聯合航空 (UAL) 2011 Q2 法說會逐字稿

Good morning and welcome to the United Continental Holdings earnings conference call for the second quarter of 2011.

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

Following the initial remarks from management, we will open the lines for questions.

(Operator Instructions)

This call is being recorded and is copyrighted.

Please note that no portion of this call may be recorded, transcribed, or rebroadcast without the Company's permission.

Your participation implies your consent to our recording of this call.

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

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

Please go ahead.

Thank you Michelle.

Good morning everyone and welcome to the United Continental Holdings second quarter 2011 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 CFO, Zane Rowe, and Senior Vice President, Finance and Treasurer, Gerry Laderman.

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

Zane will follow with a discussion of our cost structure and the balance sheet.

Jeff will make a few closing remarks and then 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 will turn it over to Tyler.

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 investor update, and the remarks made during this conference call, may contain forward-looking statements which represent the Company's current expectations or beliefs concerning future events and financial performance.

All forward-looking statements are based upon information currently available to the Company.

A number of factors could cause actual results to differ materially from our current expectations.

Please refer to our press release, form 10-K, and other reports filed with the SEC 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 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 of last quarter, we will present our second-quarter 2011, results on a combined basis for United Continental Holdings.

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 updated issued during the fourth quarter of 2010, and the first and second-quarters of 2011, which are also available on our website.

Unless otherwise noted, as we'll walk you through the numbers for the quarter, we will be excluding special items, merger related expenses, and/or fuel hedge non-cash net mark to market gains and losses.

These items are detailed in our earnings release.

And now I would like to turn the call over to Jeff Smisek, President and CEO of United.

Thanks Tyler and Nene, and good morning and thank you all for joining us.

I would like to thank my coworkers for delivering solid operational and financial performance this quarter.

We are in a period of transition as we work to integrate our two subsidiaries, and my coworkers continue their professional focus on delivering clean, safe, and reliable air transportation for our customers.

Today we reported a net profit of $577 million for the second quarter, or $1.49 per diluted share, delivering a 6% pre-tax margin for the quarter.

Our operational results during the second quarter were good, despite challenging summer storms in the Midwest in June.

Both subsidiary carriers completed more than 98.5% of all flights during the quarter.

Based on our year-to-date profit and our solid operational performance, we have accrued $90 million in profit sharing and have paid $23 million in the on-time performance bonuses to our coworkers so far this year.

While the final profit sharing will be based on full-year results, we look forward to being able to share the Company's success with our coworkers.

Although fuel prices moderated somewhat during the quarter, they remain very high and volatile.

We saw our second-quarter fuel expense, excluding the impact of hedges, rise $1.1 billion compared to the same period of 2010.

In addition, we are operating in a tepid economic environment in the US, with significant uncertainty here and abroad.

We have responded appropriately, raising fares in the face of high fuel costs, and reducing our planned capacity to reflect the challenging environment that we face.

At the new United, we are focused on achieving sustained and sufficient profitability for the benefit of all of our stakeholders.

To do this, we must create economic value, generating returns in excess of our cost of capital, across the business cycle.

This quarter's results demonstrate our commitment to this important goal.

As we continue to integrate our two great carriers and realize the synergies from our merger, we will be well positioned to deliver on the significant potential of the new United.

We are on track with the merger integration, made significant progress this quarter.

We have aligned our major policies and procedures across the travel experience, and have enhanced our technology to create a more seamless experience between the two subsidiary carriers.

Our kiosks now serve both carriers' passengers, we now have a single area for check-in for either subsidiary at a 275 of more than our 370 airports, and we have repainted more than 601 aircraft in our new livery.

Since the closing of our merger, we have been working hard to reach joint collective bargaining agreements with our labor groups.

These are complex negotiations about complex agreements, and we are actively engaged in discussions with representatives from several of our labor groups.

Although I have made it clear to my own negotiators that I would like to reach joint collective bargaining agreements promptly, we are not going to repeat the mistakes of the past and create an unsustainable cost structure.

That is not good for anyone.

Any collective bargaining agreement must be fair to my coworkers and fair to the Company.

I originally set an admittedly aggressive goal of reaching joint agreements with all of our representative work groups by year end.

I don't think we will achieve that goal, given the complexities of merging mature long-standing contracts, as well as factors outside of our control.

Although some of our work groups now have a common union, others still don't, and representation elections will still need to be held for them.

We have experienced recent progress as our flight attendants completed their representation election, and the representation election for our fleet service workers is now underway.

Just as we have been working with representatives of our pilots and our tech ops groups, we work with the newly elected representatives of our flight attendants and fleet service group to reach collective bargaining agreement as promptly as practical.

Integrating our two subsidiaries is not the goal of our merger.

We are building the world's leading airline.

The airline people want to fly, coworkers want to work for, and investors want to invest in.

We plan to be the airline of choice for the smart business traveler, and are beginning a series of significant product enhancements designed to improve our passengers' experience.

We are investing in the onboard product across the domestic and international fleet.

As you know, we have already announced that we are bringing our successful Economy Plus product to the Continental fleet beginning next year.

