聯合航空 (UAL) 2011 Q3 法說會逐字稿

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

My name is Michelle, and I will be your Operator for today's call.

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 hosts today, Miss Nene Foxhall and Mr.

Tyler Reddien.

Please go ahead.

Thank you, Michelle.

Good morning, and welcome to the United Continental Holdings third 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 of 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 cost structure and balance sheets, Jeff will make a few closing remarks, and then we will open the call from questions first from analyst and then from the media.

We would appreciate it if you would limit yourself to 1 question and 1 follow-up.

With that I'll turn it over to Tyler.

Thank you Nene.

Our earnings release and separate investor update were issued this morning 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 in 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 the 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 with last quarter, we will present our third 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 Updates issued during 2011 and the fourth quarter of 2010, which are also available on our website.

Unless otherwise noted, as we walk you through you our 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 all over to Jeff Smisek, President and CEO of United.

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

Today we reported net income of $773 million for the third quarter, or $2 per diluted share, delivering a 7.7% pre-tax margin for the quarter.

We closed the merger between United and Continental Airlines a little over a year ago.

We are working together to build the world's leading airline; an airline that our customers want to fly, our co-workers want to work for, and investors want to invest in.

I would like to thank all of my co-workers for their hard work over the past year, maintaining their focus on delivering clean, safe and reliable air transportation to our customers, while we integrate these 2 great airlines.

Despite the challenges of integration, we delivered solid operational and financial performance during the quarter.

We accrued an additional $152 million of profit sharing during the quarter, for a total of $242 million accrued for profit sharing year-to-date.

In addition, during the first 9 months of 2011, we paid $27 million in on-time performance bonuses to co-workers.

I look forward to distributing profit sharing payments on Valentine's Day next year, based on our 2011 full year earnings.

We improved our balance sheet again this quarter, reducing total debt, including capitalized aircraft operating lease obligations, by $469 million.

We remain focused on derisking the business and improving the strength of our balance sheet.

While we are pleased with the results this quarter, we are mindful of the uncertainties surrounding the global economy.

Despite the concerns we all read about, we are not currently seeing a reduction in business demand, as Jim will discuss later in the call.

Our third quarter revenue results demonstrate the power of our network and capacity discipline, with PRASM up 10.1% for the quarter.

Should we see demand decrease, however, we will respond nimbly and appropriately by decreasing capacity and taking costs out to help ensure we remain profitable throughout the business cycle.

The capacity reductions we implemented with our September schedule are paying off.

We right-sized the airline for the expected reduction in fourth quarter leisure demand due to the higher fares we put in place as fuel prices rose earlier this year.

Our current plans for 2012, reflect consensus expectations for sluggish economic growth in 2012, and our goal of generating sustainable and sufficient profitability.

We will maintain our 2011 consolidated capacity level again in 2012, for the second year in a row, effectively keep United the same size it was in 2010 and 8% smaller than it would have been on a pro forma basis in 2007.

We will continue to optimize our network, reducing our domestic capacity as we retire older, less fuel efficient aircraft, reconfigure domestic wide body aircraft for international service, and implement Economy Plus on the Continental fleet.

United will take delivery of five Boeing 787 Dreamliners next year with the first coming into service in the second half of 2012.

As a result, we expect to grow international capacity in 2012 as this game changing aircraft creates new profitable market opportunities.

One of the major impediments to creating economic value is the crushing tax burden that the US airline industry faces, with about 20% of the typical ticket price paid in taxes today.

And that doesn't even include income taxes.

Airlines currently pay 17 different federal aviation taxes and fees in the US, totaling $16.5 billion in 2010.

Unfortunately, Washington is attempting to make US airlines its piggy bank once again.

The US airlines have lot a total of $55 billion over the past 10 years.

Now, Washington is proposing $35 billion of additional taxes over the next 10 years.

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

We are taxed as a sin.

We are not a sin.

We connect people and cultures.

We transport cargo.

We are drivers of the economy.

We bring business and job growth to our hubs and spoke cities.

We contribute $1.2 trillion to the US economy each year.

If this crushing $35 billion of additional taxes becomes law, we will have no choice but to raise fares, reduce service, eliminate service to some communities, and reduce the size of our work force.

Simply put, this tax proposal is a jobs killer.

We also face the potential for an additional tax burden in the form of the European Union Emissions Trading Scheme.

