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Operator
Good morning, and welcome to United Continental Holdings earnings conference call for the fourth quarter of 2010.
My name is Karma and I will be your conference facilitator today.
Following the initial remarks from management, we will open lines for questions.
(Operator Instructions).
This conference is being recorded and is copyrighted.
Please note that no portions of the call today may be recorded, transcribed, rebroadcast, without the Company's permission.
Your participation implies consent to our recording of this call.
If you do not you 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.
Nene Foxhall - EVP, Communications/Government Affairs
Thank you, Karma.
Good morning, everyone.
And welcome to the United Continental Holdings fourth quarter and full year 2010 earnings conference call.
Joining us here in Chicago to discuss our results are President and CEO, 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.
As you know, on October 1, we closed our merger transaction.
And the fourth quarter results we will be discussing today are on a combined basis for the full quarter.
Jeff will begin with some overview comments, after which Jim will review capacity and revenue results.
Zane will follow with a discussion of cost structure and the balance sheet.
At that point, we will open the call for questions, first from analysts, and then from the media.
We would appreciate it if you would limit yourself to one question and one follow-up.
With that, I'll turn it over to Tyler.
Tyler Reddien - Managing Director, IR
Thank you, Nene.
Our earnings release and separate investor update were issued this morning and are available on our website at ir.unitedcontinentalholdings.com.
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 on 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-K and other reports filed with the SEC by United Continental Holdings, United Airlines, and Continental Airlines for a more thorough description of these factors.
Also during the course of our call we will be discussing several non-GAAP financial measures.
For a reconciliation of these non-GAAP measures to GAAP measures, please refer to the tables at the end of our earnings release, a copy of which is available on our website.
As Nene mentioned, our fourth quarter results will be presented on a combined basis.
All prior period results discussed, today including comparisons against prior periods, will be based on unaudited pro forma results for the combined Company and include estimates of the impact of purchase accounting.
For additional details, please refer to our investor updates issued in November and December, which are also available on our website.
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/or fuel hedged non-cash net mark-to-market gains and losses.
These items are detailed in our earnings release.
Now I'd like to turn the call over to Jeff Smisek, President and CEO of United.
Jeff Smisek - Chairman, President and CEO
Thanks, Tyler and Nene, and good morning.
And thank you all for joining us.
I'd like to recognize and thank my coworkers for delivering solid operational and financial performance this quarter.
The members of the new United team are working together, and it shows in our results.
Today, we reported net income of $160 million for the fourth quarter, or $0.44 per diluted share, an improvement of nearly $350 million as compared to the same period last year.
Both operationally and financially, we are delivering strong results and proving that even with all the hard work of integration, we remain focused on serving our customers and providing them with clean, safe, and reliable air transportation.
I'm particularly pleased with this quarter's results, as we faced significant operational challenges in December with severe snow storms in western Europe and the northeastern United States, which shut down major airports in New York, London, Paris, Boston, and Philadelphia on peak travel days.
My coworkers across the system worked tirelessly to help re-accommodate our customers whose travel was disrupted by the weather.
One of the hidden synergies of our merger is the flexibility that our greatly expanded hub structure and fleet allow as we recover from irregular operations.
My coworkers rerouted customers through some of our other hubs, including by train from Newark to Washington Dulles.
We also launched extra flights and upgauged aircraft to make sure that our customers could get where they needed to go once airports reopened.
As a result, we were able to give great customer service and recapture a large amount of the revenue we otherwise would have lost.
All in all, the adverse impact of these major storms on our earnings for the quarter was only $10 million, a testament to our highly skilled coworkers, our network, our fleet, and our agility.
In spite of these weather-related challenges, we ran a good operation in the fourth quarter.
We completed more than 99% of the combined mainline flights, demonstrating our focus on running a reliable airline for our customers and for our employees.
Our employees earned $18 million in incentive program rewards for excellent operations this quarter.
For the full year, we reported pro forma combined net income of $1.6 billion, producing a net margin of 4.8%.
I'm proud of my coworkers' accomplishments as a team in 2010, and I look forward to handing out profit-sharing checks at celebrations system wide on Valentine's Day, February 14.
In total, we'll distribute $224 million to the new United's coworkers in recognition of their hard work to make us profitable this year.
Variable pay is an important part of our compensation structure at the new United.
Much like when we share the financial rewards of a reliable operation through our on time bonus and perfect attendance programs, when we all work together to create a profit for our shareholders, we'll then share the value we've created through profit sharing.
We will soon announce our profit sharing program for 2011 as we continue the success of the new United.
We are nearing the end of our fourth month of integration work and have made progress across many fronts.
We remain committed to delivering $1 billion to $1.2 billion of annual net synergies by 2013 and are focused on harvesting approximately 25% of those synergies this year.
In January, we began redeploying aircraft across the system, optimizing the gauge and frequency of our flights to maximize yield.
This redeployment has allowed us to introduce new flights connecting the dots between cities that previously did not have service out of Continental hubs or United hubs.
For instance, we've expanded flying to Mexico out of Los Angeles, San Francisco, and Chicago.
We've aligned our two revenue management teams and pricing strategies to better manage our inventory on a daily basis.
Our combined sales force is meeting with corporate customers and working to improve existing agreements and earn the business of new clients.