We are also taking delivery next year of 19 Boeing 737-900ER aircraft, which will be equipped with our very popular DIRECTV service, as well as the new Boeing Sky Interior.

Our domestic enhancements are not limited to the mainline fleet, as we are adding first-class and Economy Plus seating to our Q400 regional aircraft, significantly expanding the available premium seating options on those aircraft.

On the international front, next year we will take delivery of 6 of the 50 Boeing 787 Dreamliners we have on order.

We are also working to complete reconfiguration of our international fleet premium cabins, which will have flat-bed seats in first and business class.

We currently have flat-bed seats on 123 of our aircraft, more than any other US carrier.

We understand how important in-air connectivity options are becoming to customers, and we have signed a letter of intent to install Ka-band WiFi on our aircraft that have DIRECTV.

We are currently developing a strategy to deploy WiFi across the rest of our mainline fleet, providing additional in-flight entertainment options and partnership opportunities for the Company.

Our in-flight product is not the only part of the experience that we are improving.

We will be launching our re-branded lounge, the United Club, in the third quarter, and have plans to refurbish an upgrade lounges across the system.

In June, we aligned the United Club beverage and snack offerings worldwide.

We are investing our facilities, including building a new terminal for our regional aircraft in Houston, and upgrading baggage systems at our hubs to improve bag service for our customers.

Later this year we will introduce our new loyalty program under the name MileagePlus.

The program features for our combined loyalty program will be effective for the 2012 program year.

Earlier this week, we launched our new co-branded credit card offering, the Explorer Card from Chase, which provides customers with valued features and benefits.

We will also be making a number of other loyalty-related announcements in the coming months.

For now, our job is to deliver on the significant potential of our two great companies as we combine them.

Mergers in the airline business are extremely complex and time-consuming; and we are only part way down a long and winding road; however, what we have experienced so far is very exciting, and I am pleased with our progress to date.

As we continue to build the world's leading airline, we won't lose sight of our daily mission, running a clean, safe, and reliable airline and generating sustained and sufficient profitability.

With that, I will turn the call over to Jim and Zane to review the revenue environment and financial results.

Thanks Jeff.

I would also like to thank our coworkers for the hard work this quarter.

United second-quarter revenue results continued to improve and build upon the success of the last two quarters.

On a year-over-year basis, consolidated unit revenue was up 9% and the mainline PRASM was up 9.1%; regional PRASM improved 8.8% versus the second quarter of 2010.

Yield growth and capacity discipline continue to be the principal sources of year-over-year unit revenue improvement.

Yields in both the mainline and regional systems were up 10% year-over-year in the second quarter.

Mainline domestic PRASM increased 9.7% year-over-year with capacity down nearly 2% versus second quarter 2010.

Second-quarter mainline international PRASM was up 8.3%, driven by yield improvements of 10.8% versus 2010, due largely to our second-quarter international average fares increasing 10%, versus second quarter of 2010.

Latin America was a stand-out performer among mainline international entities this quarter, with unit revenue up 20.2%, and yield up 22.7%, as compared to 2010.

The average fare to Latin America increased more than 20% versus last year, driving extremely strong unit revenue growth in Central America, the Caribbean, and deep South America.

Central America results led the entity with PRASM up 30% and yields up 28% year-over-year.

Pacific PRASM was up 5.7% year-over-year in the second-quarter, with premium cabin PRASM up 8% and yields up 10%.

Premium cabin traffic to China was up more than 5% in the quarter, driving premium cabin PRASM up 13% versus last year.

This quarter's specific revenue result was reduced by approximately $100 million for approximately 5 points of year-over-year PRASM growth, due to the Japanese earthquake and subsequent tsunami and nuclear crisis.

As the second quarter progressed, we saw the pace of Japan point-of-sale net bookings improve, and believe that over the course of the third quarter, net bookings from both US and Japan points of sale will return to more normal level.

Second-quarter mainline trans-Atlantic PRASM increased 5.6% and yield increased 8.3% versus 2010.

The Middle East and India continue to outperform Europe with double-digit yield improvements in the quarter.

We shared a portion of our trans-Atlantic revenue success with our trans-Atlantic joint venture partners again this quarter.

And we are seeing significant benefits coming from the joint ventures structure.

One opportunity we are leveraging is the ability to coordinate capacity plans with our joint venture partners.

We, along with Lufthansa and Air Canada, have reduced our fourth-quarter joint venture trans-Atlantic capacity by more than 6 points, in light of the demand environment.

We now expect fourth-quarter trans-Atlantic capacity for the joint venture to be roughly flat versus our fourth-quarter 2010 capacity.

The benefits of our joint venture don't stop with capacity.

We are currently developing joint pricing, and inventory management systems, and processes across the full joint venture.

As we continue to develop and improve these systems and processes, we expect the benefits of our trans-Atlantic joint venture to grow.

Corporate revenue continued to show slow but steady improvement in the second quarter.

The recovery has been driven by yield improvement with corporate yields up 9% when compared to 2010.

We continue to run our airline with the business customer in mind.

In addition to the solid demand environment we saw this quarter, we have developed a strong fare environment.