We are committed to the environment and reducing our fuel burn benefits both our business and the environment.

At the new United we are proud of our combined track record as we have improved aircraft fuel efficiency by 32% since 1994.

The EU Emissions Trading Scheme is an extra-territorial unilaterally imposed patchwork tax rather than a unified global solution for aviation emissions.

More than 20 countries, including the US, China, Russia, India and Japan have stated their opposition to this tax and reinforced the belief that it violates international law.

While these potential taxes and other new challenges threaten our ability to achieve our long-term financial goals, we remain focused on the most significant opportunity currently available to us, completing the integration of our 2 great airlines and unlocking the full $1 billion to $1.2 billion of annual synergy value.

We made progress with our integration again this quarter.

We introduced our new loyalty program effective in the 2012 program year.

We are very excited about the new program and made a number of changes designed to better differentiate between elite tiers and provide incentives to our customers to earn the great benefits that Mileage Plus offers by engaging them in behavior that more directly benefits United.

We also introduced our new co-branded credit card, the Explorer card, with our credit card partner, Chase, and we are very pleased with the growth of that card to date.

Since closing the merger, we have completed co-location at 53 airports and now have a single point of check-in at 75% of the airports we serve worldwide.

We have rebranded our hubs in Cleveland, Denver, Houston, Narita, Newark, O'Hare and San Francisco, and have also rebranded an additional 30 stations that we serve.

We, also, recently unveiled our combined airport lounge program, the United Club.

These are not the only changes you will see as we continue to improve the products and services that we provide to our customers.

We recently announced an investment of more than $550 million in our product on board our existing aircraft.

Soon we will finish installing our flatbed seats in all our international premium cabins.

We'll also improve the in-flight entertainment experience by adding streaming video on our 747 fleet and rolling out wireless internet connectivity across our entire main line fleet.

On our domestic fleet, we will add overhead bin space and refresh the interiors of our Airbus aircraft and completely overhaul the interiors of our popular p.s.

transcontinental flights.

When we are done with our p.s.

fleet, it will be the best transcontinental product in the sky.

Of course, we are also rolling out Economy Plus across the entire Continental main line fleet and we'll be offering the popular Channel 9 Air Traffic Control audio on our Continental aircraft.

Our integration progress is moving forward behind the scenes as well.

We continue to work closely with the FAA and are on track to achieve our single operating certificate by the end of the year.

In fact, in the next month, we'll have more than 90% of the processes and procedures that align the operations of our 2 subsidiaries implemented.

We are making good progress towards a single passenger service system by the end of the first quarter next year and have already begun training our co-workers to prepare them for that system.

We are working closely with our labor groups and are making good progress.

We already have agreements in place with our Continental subsidiary flight attendants, mechanics, and Below the Wing Agents.

We are currently in negotiations with our United subsidiary flight attendants, focusing on a few key issues within a tight time frame in order to try and reach a new agreement by January to be promptly followed by negotiations for a joint collective bargaining agreement.

We are also engaged in expedited negotiations with the IBT for our United subsidiary mechanics and we believe we will have a new contract proposal in the near future.

Again, to be followed by negotiations for a joint collective bargaining agreement.

After the recent conclusion of the representation election for our Below the Wing agents, we are starting negotiations next month with the IAM for a joint agreement for that work group.

The representation process has begun for our Above the Wing customer service and reservations agents, with the IAM recently filing a request with the National Mediation Board for single carrier status.

Finally, we are making progress with our pilots and are hopeful that with the recent election of a new MEC Chairman at the United subsidiary, that we can move the process forward.

We are committed to providing our employees with the competitive pay and benefits that they deserve.

However, any agreement must be fair to our co-workers and fair to the Company.

In this uncertain economic environment, I am very certain of one thing; the significant potential of the new United.

We are well positioned to create economic value, as we work together to create the world's leading airline.

With that, I'll 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 co-workers for their hard work this quarter.

United's third quarter consolidated and main line passenger unit revenue both increased 10.1% year-over-year.

An outstanding performance in a slow growth economy.

Regional PRASM improved 9.6% versus the third quarter of 2010.

Since closing our merger last year we have often talked about United's unmatched global network and hub structure.

And while we are still early in our network integration efforts, we are seeing the significant value of those assets, as we generate revenue and yield premiums relative to the industry.