We've selected the critical information technology systems for the new Company and have begun the process of transitioning to the new platforms.
This transition will take more than a year to accomplish, as it is quite complex and exceedingly important.
Members of our airport lounges already have access to both United and Continental clubs, and we are deeply into the process of combining our loyalty programs, as we design our new elite program, improving how and when we reward our best customers.
Soon our customers will experience a measurable difference in our brand's appearance and the consistency of service across our two carriers.
We continue to introduce aircraft into service with the new United livery, having repainted more than 200 airplanes already and will be co-located at more than 35 airports, including all of our hubs by the end of the second quarter.
Starting in late spring, customers will experience a more seamless and integrated experience between the two carriers.
You'll be able to check in at any United or Continental ticket counter at most airports.
You'll find a line to departure management and boarding processes, and we'll have harmonized key customer policies and fees.
Our websites, United.com and Continental.
com, will begin to offer and sell the new United Airlines as one integrated network.
We'll start to roll out our new brand, initially at the hubs of our United subsidiary, and then more broadly across our system, and we plan to introduce our new airport lounge product, the United Club, in the third quarter.
As I mentioned, we've already begun the process of integrating the two loyalty programs, and later this year we'll introduce the combined program for 2012.
In the meantime we'll soon add the ability to link mileage accounts between the two programs, and customers will be able to combine their separate OnePass and Mileage Plus accounts to earn elite qualifying miles and segments on either carrier.
We're also working to harmonize the onboard product and expect to make announcements regarding some of our future aircraft seating configurations over the next 30 to 60 days.
We have many more exciting changes in store during 2011 and beyond, as we take advantage of the magnificent carrier that we are creating as the new United.
We've already merged the operating certificates of Continental Micronesia and Continental Airlines and are on track to achieve a single operating certificate for United Airlines and Continental Airlines by the end of this year.
We're also doing the important work to migrate to a single reservation system, which is on track to be completed by the end of the second quarter of 2012.
We continue to have productive discussions with many of our labor unions and during the fourth quarter, we announced tentative agreements with the Continental flight attendants and with the Continental ramp employees.
As I've said before, we want to reach agreements that are fair to our coworkers and fair to the Company and are committed to doing that as promptly as we are able to do so.
The industry is once again facing higher oil prices, recently around $90 a barrel.
We've been responsive to the higher oil price environment through fare and fuel surcharge actions.
We implemented several fare increases over the past few weeks as we attempt to price our product commensurate with the cost environment to which we are exposed.
If necessary, we will also take capacity action to ensure that we respond appropriately to rising oil prices.
We remain committed to capacity discipline, and we're carefully evaluating our summer, fall, and winter schedules to ensure that we have the appropriate capacity to allow us to recover the higher cost of doing business.
Certain international regions have continued to experience accelerated economic growth, and we'll evaluate all new flying opportunities where we believe we can make money.
But given where the fuel and fare environment is currently, we have a generally downward bias toward capacity.
We are committed not only to harvesting merger synergies, but also to taking advantage of all other available opportunities to continue to strengthen our operational and financial performance.
We continue to focus every day on achieving our objective of sustained profitability.
To do that, we'll take action to aggressively manage our costs and grow our revenue.
We need to take control of our own destiny and we are committed to doing what is necessary to create the world's leading and sustainably profitable airline.
With that, I'll turn the call over to Jim and Zane to walk through the revenue environment and the financial results.
Jim Compton - EVP and CMO
Thanks, Jeff.
I join Jeff in thanking our coworkers for the hard work during a challenging quarter.
Moving on to our fourth quarter revenue results, on a year-over-year basis, United and Continental's combined mainline passenger unit revenue was up 12.5%, driven primarily by strength in mainline yields.
We also saw strong improvement in regional PRASM, up 6.7% for the fourth quarter.
Consolidated PRASM was up 11.5% year-over-year, and we once again expect this to be among the best in the industry.
PRASM growth was strong throughout all regions, mainly due to strength in yields, with double-digit yield growth in all three international entities.
The total domestic market, both mainline and regional, experienced a 9% increase in PRASM in the quarter, driven by a nearly 9% improvement in yields as compared with the prior year.
Trans-Atlantic premium PRASM was up 17% year-over-year, due to both strong yields and higher load factors.
Overall, Trans-Atlantic PRASM was up 8.0%.
This performance was led by tremendous growth in unit revenues to India and the Middle East, up 27% and 21% respectively.
We continue to see opportunities to expand Trans-Atlantic service further into Africa and the Middle East and expect our new service to Lagos and Cairo to perform quite well.
The pacific continued its dramatic improvement again this quarter with higher loads and yields both in the front and back cabins.
Premium cabin PRASM was up 31% year-over-year in the Pacific, and overall Pacific PRASM was up 26.4%, reflecting the strength of demand on our strong network.
China and Japan led the way in revenue performance, with unit revenues in both countries up nearly 30% and yields up more than 20% versus 2009.
The Australian market also showed significant yield recovery in the fourth quarter, with PRASM up 27% as the competitive landscape there has somewhat stabilized.
Latin unit revenues also performed very well this quarter and were up 15.7% year-over-year, driven by improved yields to beach destinations.
As we discussed on calls earlier this year, we strategically increased our Mexico flying in light of the changes to the competitive landscape.