Second-quarter fares benefited from the many fare increases that began in February, resulting in double-digit fare increases in both the domestic and international markets as compared to 2010.

International fuel surcharges in the second quarter also remain elevated versus 2010, with fuel surcharges up 47% in Latin America, 36% in the Atlantic, and 48% in the Pacific.

While the pace of fare increases activity has slowed versus earlier in the year, we are seeing success in managing yields upwards through revenue management strategies.

Our capacity discipline supports higher fares by adjusting the size of our airline to the current demand environment.

Early in the year, in response to the volatile fuel and a tough US economy, United reduced expected consolidated capacity growth for full-year 2011 to be roughly 0 versus 2010, and we still believe that is the right plan for our airline.

We continue to optimize our capacity plan in light of high oil prices and the macroeconomic environment, and have reduced our capacity plans modestly from our prior guidance.

We now expect our third-quarter consolidated capacity to be flat to down 1% year-over-year.

And our fourth-quarter capacity to be down nearly 3% year-over-year.

We are building the preferred airline for the smart business traveler, and we are committed to investing in our product on the ground and in the air.

We have aligned the food and beverage items in our 57 United Clubs worldwide.

We continue investing in our international premium cabin and have retrofitted 123 aircraft with flat-bed seats.

We expect to complete the retrofits next year.

These and many product enhancements Jeff mentioned earlier, are just some of the improvements that are on the horizon, as we renew our fleet and improve our product offerings for our customers.

[Ensuing] revenues for the quarter were up modestly year-over-year, as we saw very strong growth and value-added products and services offset by a reduction in bag fees, due to the growth of elite travelers and co-branded credit card holders as a percentage of the total.

This growth in high-value customers is positive to revenue overall, but it does impact this line.

We recently announced the introduction of second bag fees to Asia, excluding Japan and Hong Kong, as well as at Latin destinations.

Customer demand grew for Economy Plus and extra leg room seats this quarter,with the seat up-sell revenue increasing 34% year-over-year, as we expand the channels through which our customers can purchase Economy Plus seats and optimize our pricing.

We have seen similar growth rates with our other travel option products, such as Premier Line, which provides an elite-for-a day experience, and Award Accelerator, which allows our MileagePlus and OnePass customers to earn awards faster when they fly.

Second-quarter cargo revenue increased 5% versus the same period last year, with yield up more than 20% and volume down 13% year-over-year.

Since closing the merger 9 months ago, the team has taken action to begin to capture the $800 million to $900 million of revenue synergies we have identified.

One of our revenue synergies is redeployment of our Continental subsidiary aircraft in United subsidiary markets and vice versa.

We continually monitor the global economy and actively manage our capacity by choosing the right aircraft and frequency for any given market.

This quarter we optimized our Newark to Zurich service, replacing a subsidiary Continental Boeing 767-200 with a subsidiary United Boeing 767-300.

In June, we are also introduced a second frequency between Washington, DC, and Paris, using a subsidiary Continental Boeing 757.

In addition to fleet redeployment, another synergy source is network optimization.

United's network is an unmatched asset, with gateway hubs ringing the US.

This unique structure allows us to identify new routes to serve, that on a stand-alone basis neither United nor Continental, prior to the merger, could profitably serve.

Two examples of network optimization this quarter include the launch of our Los Angeles to Shanghai flight and expanding our Mexico footprint by adding service to Guadalajara from Los Angeles and San Francisco.

Between network optimization, fleet redeployment, and other initiatives underway, we estimate that the passenger revenue synergies captured in the quarter to be approximately $50 million.

Turning to the outlook for July unit revenue.

Based on our current outlook, we estimate United's mainline and consolidated PRASM will be up approximately 7% for July year-over-year.

This PRASM estimate is preliminary, based on the data we have for July thus far.

With that, I will turn the call over to Zane.

I would like to thank the entire team for its contributions to this quarter's results, but we still have a lot of work ahead of us.

The team is doing a good job integrating our two carriers, and we are beginning to see those results in synergies.

United's consolidated operating expense increased approximately 12% or $965 million year-over-year in the second quarter, primarily as a result of higher fuel prices.

Consolidated fuel expense, including the benefit of our hedges, increased $787 million year-over-year, a more than 30% increase.

Consolidated unit comps for the second quarter increased 11% year-over-year and mainline unit costs increased 10.7%.

Thanks to the efforts of the team, we managed our costs well, so that consolidated unit cost, holding fuel rate, and profit-sharing constant, was up only 1.3%.

This is the first quarter that we began to realize more substantive benefits from merger-related cost synergies, and we're on track to achieve our full-year estimate of over $200 million.

We realized synergies in a number of areas, including management, overheard, and procurement savings.

In aggregate, we generated approximate $100 million of revenue and cost synergies in the quarter.

As in the first quarter, we faced some inflationary pressures, most notably in the area of aircraft maintenance.

Step increases in certain of our engine contracts and a larger number of heavy checks, drove maintenance expenses up 20% year-over-year.

The volume of heavy checks begins to moderate on a year-over-year basis in the second half of the year.