As with prior quarters this year, yield growth and capacity discipline drove United's third quarter revenue results.

Consolidated yields were up 10.9% year-over-year in the third quarter.

The Company reduced third quarter main line domestic capacity by 2.3% year-over-year and main line domestic PRASM increased 10.9% versus third quarter 2010.

Third quarter main line international PRASM increased 9.2% and yield improved 11.6% versus 2010 with international capacity growing 0.6%.

Latin America remains our best performing international entity this quarter with unit revenue up 21% driven by a 22% increase in yields compared to last year.

South American demand continues to grow at a quick clip, resulting in PRASM and yield increases of nearly 25% this quarter.

Transatlantic PRASM increased 7.3% year-over-year in the third quarter with yields up 9.4%.

Europe results were notably weaker than those of the emerging TransAtlantic markets.

With Middle East PRASM increasing 15% and India PRASM increasing 14% year-over-year.

Fares in these markets were up considerably, nearly 12% in the Middle East and 16% in India, [third] quarter 2010, reinforcing our decision to take advantage of international growth markets.

During the quarter, we reduced our transatlantic capacity by 1.6%.

Reduce and down-gauging flights to Europe which were not generating returns in line with our goals and expectations.

Our Pacific network saw solid yield increases this quarter with yields up 9.9% and PRASM up 6.5% year-over-year.

The Japan market continues to recover from the tragedy last March, with PRASM increasing 9.8% in the third quarter.

Corporate revenue continued to show steady improvement.

Corporate yields grew solidly, increasing 13% versus third quarter 2010 and increasing nearly 25% versus third quarter 2009.

We run our airline with the business customer in mind.

We are focused on growing United's relevance and attractiveness to the high yield business traveler through product investments, improved schedule utility, connectivity options, and service to the right markets.

In order to generate revenue, compensatory with service we provide our customers, we must be disciplined in our capacity and asset deployment.

We regularly evaluate the performance of each flight and market -- in markets we serve and reallocate assets if a route is not generating sufficient returns.

During 2011 we have appropriately reduced capacity to right size our supply for the expected demand.

As a result, PRASM for the first 9 months of 2011 increased 9.7% year-over-year, an excellent result during a period of extremely low US and global GDP growth.

We continue to refine our 2011 capacity and further reduced our fourth quarter capacity plans.

We now expect fourth quarter main line capacity to be down about 3.5% and consolidated capacity to be down more than 3% versus 2010, resulting in our expected full year 2011 consolidated capacity to be down nearly 0.5%.

As Jeff mentioned, we continually evaluate the demand environment.

And based on the information we currently have, we expect the demand environment to remain stable.

Accordingly, we expect our full year 2012 consolidated capacity to be essentially flat versus 2011.

As we demonstrated throughout this year, we are prepared to respond with further reductions if the demand environment deteriorates.

As we prepare for the migration to a single passenger service system in the first quarter of next year, we have slowed the introduction of new ancillary products and services as we have concentrated our IT resources on making sure the migration occurs successfully and on time.

Our emphasis on driving ancillary revenue growth has not changed, however, and ancillary revenue this quarter grew by 5% year-over-year.

United successively introduced the fee for the second piece of checked baggage into many new geographies during the quarter.

United now has the industries broadest global footprint for this important cost recovery mechanism covering travel between North America and Europe, Israel, the Middle East, India, China, Hong Kong, Korea, Australia and most of South America.

Customers continued to show their preference and willingness to pay for extra space in coach, with the revenue from our seat upsell programs increasing nearly 17% in the third quarter as compared to last year.

We look forward to introducing Economy Plus on our subsidiary Continental fleet beginning in the fourth quarter of this year.

Third quarter cargo revenue declined 2.4% versus the same period last year.

Substantially higher industry cargo capacity, particularly in Asia as the new industry freighter capacity came online earlier this year -- somewhat offset the benefit resulting from a 40% increase in fuel surcharges year-over-year.

Overall, cargo yields were up 15% while cargo volumes were down about 15% year-over-year.

We continued to generate synergies in line with our expectations and eagerly anticipate our transition to a single passenger service system in the first quarter next year.

Once we are on 1 platform, we will be able to better market our products, better service our customers, better sell ancillary products and better flow aircraft throughout our global network.

As I mentioned, passenger demand remains good.

Based on our current outlook, we estimate United's October consolidated PRASM will increase a bit more than 10% year-over-year.