And in the fourth quarter, we saw PRASM growth of over 12% driven solely by yield.
As the economy continues to improve, we remain cautiously optimistic about revenue trends.
Corporate trends are positive, and we have seen continued improvement in corporate travel demand.
The network created by bringing together United and Continental is the most business-oriented network in the world, and we are already seeing increases in our corporate travel sales as a result.
We are attracting new corporate accounts because of our unique ability to fly their employees to nearly any destination in the world with few or no stops along the way.
Put simply, no other carrier in the world has a network as comprehensive as ours.
Premium demand continues to show strength with premium cabin unit revenue up 20% in the fourth quarter across our network.
We remain committed to investing in our on-board product, especially in the premium cabins where many of our most loyal and valuable customers sit.
To date, we have installed lie flat seats in international United first, United business and Continental business first cabins in over 70% of the combined international fleet.
These products continue to attract customers to our flights and the new United network.
Travel is a personal experience for each of our customers.
So we are focused on ensuring that we put the right products in the right markets for our customers, as well as distributing our products through effective channels to satisfy their needs.
We want to offer a full range of fares and products that provide value to customers and are cost effective for the Company.
New technologies and other innovations are allowing us to tailor our product offering specifically to customers, allowing them to choose the services they value.
For example, in December we launched a feature on Continental.com called fare lock.
Customers planning leisure trips who need more time to finalize their travel plan beyond the 24-hour period we give all customers can now have us hold the inventory for them and extend the ticketing time of their itinerary for a fee starting at $5 for a 72-hour hold and $9 for a seven-day hold.
Fare lock is an example of an innovative new feature that today can either be distributed or serviced through legacy technologies because of the limitations of those legacy technology platforms.
We believe having more customer traffic at our websites and continuing our efforts to bring these innovative offerings to our other distribution points, which is possible through modern technology, will help ensure that we can offer our customers the products and services they value and will pay for.
During the fourth quarter, we put into effect the revenue share agreement between us and our joint venture partners, Lufthansa and Air Canada.
Over the course of 2010, we experienced many benefits of a close relationship with these carriers.
One example of these benefits is our capacity coordination across the four carriers.
With this coordination, we are able to better manage slots that constrained airports, offer more time of day coverage, and introduce new flights for our customers.
We look forward to capturing these and other opportunities with our upcoming Trans-Pacific joint venture with ANA, which we expect to start in the second quarter of this year.
Now turning to the outlook for January PRASM.
Based on our current outlook, we estimate the new United's mainline PRASM will be up approximately 12%, and consolidated PRASM will be up about 11% for January year-over-year.
Again, this estimate is preliminary based on the data we have for January thus far.
With that, I'll turn the call over to Zane.
Zane Rowe - EVP and CFO
Thanks, Jim.
I also want to thank the whole team for their hard work, delivering strong operational performance despite the difficult conditions during the quarter.
Our fourth quarter results also demonstrate our ongoing commitment to cost control and we're pleased to report a profit in what is typically a seasonally weaker period.
United's consolidated operating expense increased approximately 10% year-over-year in the fourth quarter, as we continued to face mounting pressure from higher fuel prices.
Mainline operating expense increased about $590 million, largely due to a 22% increase in fuel expense compared to the fourth quarter of 2009.
United's consolidated unit costs for the fourth quarter increased 6.1% year-over-year, and mainline unit costs increased by 6.3%.
Holding fuel and profit sharing constant, United's fourth quarter consolidated and mainline unit costs were up 1% and 1.1% respectively, as compared to the same period last year.
As Jim mentioned earlier, in December we executed the revenue share agreement related to our Trans-Atlantic joint venture with Lufthansa and Air Canada, which is retroactive to January 1, 2010.
During the fourth quarter, United recorded $130 million of other operating expense related to the revenue sharing obligations for the first three quarters of 2010.
Without this charge, our fourth quarter consolidated unit costs, holding fuel and profit sharing constant, would have been reduced by 1.6 points to a 0.6% decline year-over-year.
This again highlights the great cost control demonstrated by the entire team.
Our pre-tax profit for the fourth quarter was $172 million, which equates to a 2% pre-tax margin, an improvement of 4.5 points of margin year-over-year.
The full year, we earned a pre-tax profit of $1.6 billion, resulting in a pre-tax margin of 4.8%.
Moving on to the balance sheet, we ended the fourth quarter with an unrestricted cash and short-term investment balance of $8.7 billion.
During the quarter, UAL generated $106 million in operating cash flow.
Gross capital expenditures were $257 million.
Continental issued $427 million of secured EETC debt at a record low blended interest rate of approximately 4.9% to finance new aircraft delivery through the spring and to refinance some maturing EETC debt.
Also during the quarter, the Company made approximately $530 million in scheduled debt and capital lease payments.
We ended the year with $15.3 billion of net debt, including the capitalization of off-balance sheet aircraft leases, a reduction of $3.2 billion from last year.
In the fourth quarter, we contributed $40 million to our defined benefit pension plans, bringing full year contributions for 2010 to $193 million.
In addition, we contributed $82 million this quarter to our 401-K plans, totaling $340 million in contributions for the year.
Earlier this month we contributed $38 million to our defined benefit pension plans and have minimum pension funding obligations of approximately $90 million for the remainder of 2011.