Our second-quarter pretax income was $581 million, representing a 6% pretax margin.

For the last 12 months our pretax margin was 4.2% and our return on invested capital was 12%, exceeding our cost of capital.

We recognize the importance of generating returns in excess of our cost of capital across the business cycle.

We continue to focus on this objective during this period of slow economic recovery and high and volatile fuel prices.

We accrued $90 million in profit sharing this quarter based on our year-to-date profitability.

Profit-sharing payments are made on the basis of full-year profitability, and at this point we expect to accrue additional profit sharing expense in the second half of the year.

Moving on to the balance sheet, we ended the second quarter with an unrestricted cash and short-term investment balance of $8.6 billion.

We reduced our total debt during the quarter, paying $1 billion in debt and capital lease obligations.

This includes $570 million paid to holders of UAL's 4.5% convertible notes that were put to the Company in June.

The Company also prepaid $106 million of aircraft back debt in July, bringing our year-to-date debt prepayments to approximately $300 million.

The Company has $769 million of scheduled debt payments due in the remainder of 2011, which, in addition to prepayments made year-to-date, will bring our expected full-year total debt payments to $2.5 billion.

As we continue to pay down debt and strengthen our balance sheet, we are also building a base of unencumbered assets.

Currently, based on appraised values, we have about $1.8 billion of unencumbered assets, of which nearly 50% are section 1110 eligible aircraft.

During the quarter, we generated over $750 million in operating cash flow.

Gross capital expenditures were $178 million, which includes the delivery of one Boeing 737-900ER aircraft.

We are committed to managing our expenses aggressively in this competitive business, particularly in light of the high price of fuel.

We expect our full-year non-fuel consolidated CASM, excluding profit sharing expense, to be up just under 2% year-over-year with capacity flat for 2010.

We anticipate third-quarter non-fuel consolidated CASM to be up 1% to 2% year-over-year.

We have approximately 51% of our expected fuel consumption for the remainder of 2011 hedged at an average Gulf Coast jet equivalent price of the $3.12 per gallon.

Based on the forward curve as of July 18, we expect our consolidated fuel price to be $3.18 per gallon in the third quarter, a year-over-year increase of 37%, and $3.10 per gallon for the full year, an increase of nearly 33% compared to 2010.

We expect our gross capital expenditures to be about $290 million in the third quarter, and $1 billion for the full year.

As Jim mentioned, we will continue to invest in the product and customer experience and are doing so in a fiscally responsible way.

In addition to the 737-900ER we invested into service in April, we expect to add one 737-800 in the third quarter.

We removed three parked aircraft from our fleet in the quarter, selling two Boeing 737 Classics and one Boeing 747.

We also removed one Boeing 767-200 from our operating fleet.

Our regional fleet declined by two aircraft in the quarter as we allowed nine ERJ-145 leases to expire and added three Q400 and four Q300 aircraft.

Fundamental component of our fleet strategy is incorporating flexibility, allowing us to resize the fleet to best match the demand environment while continuing to improve fuel efficiency.

With almost one-half the fleet coming off lease, or becoming unencumbered over the next four years, and our significant new aircraft order book, we have the ability to retire older, less efficient aircraft, and acquire modern, fuel-efficient aircraft.

As we discussed earlier, we have seen good momentum in the integration as well as in the achievements of our synergies.

We continue to expect to reach 25% of the $1 billion to $1.2 billion of total annual estimated synergies this year.

This is a highly competitive business, with competition from both global and low-cost carriers.

With the slow pace of the economic recovery and high fuel prices, the current environment is challenging.

That said, we have the right people, the right assets, and the right plan to position ourselves to achieve our long-term goal of generating returns in excess of our cost of capital and creating stability and success for all of our stakeholders.

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

While we are pleased with our results this quarter, we are more excited about what is to come.

We are doing the hard work necessary to create the world's leading airline.

Our goal is to create an airline that will provide great products and services for our customers, stability and rewards for our coworkers, and sustainable and sufficient profitability for our shareholders.

We have much more work to do, and it will take us considerable time, but I am confident that we will be successful.

With that, I will turn the call over to Tyler to open it up for questions.

Thank you Jeff.

First we will take questions from the analyst community and then from the media.

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

Michelle, please describe the procedure to ask a question.

Thank you.

(Operator Instructions)

Michael Linenberg, Deutsche Bank.

Please go ahead.

Yes, good morning, everyone.

I guess, a question just on the guidance that was out this morning.

You gave a view on the advance book out over the next 6 weeks, and if I think, if we go back and we look at it versus the guidance from about a month ago, it looks a little bit better at least on domestic.

It's like, maybe it's up a tenth.

The international looks, the book load looks better by about 1 point.

How much, I mean maybe I am reading too much into it, but how much of it is seasonal, or, and I realize that this brings us to the end of August, are there seasonal factors there?

Are there maybe back-to-school issues, or is it just that maybe we were in a bit of a soft patch in June and maybe things are moderating somewhat?

How should we think about that?

Mike, this is Jim.

Hello, Jim.

I think I would describe it as more seasonal than anything.