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

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

Thanks Jim.

I would like to start by recognizing the entire United team for all the effort in helping generate strong third quarter results despite high fuel prices and tepid economic growth.

United's consolidated operating expense increased approximately 11%, or $886 million year-over-year in the third quarter, primarily as a result of higher fuel prices.

Excluding the impact of fuel hedges, fuel costs rose $1 billion year-over-year as fuel prices increased 44%.

Consolidated fuel expense, including the benefit of our hedges, increased $843 million year-over-year, a 33% increase.

Consolidated unit costs for the third quarter increased 11.7% year-over-year and main line unit costs increased 11.3%.

Our consolidated unit costs, holding fuel rates, and profit sharing constant is up only 0.7% despite a nearly 1% decline in capacity year-over-year.

Company-wide we are doing a good job managing costs throughout the year and this is reflected in our quarterly cost performance.

During the quarter we faced some of the same inflationary pressures that we saw in the second quarter, primarily in the areas of aircraft maintenance and salaries and related costs.

Maintenance costs increased largely due to the escalation in certain engine contracts.

Salaries and related costs increased year-over-year from higher wage rates and longevity increases.

These were partially offset by reduced management headcount.

As Jeff mentioned, our integration efforts and achievements of synergies are progressing well and we expect to reach our synergy targets for 2011.

We accrued an additional $152 million in profit sharing this quarter for a total of $242 million year-to-date.

Our profit sharing payout, of course, will be based on our full year profitability.

Non-operating expense was $275 million in the quarter, up $46 million year-over-year.

Interest expense declined $39 million due to lower overall debt levels.

However, this was offset by a $56 million fuel hedge in effectiveness expense associated with our WTI hedge positions due to the dislocation between WTI and jet fuel.

This charge was about $20 million higher than we expected when we provided guidance late last month due to an even further dislocation between WTI and jet fuel toward the end of the quarter.

Our third quarter pre-tax income was [$780 million], a 7.7% pre-tax margin.

While this is a seasonally strong quarter for the airline, we are pleased with our performance in light of the weak economic backdrop.

For the last 12 months our pre-tax margin was nearly 4% and our return on invested capital was 12%.

This quarter was another positive step in achieving our long-term objective of generating returns in excess of our cost of capital.

Moving onto the balance sheet, we ended the third quarter with an unrestricted cash and short-term investment balance of $8.4 billion.

Reduced total debt this quarter paying $469 million in debt and capital lease obligations, including $170 million of pre-payments.

We have reduced our total debt, including capitalized aircraft lease obligations, by $2.1 billion year-to-date.

During the quarter, we generated $385 million in operating cash flow, and growth capital expenditures were $196 million.

As we continue to generate free cash flow, we intend to invest in our business and to strengthen our balance sheet.

We expect our fourth quarter consolidated capacity to be down more than 3% year-over-year and to expect our consolidated chasm, excluding fuel and profit sharing, to increase between 1.5% and 2.5% year-over-year.

We anticipate our fourth quarter costs will be modestly higher than originally expected primarily due to higher year end liability adjustments related to workers compensation and pilot long-term disability.

Both of which are affected by the decline in Treasury rates.

Based on the forward curve, as of October 20, 2011, we expect our consolidated fuel price to be $3.15 per gallon in the fourth quarter, a year-over-year increase of nearly 30%.

We have hedged approximately 56% of our expected fourth quarter fuel consumption at an average Gulf Coast jet equivalent of $3.23 per gallon.

We have hedged approximately 34% of our expected fuel consumption for the first half of 2012.

In the fourth quarter, we expect growth capital expenditures to be about $300 million for a total of just over $900 million for the full year.

We are monitoring the economic environment closely and we are taking a conservative view in our planning for 2012, with essentially flat capacity expected year-over-year.

We are prepared to take additional actions, including reducing capacity further, should economic conditions warrant it.

As we have mentioned previously, a 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.

As we optimize our network, we plan to reduce both domestic capacity and our domestic fleet counts in 2012.

We are converting 14 Boeing 767-300 aircraft from the domestic configuration to our international configuration with flatbed Business First seats and Economy Plus.

We are also upgrading fuel efficiency of our domestic fleet by taking delivery of 19 new 737-900ER aircraft in 2012.