Jet fuel prices have been volatile, and we continue to hedge our exposure to mitigate this volatility.
We have hedged approximately 63% of our first quarter fuel needs and about 40% for the full year 2011, using a mixture of calls, swaps, and collars.
You can find details of our hedge position in our investor update published today.
We expect our consolidated fuel price to be $2.63 per gallon in the first quarter of 2011, a year-over-year increase of nearly 18%.
In addition to fare and capacity actions, our best tools for managing the impact of our fuel expense continue to be operating a modern, fuel efficient fleet and utilizing efficient operating procedures.
The operating groups have done a good job of implementing fuel saving processes, and they continue to work to find ways to conserve fuel.
United operates one of the most fuel efficient fleets in the industry, and we will continue to modernize our fleet.
We ended 2010 with 710 mainline aircraft in service.
In the fourth quarter, we added two new Boeing 737-900ERs to the fleet.
Earlier this month, we brought into service a new 737-800 with Boeing's new Sky Interior and removed from service one 747 that had been serving as an operational spare.
In addition, we completed the sale of six 737-500s to airlines based in Russia, including three sold earlier this month, and expect to sell four more 737s in early 2011.
We ended the year with 552 regional aircraft flown on our behalf under capacity purchase agreements.
We expect to take delivery of four new Boeing 737 aircraft during 2011 -- two 737-800s scheduled at the end of the first quarter, one 737-900ER due in the second quarter, and the fourth, a 737-800 to be delivered in the third quarter, which will replace older, less fuel efficient aircraft.
In addition to better operating economics and fuel efficiency, these aircraft also will be equipped with winglets, direct TV in every seat back, and the new Boeing Sky Interior, improving the customer experience on-board.
While we have not yet received a revised 787 delivery schedule from Boeing, we do not currently anticipate taking delivery of the first of these aircraft until the first quarter of 2012 at the earliest.
Since we had earlier expected these aircraft to be delivered in the second half of this year, this delay does not materially change our estimate for capacity in 2011.
While we are disappointed by this most recent delay, we remain big believers in the 787, which will be a game-changing aircraft that will give us competitive advantages over airlines that won't have the aircraft.
While at this time we are not revising our consolidated full-year capacity outlook of up 1% to 2% for the year, we have re-evaluated our overall schedule to maximize profitability in a higher fuel price environment.
We now expect our full-year consolidated domestic capacity to be down between 0.5% and 1.5% year-over-year, a reduction of a point versus our prior 2011 domestic capacity guidance, underscoring our commitment to capacity discipline.
Consolidated international capacity is expected to be up between 4.5% and 5.5% for the full year, as we take advantage of new opportunities created not only by the strength of the combined network, but also the relative macroeconomic growth rates around the world.
For the first quarter, we expect consolidated domestic capacity to be down approximately 1%, while international capacity is increasing approximately 6% year-over-year.
Overall, we expect the Company's first quarter mainline and consolidated capacity to increase about 2% year-over-year.
We expect first quarter consolidated unit costs, excluding fuel and profit sharing expense, to be up between 2% and 3% year-over-year, with mainline unit costs expected to rise between 2.5% and 3.5%.
We see inflationary pressure coming from higher maintenance expense in the first quarter, as well as higher revenue related costs.
For the full year, we expect consolidated unit costs, excluding fuel and profit sharing, to increase between 1% and 2% and mainline unit costs, excluding fuel and profit sharing, to increase between 1.5% and 2.5% year-over-year.
As we initially expected, we have determined that the merger resulted in an ownership change as defined under Section 382 of the Internal Revenue Code, which triggers limitations on the use of existing net operating losses for both legacy Continental and legacy UAL Corporation.
Based on our analysis, we currently believe that these ownership changes will not significantly limit our ability to use our net operating losses in the upcoming years.
We expect to make $450 million of scheduled debt payments in the first quarter, and we have $2.5 billion due in 2011, including the $150 million impact of the UAL 5% convertible notes that we plan to redeem for cash in February.
And the $726 million impact of the UAL 4.5% convertible notes that may be put to the Company in July of 2011.
We expect gross capital expenditures of about $300 million in the first quarter and $1.2 billion for the year, much of which is related to our merger integration and investments in our product.
On a net basis, we expect capital expenditures of about $240 million in the first quarter and $900 million for the full year.
We continue to seek additional opportunities to improve the strength of our balance sheet as we did in 2010 through select debt reduction initiatives.
In the fourth quarter, and early in the first quarter of 2011, we eliminated approximately $325 million of debt beyond our scheduled obligations, including nearly $150 million during the month of January.
We plan to continue to take advantage of opportunities to pay down existing debt as well as refinance high cost debt when it makes sense to do so.
In order to effectively compete in a global marketplace and provide a return to all of our stakeholders, we must achieve our goal of consistent, sustainable profitability.
We are focused on delivering solid operating performance, exercising cost discipline, as well as capturing merger synergies to take advantage of the opportunity presented by the new United.
While there's still much work ahead, this quarter's results demonstrate a solid step in the right direction.
With that, I'll turn the call back over to Jeff.
Jeff Smisek - Chairman, President and CEO
Thanks, Zane.
Although our merger and the ongoing integration get a lot of attention, our primary focus remains on our operations and service and competing for our customers' business every single day.