Just a couple things that obviously we focus on is always managing the booking curve from a revenue management's perspective and so forth, but also the next 6-week outlook is a really strong peak period in the trans-Atlantic, as you kind of move through the second half of July and August.

And so, but overall, we are seeing kind of the demand that we have seen, that's been relatively a strong demand environment continues, so I think that, the relative book load factor is more the seasonality behind it.

Okay, and then just my second, and this is to you Jim as well.

I realize everybody wants to know about September, because it is predominantly much more business travel by definition.

You kind of don't know what it is until it is on top of you.

But I know, as a big company now, and you've had a lot of continuous conversations with the corporates, are you hearing anything about their views on travel in the fall, or whether or not they have hit their full-year budgets given where pricing has been?

I mean, any color on that front to give us a feel for maybe, what -- early read on September?

Michael, both from a data perspective as we look at the corporate, we see kind of a consistent demand environment in there.

In the sales team, once again, had a corporate advisory team to keep the dialogue going with our corporate partners and so forth.

Just recently concluded that.

And really the discussion within there and the things we have heard from the corporations was, that it is kind of right now, business as usual.

Tied to that slow growth, subject to what you are seeing in the economy and so forth.

But really no change, at least at the margin right now.

But you are right, September is out there, and for me to comment on September is too far out there versus the business outlook.

But what we are hearing from the corporations is, it is business as usual right now.

Okay, that's helpful.

Thank you.

Jamie Baker, JPMorgan.

Please go ahead.

Good morning, everybody.

First, just to Jim Compton, I appreciate you building an airline for the smart business traveler.

I certainly hope I can fit into that category at some point, but you never know.

Question for Zane.

Delta has a pretty aggressive non-fuel cost target for 2012.

Not a guarantee that they will get there, but it is a plan nonetheless, and I have not heard one from United.

I know you have opted to talk in synergy terms, but what is your view on consolidated ex-fuel CASM going forward?

I am not looking for guidance particularly, but with all the structural changes, merger benefits, I would expect you to eventually achieve something better than the $0.085 that you did in 2010.

Any thoughts on this?

Sure Jamie.

Obviously we are benefiting from the synergies and a lot of hard work by all the teams here, and you see some of that improvement through the course of this year.

It is premature for us to weigh in on 2012 as it relates purely to cost.

I will tell you, as we restructure the business and restructure the network, you may see some elements that actually apply some cost pressure and yet make sense for us to do.

For instance, Economy Plus taking seats out of the Continental subsidiary aircraft, as well as a lot more international flying that may actually put some cost pressure on the network, and yet yield a better result for us.

So, the teams are all working quite aggressively at managing expenses.

We are not at a point where we are ready to give 2012 guidance just yet, but we feel pretty good about the progress we are making to date.

Okay, that's helpful.

And Jeff, I think we all appreciate the update on the labor situation, some of the complexities and challenges there, but by dragging out this process, are you running the risk that AMR gets a deal first?

I mean if the benchmark moves from Delta to something even higher at AMR, doesn't that put you at risk?

Well, Jamie, first of all, just to be clear, we are not dragging the process out.

This process takes time.

And we have work groups that don't even have a consistent union that we can negotiate with -- a common union.

So we don't have any intention of dragging it out.

We've got to make sure that we have a deal that is fair to the Company and fair to our coworkers as well.

We are going to pay competitively.

We are going to pay fairly.

That's very clear, and we will take a look at what the market is in determining that.

That is our goal and we will take the time that it takes to get there, but we are working hard to get there as promptly as we can.

And the second thing I want to say is, I think, Jamie, you are such a smart business traveler you will fly United exclusively.

(laughter)

Okay.

Well done.

I certainly wasn't implying that management was unilaterally dragging its feet.

I was just talking about the process overall.

Thanks for all the color, gentlemen, I appreciate it.

Bill Greene, Morgan Stanley.

Please go ahead.

Hello, good morning.

Jeff, can I ask about your thoughts about the American fleet order?

Does it change the competitive landscape?

Is the deal sort of a size and type that you would need to do to remain competitive?

I know United had an RFP out, so how do we think about it?

Is this game changing, or is it not that big a deal for you?

No, I don't think it changes things for us at all actually.

We are very comfortable with where we are.

We have a good fleet today.

We have a very solid aircraft order, not only for narrow-body aircraft, but for wide-body aircraft.

We have got a lot of fleet that is coming off finance or off lease over the next 4 years, so we have a lot of fleet flexibility.

Our intention is to continue to take modern fuel-efficient aircraft and retire older aircraft.

So, we are very comfortable where we are, and American's decision does not change anything for us.

Okay.

Jim, can I ask you about your comment?

You mentioned that you were looking to have some further products out there that customers value.

Should we take that as an indication that there is a lot more to go here on ancillaries?

And if so, was that included in synergies when you first sort of talked about these, or how -- what do we think about that pipeline?

In terms of merchandising, I do think there is a significant upside as we develop technologies that allow us to know more and more of our customers and to be part of that experience of travel with them.

So I do think, not only are there more products, but I think how we present the products that we have today, and how we bundle those together, drives, I think, a lot of opportunity going forward.