We plan to retire 19 less efficient narrow body aircraft from the fleet, comprised of 14 737-500 and 5 domestic configuration 757-200 aircraft.

We are planning modest international capacity growth in 2012 as we take advantage of market opportunities enabled both by the merger and next generation aircraft technology.

In addition to the 767s that we will redeploy internationally, we are expecting to take delivery of 5 787 Dreamliners, which will enter service in the second half of the year.

As a result we expect to retire older, less fuel efficient wide body aircraft, removing additional 767-200s and a 747 from the fleet.

Our goal at United is to create economic value over the business cycle and our performance this quarter highlights our progress.

Our team of over 80,000 is working hard to leverage our industry leading network, our operational reliability, our fuel efficient fleet and investments in our product to become the world's leading airline.

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

Thanks Zane.

As this quarter's results demonstrate, we are delivering solid financial results while making significant progress integrating our 2 airlines.

This is a challenging industry, with significant competition and a brutal level of taxation to overcome.

That said, we have the right network, the right product, and the right people to deliver on the promise of the new United as we work together to create the world's leading airline.

I'll now turn to over to Tyler to open up the call for questions.

Thanks Jeff.

First, we'll take questions from the analyst community, then we'll take questions from the media.

Please limit yourself to 1 question and if needed 1 follow-up question.

Operator, please describe the procedure to ask a question.

(Operator instructions).

Our first question comes from Michael Linenberg from Deutsche Bank.

Please go ahead.

Yes, hello.

Two questions, I guess maybe these both may be for Zane.

When I look at your CapEx in the guidance versus, I think, the last time we saw it, it looks like it is down about $100 million, maybe $125 million.

Is that -- does that reflect maybe taking delivery of one or two less 787s next year?

What is behind that decline?

No Mike.

The only guidance we have given is 2011.

You are correct in that the CapEx has moved down moderately.

You know, as we look at the integration and integration expenses and how we spend that money, there is mostly just timing differences there.

You know, we continue to be fairly thorough in how we view CapEx in the Company.

Okay.

And then my second question, Zane, I mean I really appreciate the fact you are providing your return on invested capital.

I believe you said 12%.

Can, can you give us a feel for you know, maybe the weighted average cost of capital?

Or if we go back, I think last quarter, you did indicate that the 12% was well in excess of, of your cost of capital.

I guess I would ask, regarding the cost of capital, if you can't give maybe a range, is the equity piece, is that being calculated based on your book equity?

Or is that a function of the market value of your equity?

Sure, Mike, it is a good question.

You know when we calculate the return on invested capital, we go back to the more traditional sort of textbook approach to calculating that, which is how you derive the 12%.

If you are asking about the weighted average cost of capital, that is obviously, as you have highlighted, driven by a number of variables.

We estimate, depending on Betas and a number of other input that, that number is somewhere between 8% and 9% for us.

Okay.

Super helpful.

Appreciate it.

Thanks.

Thanks Mike.

Our next question comes from Kevin Crissey with UBS.

Please go ahead.

Hi.

Good morning everybody.

Hi Kevin.

Maybe for Jim.

Thanksgiving and Christmas, can you talk about how they are booking since they have a bit longer booking career than the other periods, I imagine?

Yes Kevin, this is Jim.

The -- right now we are really comfortable with our holiday bookings.

And you know, the -- on a couple of -- one, the demand is looking good over the holidays particularly the peak days, which we are also revenue managing these days.

And in addition, and kind of in line with our capacity discipline strategy, we are taking a lot more aggressive approach on kind of day a week cancellations, particularly in the sub UA network this Thanksgiving versus the past.

So looking at the holidays, we feel really comfortable with where we are at.

And if we were to think about the, your comparisons, I know there were some storms last year such in December, et cetera, but the comparisons get in December are easier from a RASM perspective?

I know the revenue growth isn't as high.

But is, is that the way to think about it?

I'm trying to, you know, see how the quarter might progress from your 10% on.

I know you don't guide to it.

But just comp wise.

You are right.

We don't really guide to the revenue performance.

I think that I, you know, if you look at the third quarter, in terms of where yields are at, I think we see the environment relatively stable.

And so you know, until we feel really comfortable with kind of where the fare structure is at, as well as the bookings.

Alright.

Thanks.

I'll let you go there.

Our next question comes from Gary Chase from Barclays Capital.

Please go ahead.

Good morning, everybody.