We have a lot of competitors out there, some of whom think they can take advantage of us as we integrate our two great carriers.
Let me be clear.
We are not going to let that happen.
We are a tough, focused, and aggressive competitor, and we intend to stay that way throughout the merger integration process.
And when we finish our integration, we will be a tougher, more focused, and even more aggressive competitor with the world's best network, the world's largest and best frequent flier program, a great fleet, a great product, world class facilities, and the finest people in the business.
I am very confident of our success, and we will remain focused on achieving sustained profitability across the business cycle.
Our financial results today, as well as all the work going on across this superb Company, are very solid steps as we work together to build the new United.
With that, I'll turn the call back over to Tyler to open it up for questions.
Tyler Reddien - Managing Director, IR
Thank you, Jeff.
First we'll take questions from the analyst community, then we'll take questions from the media.
Please limit yourself to one question and if needed one follow-up question.
Karma, please describe the procedure to ask a question.
Operator
(Operator Instructions).
First question comes from the line of Bill Greene from Morgan Stanley.
Please proceed.
Bill Greene - Analyst
Yes, hi.
Jeff, I'm wondering if we look at your fleet, United had a narrow body RFP sort of process under way before the merger, so what timing do we have to think about for when you would address some of the narrow body or even just broader fleet issues?
You touched on -- or Zane touched on -- some of the comments in the prepared remarks, but I'm sort of thinking about as you look kind of longer term, how do you feel about where we are on your order book?
Jeff Smisek - Chairman, President and CEO
Well, Bill, I'll let Zane speak to that as well, but we've got a pretty solid order position with the new United that we inherited from the Continental subsidiary.
So we're pretty comfortable with what we've got right now.
As well, United has an order book for Airbus aircraft as well, Airbus narrow bodies.
So we're in the process right now of going through and sorting out our long-term fleet plan, and we're not done with that process.
But we've got a pretty solid order book right now for narrow bodies, as well as we've got a good order book for the 787 and the Airbus A-350 as well.
So we're pretty comfortable with what we have right now.
Zane Rowe - EVP and CFO
But I would just add, as we've highlighted before, we have tremendous flexibility as we look at the fleet and the network closer, optimizing the demand and revenue side of this.
So there's clearly tremendous opportunity over the next number of years as we see aircraft come off lease and with our order book to make whatever adjustments we think optimize profitability for the combined Company.
Bill Greene - Analyst
Jeff or Jim, as you guys have gotten in and kind of looked and compared notes with United and Continental, any surprises from the ancillary perspective in terms of what you maybe had as expectations from Continental going in about what United has done or what successes maybe Continental had that weren't appreciated on the United side?
Jim Compton - EVP and CMO
Hey, Bill, this is Jim.
I think in terms of surprises, I think what -- from my perspective what I've learned is clearly United was a leader in ancillary products and getting them into the marketplace and so forth, as well as the great things Continental had done.
What's really happening in a lot of areas, when you bring two teams together that are really, really talented, you begin to find best practices from both teams.
So I think kind of expecting that, but actually very much surprised by the innovation that's been at both companies and so forth.
So as the platforms combine and as we move forward, we're very excited about what we can do in the ancillary area.
Operator
The next question comes from the line of Jamie Baker from JPMorgan.
Please proceed.
Jamie Baker - Analyst
Hey, good afternoon, everybody.
How are you?
Jim Compton - EVP and CMO
Great.
Jeff Smisek - Chairman, President and CEO
Hey, Jamie.
Jamie Baker - Analyst
Question on the cost guidance for 2011.
Does the ex-fuel CASM figure assume your current labor cost structure, or does it incorporate some magnitude of increase?
If the answer is the latter, any details are welcome, though I'm guessing mum's the word.
Zane Rowe - EVP and CFO
Hey, Jamie.
This is Zane.
Part of your question is breaking up.
I think you're asking about our cost guidance and some of the embedded assumptions as it ties to agreements.
As we've said in the past, we won't comment on what's in and what's out.
But we obviously accrue in accordance with GAAP, and our most likely guidance is our most recent thinking.
Jamie Baker - Analyst
Okay.
And hopefully this follow-up will get through.
One criticism I've had of Delta, and I'm guessing others feel the same, is that their post-merger margin performance hasn't really been any different than the industry, once you make some adjustments for fuel hedging and the like.
If the synergies are actually there, I can't identify them.
You've talked about harvesting your own synergies, but I wonder if you've given any thought into how you'll identify them in a way that hopefully your shareholders can actually see them.
Zane Rowe - EVP and CFO
Right, Jamie, I think that's a fair criticism.
What you'll see us do through the course of the year is highlight both on the revenue and the cost side what we believe those synergy values are.
And as we build that out through the year, obviously given the ramp-up that Jeff talked about, we would expect to see more of that in 2012 than we see in 2011.
But we're well on our way and obviously pleased with the path we're taking right now.
Operator
And the next question comes from the line of Hunter Keay from Stifel Nicolaus.
Please proceed.
Hunter Keay - Analyst
Thanks very much.
Good morning.
Jeff Smisek - Chairman, President and CEO
Good morning.
Hunter Keay - Analyst
That January PRASM number was really strong.
It was much better than I was expecting.
Hoping to maybe flush out some color on that.
I guess a couple questions there.