And the team is really focused on that.

The synergy, there were -- obviously there's merchandising synergies as we brought the 2 companies together, but think of that separate from the overall opportunities that are happening on the merchandising side for us.

Okay, thank you for your time.

Gary Chase, Barclays Capital.

Please go ahead.

Good morning, everybody.

I wondered if I could just ask Jim to comment a little bit.

Just on the value that you are getting out of the JV agreement.

We see these adjustments that come at the end of the quarter, and I definitely understand that is sort of a mechanical issue.

But, optically, it feels like there's money flowing out of United into the joint venture and, again, I kind of understand what is behind that; can you just give us a sense, do you think you are getting the value that you are supposed to be, out of the JV?

Is that something that is to come, in the process that you were describing of getting closer together?

Gary, yes, I do think we are getting the value out of the JV.

A lot of the revenue we are driving through the JV -- our partnership with Lufthansa out of Germany is quite significant, and the amount of connections that are new to the network that were not there before, and so forth.

So, I do think that there is tremendous value coming from the JV.

I also think that the JV works very well together.

As I mentioned in our comments, that the JV as a group is also keeping its eye on the macro environment where capacity is.

And so we have made some adjustments as a group to manage that.

And then the third thing is, JV structure has a structure within it that the base gears move, and so that as you move through it, a new base is sought; and so it is built in a way that all partners can always move toward kind of an equilibrium, and that is the goal.

Yes, the benefits are there on the revenue side.

We have clearly, again in this second quarter as I mentioned, outperform our partners and there is a payment.

But we are very optimistic and we are very excited about the future of the JV.

You obviously think the payment is -- the out performance you're getting, is enough that it is offsetting some of the money that is out flowing, right?

Yes I do.

And just a quick [nit], the $50 million you said in synergy that you had achieved in the quarter, was that an annualized number, or was that just for Q2?

That's just Q2.

Okay.

So you are at about 200 of the 8 to 9?

Yes.

I mean that's Q2.

So we will keep monitoring as we go through the year, and keep measuring it with the measurements that we have set up.

I was just multiplying it by 4, proving I am smart enough to travel on United.

(laughter) Thanks guys.

Gary, you made the cut.

(laughter)

Hunter Keay, Wolfe Trahan.

Please go ahead.

Thank you, good morning.

Tell me if you could help us out a little bit on how to think about, at least directionally, how you are approaching the capacity plan for 2012.

Maybe help us sort of bracket in what the conservative and aggressive way to think about growth and flexibility, and maybe how that fits in to the -- giving an update on how you think about potentially putting in a fleet type, which I think you referenced back in April.

This is Jim.

We are very early in the stages now -- we are kind of beginning our planning process right now.

I don't -- from a profit point of view, I don't think anything is going to change about our focus on the macro environment, and keep an eye on where fuel prices are and so forth, and obviously our competition.

And so, over the last several years we have had a good record of capacity discipline and, given the environment, I know we will keep focusing on that capacity discipline as we look out forward.

We are just right now beginning the process of the planning process, so it would be early to comment on 2012 specifically.

Hunter, this is Zane.

With regards to the fleet obviously we are assessing all of our aircraft requirements, and have significant flexibility, but I don't think we've been out talking about actually putting down a fleet type, at least not at this point.

Okay.

And I guess beyond that, in that vein sort of, you've obviously got a bit of a bow wave, if you want to call it that, of aircraft deliveries next year -- I guess 25 coming in.

How should I think about maybe the CapEx component?

And, given your cash balance, is there any thought, I mean if [UPEP's] ramping the back half of this year?

Is there any thought in maybe building over the equity in these planes, and paying cash for them as they come on?

Hunter, we are not going to give much guidance on that one just yet.

We will offer overall CapEx guidance probably early in the fourth quarter as it relates to our 2012 deliveries.

Okay, thank you very much.

Kevin Crissey, UBS.

Please go ahead.

Good morning, everybody.

This question is probably for Jim, I would imagine.

Has there been a shift in website direct sales versus travel agencies?

Anything you noticed there?

Yes, both united.com and continental.com continue to perform very well.

We -- both have seen sales growth over the most recent period, and so, relative -- we don't really -- we don't put out guidance in terms of share versus for instance OTA's and that, but both continental.com and united.com have seen significant growth over this first 6 months of the year.

Okay.

And your Travelocity deal, any change in terms, or method for delivery, or any direct or anything that would imply, direct connect or anything, or is it just a straight renewal?

We are not disclosing details of the agreement.

I will say that we are excited to have reached an agreement with Travelocity that allows our customers to have access to full fares and schedule.

And -- but, we are not commenting on the specifics of agreement.

Okay.

And did you guys talk about the profitability by hub at all?

And if not, can you?

We didn't it, and we don't do that.

Okay.

Thanks.

Duane Pfennigwerth, Evercore Partners.

Please go ahead.

Hello, thanks, good morning.

Just a follow-up to Jamie's question, practically speaking, what does the lack of a joint bargaining agreement prevent you from realizing -- specifically on the pilots -- prevent you from realizing from a synergy perspective?