Wanted to ask a couple on the Atlantic.

Couple of your competitors, and if I'm not mistaken, your Alliance partner noted there was a little bit of softness.

I know you said you haven't seen it yet.

I'm wondering if -- what your thoughts are there, and if Jeff's comment about acting nimbly can and does apply in the JV structure?

Can you respond quickly within that construct?

Yes Gary, a couple of points.

This is Jim.

First of all, on you know, kind of our performance.

Our performance has also been tied to the capacity of discipline.

So we made adjustments obviously even in the third quarter.

So our RASM performance in the third quarter TransAtlantic of the 7.3%, I believe, is actually our best year over year of the quarter so far this year, and I think that is a function of reflecting, you know, being ahead of the fact that the demand and some of the economic issues in Europe inhibiting an adjusted capacity.

So that strategy, that nimbleness as Jeff kind of mentioned in his comments, will go forward.

And then the other piece with the JV, you know, the two -- both companies, the structure has both network teams very much in communication with each other.

And they look at opportunities, they look at the challenges, right?

You know, in the past, we have seen things that as it, you know, done some day of week cancellation.

And by using our partner, Lufthansa, or Frankford, have still served the markets.

Right?

And so being able to do a lot of things like that.

That is an example of how the two companies have worked together.

And so, I think the things you are reading today of the capacity, the two network teams are always in contact with each other, to try to kind of optimize the JV across the TransAtlantic.

And then just as a quick clean up, the Middle East and India RASM numbers, you said they were gaining more year on year on an absolute basis.

Are they even close to establish Europe right now?

Are they even -- what's that?

Are they --.

The absolute performances, instead of the year on year.

I mean, are they as profitable?

Yes, obviously there is a length of haul and things like that, but I would say yes, they are relatively close.

Okay.

Thanks guys.

Our next question comes from Jamie Baker from JPMorgan.

Please go ahead.

Hey, good morning, everybody.

Morning, Jamie.

Might as well keep Jim in the hot seat.

I'm curious if corporate demand trends are fairly unified, or if any stand out at the moment.

Obviously your network tends to occupy Wall Street, for lack of a better term, more than most of your competitors.

So I'm principally interested in any trend in financial services firms.

Thanks Jamie, this is Jim.

I think on the corporate side, I talk about demand being relatively stable.

I would say that it is directly also related into our corporate business overall.

We talked about that 13% increase in yield.

So we are seeing kind that have stable corporate demand.

And as you know, Jamie, the window is relatively close-in, because of the booking curve of the corporate demand.

As I look through kind of the different corporate accounts, you know, I think on a relative basis there is more softness in the financial services and so forth, relative to, you know, for instance the pharmaceuticals which we have a terrific presence over on the Jersey side and so forth, as well as the oil industry and some of the consulting.

But on a relative basis, yes, I think there is, you know, we can obviously see some of the softness in the financial services.

And as a follow-up to that, you know, Delta has given some examples of where their unified network is attracting, you know, corporate share that they otherwise couldn't target pre-merger.

Your network integration is obviously not as mature, but some of that share capture is just going to be natural as opposed to marching in and signing up new contracts.

I'm wondering what inning you would say that you are in, in terms of capturing your fair share of the corporate wallet?

Is this shift just beginning?

Is it close to ending?

Or kind of somewhere in between?

You know, I think you know the team is really on kind of a good time line, you know, we are in the first phase of really explaining the value to our corporate partners of this new network.

So I think we are seeing some of the initial things that, Jamie, you referred to kind of the natural as you bring these networks together, generating corporate share.

But we are actually very early on to it and we are getting really good feedback as the corporate team is working with the -- you know, talking about the value.

For instance in New York, it is more about the local market for us in New York, having the only connecting hub in the New York area.

Sure.

So I like to think we always have a seat for a high yield passenger.

The RMP manages that and so we have that high yield connecting in New York as well as the local.

And so the network, the integration, brings a lot of that to the table.

So we feel pretty good about where we are at.

Okay, that's great.

Thanks for all the color Jim.

Appreciate it.

Take care.

Thanks.

Our next question comes from Bill Greene from Morgan Stanley.

Please go ahead.

Hi, good morning.

Zane, will -- should we be thinking about, as we are modeling out 2012, will there be a timing mismatch between when some of the costs changed?

Whether you can start to get synergies, or you have got to start to pay labor more versus when you kind of get the productivity from that?