What maybe regions are really driving that?
Any comp issues we should be aware of on a year-over-year basis?
Lastly, is it probably fair to assume that a lot of this fare and fuel surcharge activity is probably not even reflected in that number just yet?
Jim Compton - EVP and CMO
Hunter, this is Jim.
We don't break down, obviously, that January PRASM number by entity.
I would say, though, that the team's been very focused, whether it's a network team on capacity discipline and at the corners moving capacity to where we've seen good performance, as we talked about in international side.
So I think what we're seeing is that work continuing to reflect itself in the January numbers.
In terms of fuel surcharges, on the international side, if you went back to when we first did guidance on capacity of 1% to 2% overall for 2011 in October, on the international side there's actually been pretty good success on the fuel surcharge.
In the Trans-Atlantic, US point-of-sale, probably around 12% to 15% type of increases in the fuel surcharge and equivalent in the Pacific also.
So again, the kind of -- the team being really focused on where the demand's at, managing the capacity, I think it's paying out pretty good dividends in our January number.
Hunter Keay - Analyst
Okay.
Thanks.
Zane Rowe - EVP and CFO
Hunter, this is Zane.
Just tying that back to Jamie's point, I told Jim earlier, he can't call that merger synergies.
Jim Compton - EVP and CMO
I tried.
Hunter Keay - Analyst
I'm sure you would identify it if it was, though, right?
Thank you for that, Zane.
Also, I'd like to talk just briefly about labor.
I guess a two-part question.
I'm curious to know where you stand on some of the key issues with the pilots maybe outside of scope, and also I'm kind of curious to know how these tentative agreements that you reached with some of the Continental legacy work groups is going to -- how does that get you closer to a joint CBA?
I can't really understand that.
Jeff Smisek - Chairman, President and CEO
Sure, Hunter, this is Jeff.
In terms of the pilots, we don't negotiate in public, so I'm really not going to give you the blow-by-blow, but I'll tell you we continue to meet and have a good, constructive dialogue going with ALPA on a joint collective bargaining agreement.
In answer to your second question, in terms of agreements, we work to get agreements with our workforce.
We would like to get joint agreements done promptly, but where we're able to get agreements with the workforce, a work group, whether it's in our Continental subsidiary or United subsidiary, we'll do so.
So we've been able to reach agreements with a number of work groups at our Continental subsidiary, and we continue to have discussions and I think fruitful discussions with a number of our work groups in the United subsidiary.
Ultimately, of course, we want to get to joint collective bargaining agreements.
I've been clear.
I'd like to get all of our employee groups together with joint collective bargaining agreements by the end of this year.
I'll tell you that that's out of my control, obviously, because we also have issues regarding the union representation of the collective bargaining units, where work groups at our Continental subsidiary and work groups at our United subsidiary are represented by different labor unions, and of course there will be elections held to determine the appropriate representative for those work groups.
We will work with that elected representative to negotiate a joint collective bargaining agreement, but we're making progress and again we're very focused on reaching agreements that are fair to the Company and fair to our coworkers.
Operator
The next question comes from the line of Kevin Crissey from UBS.
Please proceed.
Kevin Crissey - Analyst
Good morning.
I'm not sure if it's for Jim or who wants to address it, but thoughts on the Google - ITA acquisition and your public stance on that?
Jeff Smisek - Chairman, President and CEO
This is Jeff.
I'll talk to it briefly.
We don't have a public stance on it.
And we really haven't commented publicly on it, and we don't intend to.
Kevin Crissey - Analyst
Okay.
And I guess the question is why, why wouldn't you -- I mean, if you're going to object or whatever, to object quietly, I don't really understand why wouldn't you have an opinion?
Jeff Smisek - Chairman, President and CEO
We're just -- this is something that I think it's a -- let the antitrust experts deal with the issue, and we're just going to stay out of that fight.
Operator
And the next question comes from the line of Gary Chase.
Please proceed.
Gary Chase - Analyst
Good morning, everybody.
Zane Rowe - EVP and CFO
Good morning, Gary.
Gary Chase - Analyst
Wanted to see if I could just touch on the topic.
I think it was in some combination of Zane and Jim's prepared remarks, you talked about reallocating the capacity outlook away from domestic and towards international.
And I think you made a specific reference to some causality there with rising fuel prices.
What is it about the international environment, you think, that is allowing you to better capture the incremental revenue that's required to offset those additional costs that doesn't exist domestically?
Jim Compton - EVP and CMO
Hey, Gary, this is Jim.
I think historically on the international side, the marketplace, the ability to match kind of the price with demand through the use of fuel surcharge has been more effective and we're continuing to see that.
Although I will say, obviously in the last month or so, even in the US domestic, there's been three or four fare increases helping manage that, watching the demand versus the capacity and passing that cost of fuel through on the domestic side.
I think the main point as we look, one is the success we're having internationally.
I'll tell you, there's a lot of things that make up the story, our participation in the joint venture with our partners and the success in that, as we grow our network with the Star network.
So a combination of a number of things, whether it's kind of the ability to pass on fuel surcharges, the attractiveness of our network to both our customers and the corporation.
All of those -- and kind of the globalness.
Zane mentioned the growth in the international countries and so forth out there lend itself to kind of at the edges kind of making that capacity move toward the international, knowing that historically, domestic's been a much tougher environment.