Seems like it primarily keeps your costs lower.

Duane, this is Jeff.

The synergies that we talk about in general, are net synergies, net of dis-synergies, and not having an agreement doesn't affect our net synergy target obviously.

We are working hard.

We like to get agreements promptly.

I think it's a good for the Company, it is good for the enterprise, it is good for the culture, to get agreements promptly, and we are working hard to do that.

Thanks, and just a follow-up.

I guess it has been reported in the press that one of the things that is on the table is scope relaxation beyond 70 seaters, I think I read 100 seaters.

Can you comment on that?

No.

(laughter)

Clear enough.

And then just lastly, can you give us some idea of the currency impacts in the quarter, on revenue and operating profit?

Certainly.

I will touch on the revenue portion.

As we look at the Atlantic side, and obviously there's a number of currencies involved, but just generally speaking it helped on both the Atlantic and the Pacific.

On the Atlantic side about 3 points of our PRASM increase was FX change year over year, and on the Pacific side about 3.9 points of that increase was due to that.

We don't typically mention the impact as that relates to the operating margin, but that's about the amounts right there.

Okay, that's very help all.

Thanks.

Glenn Engel, Bank of America Merrill Lynch.

Please go ahead.

Good morning.

Two questions please.

One, can you go through the technology integration timeline, what have we accomplished?

What's the timeline for finishing other things?

And two, earlier in the year I was hearing problems that the reservations' lines -- the phone lines, were running long to reach you.

Are there any other integration issues you have had on service that you are struggling with?

Sure, Glenn, this is Jeff, let me talk.

The technology integration actually is the integration of a large number of different platforms.

We have roughly 15 base platforms and, of course, a lot of other related software.

So, the timeline is over an extended period of time because of all the different things that we are doing.

For example, our revenue accounting system, RASCAL, we will migrate to that I believe in November of this year.

The large, more customer-facing aspect, which is the passenger service system, we are working on now with our partners at Travelport and Hewlett-Packard, HP; and we will migrate to a single passenger service system in the first quarter of next year.

In terms of our reservations, the call volumes have lengthened in terms of talk time, and that is for a number of reasons, including consumers' normal interests in -- and some degree of confusion from time-to-time -- relating to the merger.

And so the hold times have lengthened, and we are addressing that.

We are actually bringing -- we brought back a number of our folks into our reservations group and we are going to bring back some additional folks because we do need to get the hold times down.

The hold times down are just because of lengthened talk times and that the issues are more complex because of the merger.

We are going to address that and we are in the process of doing that now.

And the other big technology ones like crew scheduling and maintenance?

When are those likely to be integrated?

Those are further on, but we are going through the process between now and throughout 2012 to get things done.

We are not -- I don't think we are public on each and every one of the items, but it is a considerable process, a long process.

We are making sure that the customer-facing issues are done well.

And, of course, we are making sure all of the issues are done well.

It is a considerable timeline, but this does take quite a bit of time.

We try to get --so things that will produce for us the highest value earliest, and with a lot of focus on those.

Thank you.

Helane Becker, Dahlman Rose.

Please go ahead.

Thanks very much, operator.

Hello, everybody.

Thank you for taking my question.

There has been some talk in Washington about taxing ancillary fees, and I know that is a growing part of your revenue component.

Can you just talk to what you are hearing and what you are thinking about relative to that?

Whenever Congress is in session we are always at risk.

(laughter) We are a -- Helane as you know -- we are a brutally overtaxed business as it is.

We are taxed more heavily than alcohol, tobacco, and firearms.

And, on average, 20% of the consumers' ticket domestically goes straight to the government.

So we are always a target -- many businesses are targets.

We hope that, given the over-taxation and over-regulation of this industry, that they won't tax us even more, and we will be, of course, working hard to prevent that.

Okay.

And then my other completely unrelated question is, can you say what the long-term or net debt position was at the end of the June quarter?

Sure, Helane.

This is Zane.

Our net debt at the end of the quarter was just over $14 billion, down from $15.8 billion at the end of last year.

Great.

Thank you very much.

Thank you, ladies and gentlemen.

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

We will now take calls from the media.

(Operator Instructions)

Josh Freed, Associated Press.

Please go ahead.

Hello there.

You mentioned this morning that integration of the two airlines is not the goal of the merger.

Can you say a little more about what you mean by that, and are you okay with long-term non-integration?

No, no.

What I am saying is, we need -- this is Jeff -- we need to integrate the carriers, but that is not the end goal of what we are creating.

What we are creating is a spectacular airline with the best network in the world, with a globally competitive product, great service, and a great culture, which of course leads to great service.

So, the integration is something that we need to do; we are working on -- we are working diligently on -- and a lot of people are working very hard.

What I meant by that is, that is not the end of what we are doing here.

What we are creating is the world's leading airline.

All right.

And, what does the current status of labor talks and all the other integration issues -- what does that mean in terms of getting a single operating certificate?

Is that still an end of 2011 thing, or does that get pushed out a little?

The discussions with our various work groups have nothing to do with the single operating certificate.

The single operating certificate is ongoing right now with the FAA.

