In fact the best order book in the business.

We also have a lot of flexibility because United has airplanes that in tough times we could put down.

Where as Continental had principally brand-new airplanes on very long term leases.

So we have a lot of flexibility in the fleet clearly we will be taking a good look at a fleet on the long-term fleet plan.

To determine which airplanes we will exit in which airplanes will grow even more into.

But that 's going to take us some time as we work through.

All right thanks.

Your next question comes from the line of Mary Jane Credeur of Bloomberg News.

Hi Gentlemen, I was wondering if you could talk about whether you're bothered by your regional partner, Republic Frontier, also competing against you with branded flying particularly in Denver and if so are there any discussions or pressure on them to somehow rectify that.

Mary Jane, no, we compete against everybody.

We're very good competitors.

And with the new United we will be even more effective competitors so that doesn't bother us at all.

Okay, thank you.

Your next question comes from the line of Doug Cameron.

Good morning everyone.

I'm just curious how what's happening on LA/Shanghai squares with the mantra from everybody in terms of capacity discipline.

Is it the exception that proves the rule.

I'm sorry Doug, you broke up on me there.

Oh I'm sorry, I'm just curious with two more airlines on LA/Shanghai, I'm just curious on how that squares and with what is everyone saying in terms of capacity discipline.

Is that the exception that proves the rule?

Well Doug, first of all, when we do the analysis of going into a market we are fully aware of the competitive nature so we take that into account as we make a decision.

I'll tell you as you know with the merger, with the ten hubs that the combined carrier brings, Los Angeles is a key hub within that merger.

The United presence in Las Angeles is really the best.

It is the best in industry whether it's United alone or with Star.

So given that we have over 200 departures we have more connecting opportunities than any other carrier to China through LA.

We're very confident with it.

We have great experience working with China.

United is the largest US carrier to China.

So that relates back to how we approach our corporate customers.

The marketplace knows us very well.

So given all of those things and in addition we're always aware of the competitive nature when we go into a market.

We're very confident of our startup into Las Angeles/ Shanghai.

Year-to-date China services for the two airlines combined profitable?

Oh yes.

Thanks very much.

Your final question comes from the line of Jenna Moreno of Houston Chronicle.

Hi, I was just checking on holiday fares.

What are they looking like in the bookings?

I'm sorry what was that, Jenna?

How does holiday travel look right now and fares

We're seeing strong demand in the holidays this year and were very pleased by the demand we're seeing.

Hey Jenna, this is Jim, I would add to this that bookings are strong with sale activity this year versus last year So given the strong demand we see them looks like at this point a very good holiday period.

Thank you everyone.

Please call corporate communications at give any further questions and look for to talking to you next quarter.