Gary Chase - Analyst
Do you think the ability to explicitly market the surcharge is a material component of it?
Jim Compton - EVP and CMO
Yes, I do.
I absolutely do.
I think, again, historically the ability to pass that on.
Fuel surcharge on a year-over-year basis on the Trans-Atlantic, US point-of-sale are some 40% off, on a year-over-year basis.
So I think that has helped us in that area.
Gary Chase - Analyst
But you have the ability to raise fares domestically too, and they're either passed on or not.
I'm wondering if the ability to show it explicitly on the consumer end is worth pursuing here domestically, if you think that's what's really driving it internationally.
Jeff Smisek - Chairman, President and CEO
We obviously can't comment on forward pricing action.
When I get in a cab in Chicago I pay a dollar fuel surcharge.
As a consumer, I understand that probably better than I would if it were just buried in the fare.
Operator
Next question comes from the line of Michael Linenberg.
Please proceed.
Michael Linenberg - Analyst
Hey, good morning, guys.
Just Jeff, back to the point that you made about over the next 30 to 60 days that you would be revealing some of the maybe seating configurations, is -- maybe I'm reading too much into this.
When we look at the domestic capacity you've pulled it back a bit.
Is that -- is baked into that -- does that reflect some element of this proposed modification?
Jeff Smisek - Chairman, President and CEO
No.
Michael Linenberg - Analyst
Okay.
And then my second question, and it's sort of a two-part on distribution here.
First, back year-end, you came out and indicated that you were going to be moving towards a new reservations platform, I think something developed by HP.
When we think about a transition from the older system to HP, is that a function of cost?
Is that a function of better technology?
And the reason I'm just bringing up the technology piece is I feel like there's been a lot of criticism out there about some of the global distribution systems not keeping pace technologically-wise.
And yet there has been innovation and I think maybe one of the opposing arguments to that is that a lot of the innovation that we've seen at the GDS level really has focused on maximizing airline incentives with the travel agents.
Is that a fair assessment?
I realize it's a two-part question.
Whatever you can answer would be great on that front.
Jeff Smisek - Chairman, President and CEO
Let me talk about the reservation system first of all.
It's not a new reservation system.
In fact, for our technology platforms, what we are generally doing is picking a platform that was either at our United subsidiary or our Continental subsidiary to minimize migration risk.In the passenger servicing system and the reservations platform the technology folks at the new United picked the shared system.
That minimizes migration risk of going to a pre-existing well-known platform.
In terms of distribution, as kind of in a more general view, I think we made a lot of progress over the years in our distribution expense, if you look back over the past 15 years or so.
But we have obviously some more progress to make and as you've alluded, we've been very focused on product and marketing innovation.
We're focused on the use of modern technology as Jim was talking about in our fare lock product.
We want to offer our customers in a very clear and very transparent way a choice of our products and services that they value, And I will tell you, at the new United, our preference is clearly to be in a broad range of distribution channels, whether they're direct or via GDS systems or whether they're online or brick and mortar travel agencies.
We've got to make sure our distribution channels are cost efficient for the value received and they need to be appropriately responsive to changes in our product.
Changes in technology, changes in consumer behavior, changes in customer preferences, I mean, this is an industry that is being very innovative today and we need folks to keep up with this.
I'll tell you, we are -- we've taken steps already to partner with our distributors to help them adapt to what we're doing here.
And our partners at Sabre, our partners at Travelport, for example, with Sabre, we work with them to -- we're working on technology that lets us distribute our Economy Plus upsell at the time of booking through the Sabre platform.
We're working right now with our good partners at Travelport to deliver something that's similar to that as well.
I think in general our business continues to evolve and we're going to continue to innovate and we're going to offer more choices to more customers for the service attributes that they want and they're willing to pay for.
We want to continue to work together with our distributors and they're good business partners and we want to make -- but we need to make sure that their technology can keep up with the swift pace of our innovation.
And we've got to make sure that neither we nor our customers are hampered by the legacy technologies and so that's really what's at issue.
Operator
The next question comes from the line of Will Randow from Citigroup.
Please proceed.
Will Randow - Analyst
Good morning.
Jeff Smisek - Chairman, President and CEO
Good morning, Will.
Will Randow - Analyst
Question, want to hit on a couple points that have been touched over.
In terms of progress in realizing merger synergies, was anything realized in the first quarter?
What are you expecting in the second quarter post your headcount reductions?
And the 25% of merger synergies you're anticipating this year, is that run rate or total?
Zane Rowe - EVP and CFO
Will, this is Zane.
The synergy value is obviously embedded in our guidance.
As you would expect, there's not much in the first quarter and it does ramp up and build up through the year.
The 25% is for the full year, the expectation for the full year, so it will continue to ramp up throughout the course of the year.
We're not at a point yet where we're willing to disclose any more detail on headcount, but we will be transparent in this process through the course of the year and give you updates as we see fit.
Will Randow - Analyst
And just to be clear, the 25%, that's a total realization or you'll be running to a 25% at year-end?
Zane Rowe - EVP and CFO
It's the total, and it will be building up as we enter 2012.
Will Randow - Analyst
Thank you.
And in terms of -- should we expect the $2 billion plus in gross debt reduction this year to be primarily through cash or how should we think about that?