It is the point at which we can legally and safely operate as a single carrier.

The discussions with our work groups are completely unrelated to that, and we are currently on track to receive our single operating certificate by the end of this year.

All right, thank you.

Mary Jane Credeur, from Bloomberg News.

Please go ahead.

Hello, folks, it is Mary Jane from Bloomberg.

Thank you very much for taking my question.

Jeff, I wonder if you could talk a little bit more about the labor discussions, and where the biggest hurdles or roadblocks are that are making this take longer than you anticipated?

I am not sure there are big roadblocks in any way.

It has taken time for our various work groups to select their representatives with whom we can bargain.

And we also have -- as they have selected their new unions for example, we start the negotiations.

Those, for example, such as our pilot group, who are both ALPA, we have been negotiating since about August or so of last year.

And we continue those negotiations.

It is just that these are -- on both sides, are mature labor contracts with different outlooks.

There are some, candidly, some political elements involved as well, within labor organizations.

And these things naturally take time.

I am still very focused on getting things as prompt as you can, I hope to get some deals done by the end of this year.

But because of the pace of representation elections and other matters, some of the agreements will slip into next year, but we are very focused on it.

We have a lot of people working hard to get it done.

With the pilots, specifically of course, we are coming up on a year that you've been discussing a new contract with them, and of course representation was not an issue.

What is taking so long there?

And do you have a new target for when -- if that's not a 2011 year-end thing, is that a first half of 2012?

Mary Jane, I'm not going to talk about the specifics of any work group and the discussions with them, but the target remains to get a deal done as promptly as I can.

I would love to get a deal done with our pilots by the end of this year.

I don't know whether we will be able to do that.

It does take two to tango.

Sure, thank you.

Jena Moreno, Houston Chronicle.

Please go ahead.

Hello.

My question is also about labor.

So, Jeff, do you expect to have any of the agreements done by the end of this year?

And if so which ones?

Jena, I don't know.

We will work hard.

We will get agreements done as prompt as we can.

That said, we need to make sure that we maintain our competitiveness and that we reach contracts that are fair to the Company and fair to my coworkers.

Thank you.

Jeremy Lemer, from Financial Times.

Please go ahead.

This is a quick question for Jeff.

Could you give us your top level view about consumer and corporate demand and sort of link it to some of the global macroeconomic events that we have seen in recent weeks and months?

I'm thinking about the crisis in Europe and some of the concerns about employment rates in the US.

Could you give us a sense of how that is filtering through to travel demand, both at the consumer and corporate level?

This is Jim.

Jeremy, I think from a corporate global sense the -- obviously our US point-of-sale is our strongest presence and so forth, being a US-based carrier and that.

But I think what we are seeing is, again, pretty consistent corporate demand, that we have seen during -- through the course of the year.

So, do not see at this point any significant change from the demand that we have seen during the first 6 months of the year.

I will say it has been average fare driven, and I mentioned that in my comments.

And so, the fare environment remains strong, and the demand state is about where we have seen it over the last 6 months.

Okay.

And then I had one quick question for Jeff, which is, somebody asked you earlier a little bit about the impact of American Airlines' very large aircraft orders.

You said it would not have an impact.

I just wanted to press you a little bit more on that.

And the American order does take up some leasing slots from the lessors, it also takes up production slots from the -- quite a number of production slots from the largest airline manufacturers.

Will that have any impact on your ability to get hold of the aircraft that you want?

And do you see -- it also changes the sort of advertising dynamic Continental fears -- talked about having the youngest fleet in the market, and then, in a couple of years time as things go to plan American will be able to make that post?

So could you give us a take on those points?

Sure, I think that from the perspective of skyline, we are comfortable with the skyline we have plus the availability of the skyline from our partners.

We have very good partners in both Boeing and Airbus and we are comfortable with that.

In terms of our ability to raise the appropriate capital to take deliveries, I will have it Gerry Laderman speak to that in just a moment.

And then in terms of the fleet, what is important to us, is to have a very good onboard product, and when we are investing in it, and you will see a number of additional announcements in the future on our investments in our onboard product, in our service, and we are more than happy to compete against American or anyone with our network, and our fleet, and our product, and our people.

And with that I will ask Gerry to speak to the capital matter.

This is Gerry.

The -- American's order really won't impact us.

As far as we are concerned the availability of financing, both in the debt capital market and to the extend that we are interested in leasing aircraft.

We believe there is sufficient availability there.

The other point worth mentioning is, the one advantage of the American order, is that it is finally led to Boeing deciding what to do about the new narrow body, which is helpful really to all of us in terms of our long-range planning.

Okay, so that gives you the chance to take a re-engined Boeing in a slightly earlier timeframe then you might have got if they decided to go for a new aircraft later on?

It is just good that Boeing has now sort of laid out the timetable.

Sure.

Thanks, everybody.

We are out of time, so need to conclude the call.

Really appreciate you joining us today.

Please call corporate communications if you have any further questions, and we look forward to talking to you next quarter.

Thanks.

Thank you, ladies and gentlemen.

This concludes today's conference.

You may now disconnect.