Zane Rowe - EVP and CFO
You know, we're not going to give too much more detail on that.
The $2.5 billion in maturities this year Gerry and his team will be working through and as I mentioned earlier, we're committed to strengthening the balance sheet, but we're not going to highlight exactly how we plan on doing that at this point.
Operator
The next question comes from the line of Glenn Engel from Bank of America-Merrill Lynch.
Please proceed.
Glenn Engel - Analyst
Good morning.
Zane Rowe - EVP and CFO
Hi, Glen.
Glenn Engel - Analyst
Couple questions.
One, can you talk about what percent of your sales are happening on your own website currently and, two, with American seemingly taking a more antagonistic approach with its distribution channel, are you -- is that helping you at all with making any progress as you and -- United and Continental get together to go after large corporate agencies.
Jim Compton - EVP and CMO
Hey, Glen, this is Jim.
Our historical is about combined carrier about 28% of our tickets are sold through the direct channel, whether United.com and Continental.com.
I would -- as to the other comment, we're seeing no appreciative shift in traffic because of what's happening in the marketplace.
Glenn Engel - Analyst
On the ancillary side, combining the United and Continental, I guess, credit card programs, are you able to -- are you going to be able to get a higher return because you put them together and have better bargaining position and when do those contracts expire to let you renegotiate?
Jeff Smisek - Chairman, President and CEO
We're -- this is Jeff.
We're in the process right now of negotiating with Chase for the combined program and we're not in a position to comment on that right now .
Glenn Engel - Analyst
But that's something that could happen soon.
You don't have to wait very long to -- ?
Jeff Smisek - Chairman, President and CEO
We're working on that right now.
Operator
The next question comes from the line of Dan McKenzie from Hudson Securities.
Please proceed.
Dan McKenzie - Analyst
Hey, good morning, everybody.
Thanks.
Jeff Smisek - Chairman, President and CEO
Hi, Dan.
Dan McKenzie - Analyst
You know, Jim, I appreciate your earlier commentary on January PRASM.
I'm wondering if I could peel back the onion a little bit more here.
That is, how meaningful to the initial January PRASM estimate was any potential revenue shift from AMR Sabre dispute?
And then I guess what I'm really trying to get at here is if there are any blips, weather or otherwise, that might be skewing the January results?
Jeff Smisek - Chairman, President and CEO
Hey, Dan.
As I mentioned, we're seeing no significant shift due to the -- kind of the distribution issues in the marketplace right now.
And so we're seeing no shift in that.
And your second question, I'm sorry, I missed it.
Dan McKenzie - Analyst
Well, just if there was -- that answered it, actually.
That's good enough.
I guess just in terms of the second question here, but related to the first question is how material were the recent four fare increases?
Can they be deemed material to your domestic fare base.
Jeff Smisek - Chairman, President and CEO
The fare increases?
I think they -- in the domestic side, they're mainly on the leisure side because they're actually with the Southwest matches and so forth, so those increases like historically take a while to spool out as you go through the quarter.
So, some effect in January, but again, some of them came in December so you did see some of that realization in January.
But as recently as a couple weeks ago, another $4, $10 round-trip type increase will take a while to spool off.
Operator
And we have no further questions.
Thank you, ladies and gentlemen.
This concludes the analyst and investor portion of today's call.
We would now like to take calls from the media.
(Operator Instructions).
First question comes from the line of Ray Neidl from Maxim Group.
Please proceed.
Ray Neidl - Analyst
Good morning.
I don't know how I got over in the media section but I'm with Maxim Securities.
And can I ask my question?
Nene Foxhall - EVP, Communications/Government Affairs
Yeah, go ahead.
Go ahead.
Ray Neidl - Analyst
Okay.
The one thing is your fleet replacement modernization, you operate a couple of different types of narrow bodies and your system's big enough to support different equipment types, but going forward with the re-engined Airbus A320, Boeing, trying to decide what they're going to do with replacement aircraft and Embraer and other manufacturers trying to sell you narrow bodies, where do you think you might go in your fleet planning?
And if there's going to be obsolescence among these aircraft the next five or six years, what's your backup plan there?
Jeff Smisek - Chairman, President and CEO
This is Jeff.
We're looking at everything, obviously, Airbus comes in and visits with us and Boeing comes in and Embraer visits with us.
Everybody visits with us.
We're in the process of determining our longer term fleet plan.
Right now we have a great aircraft order book and we've got a lot of fleet flexibility.
But there are new products coming on the market and we're always interested in products that can help us operate more efficiently and give us better customer experience as well.
Ray Neidl - Analyst
Okay.
Great.
And then just a very general question, as you are working on your systems, probably still work in progress, but you probably do have excess hubs right now, some overlapping hubs in cities.
Do you think that going down the road there's big cost savings in turning maybe some of these smaller hubs into focus cities like Southwest does.
It's going to be hard to operate these smaller hubs with RJs which has been the practice over the last several years.
A change in thinking.
I'm losing my voice here.
Maybe a changing in thinking in how these hub cities are operated, would that be in the works?
Jeff Smisek - Chairman, President and CEO
We don't have any overlapping hubs.
We have actually had very little over lap in bringing the two carriers together.
That was one of the beauties of this merger is that we've produced this magnificent network with very little over lap.