Is there going to be sort of lumpiness we should be thinking it through?

You know, it depends on how you are looking at that, Bill.

And on a gross basis, I think, you know, we are expecting moderate improvement and have actually, I think, taken a good first step this year and obviously we expect further improvements next year.

On the labor side, we don't typically get into what we are accruing for or what we're not accruing for.

So a lot of that is just based on our sort of GAAP assumptions at any point in time.

So, I guess from your perspective, depending on how you are modeling it you may see some lumpiness just on the expense side.

Okay.

And then Jim, the Pacific, have we fully recovered now sort of post-earthquake in that region?

Or is there sort of more catch up to go?

Hi Bill.

Yes.

Hi, this is Jim.

I think they're, there's still, it's performing and recovering really well.

But there is still more, you know, progress to be made on that from the tragedy.

And -- but you know, we see you know kind of the industry where the Japan point of sale versus the US point of sale is probably recovering quicker than the US point of sale.

But both are improving and making its way back toward pre-earthquake levels.

Are we still, are we materially below where we were running?

Or is it not that big any more?

Not materially below, no.

Not at all.

Okay.

Alright, thank you for the time.

Thanks Bill.

Our next question comes from Duane Pfennigwerth from Evercore Partners.

Please go ahead.

Hi good morning.

Morning, Duane.

Just taking a step back as you look at these revenue results, revenue up, call it 9% in the third quarter on GDP of 2.5%.

You know this fuel is well above long run trends.

So I'm just wondering, how do you typically think about that relationship as we start to think about next year?

Yes Duane, this is Jim.

A couple of thoughts on that.

I think that, you know, I think we are very please with our revenue performance given kind of the weak economic environment.

And so, if you went back historically -- that is actually, you know, different than what we have seen historically, kind of where you would be in a recovery at GDP growth of even at 2.5% is relatively soft post where you would be in a recovery.

So, but again, I think our capacity discipline, as well as the industry discipline, what we've seen, I think we've done a good job of not -- the traffic that we are missing is the low yield price sensitive traffic.

And we are doing a good job of not diluting the higher end traffic.

And I think that capacity discipline has allowed us to do that and I think that is probably the biggest difference in trying to breaking that go GDP versus revenue growth that you mentioned.

Okay.

Appreciate that perspective.

And then just to follow-up on the Pacific, you know, load's down but maybe not down as much as the last update.

Wondering if you could give us sort of any qualitative yield commentary on that advance book load?

And if you, sort of, had to rank your regions right now, which would be weakest?

Well you know, I'll point to the from a book in the investor update.

In the Pacific you know I think we are talking about 4.4 points of book load factored down.

You know, in that market, we actually -- you know, we have some new competition in Chicago, Hong Kong, that is driving some of that load factor difference.

I'll tell you that we are pleased with where our premium bookings are at.

And that some of the softness is more on the leisure side, which gets back to me -- my earlier comment on that.

The other thing is that you know the RM team is revenue managing towards that to a certain extent also.

And just -- again preventing the dilution on the high yield side.

So we are comfortable with where that book load factor is.

So a combination of some new competition, revenue managing it, but we are actually feeling pretty good about where it is at.

Okay thanks very much.

Yes.

Hunter Keay is online with a question from Wolfe Trahan.

Please go ahead.

Thank you.

Good morning.

Jim, what were some of the lessons learned with one year under your belt with A++?

There are obviously a few true ups that happened each and every quarter this year.

And I think it's obviously taking a little more time to spool up than I think some people, including myself, thought it was going to take.

So what were some of the key lessons learned?

Should we expect sort of a disproportion out-performance next year particularly as Lufthansa implements their own RM system?

Anything like that?

Any color there?

Yes, I think the, I think the lessons learned are, you know, I'm more, there is a familiarity that is building within the JV.

Both from understanding each other's systems, as well as people, whether it is from a making sure that the right price products are out there for our customers and they are consistent, as well as communicating back and forth what each airline is optimizing with their different RM system, and then the network group, which from the beginning, has been working closely with each other.

There is that familiarity.

And so I think as we think about that, we feel that there is a lot of benefits to build on as we build that relationship going forward.

And I think you are seeing some of the capacity discipline that you are seeing, both, that both carriers, or all the carriers in the JV showing right now as kind of a result of that.

So I think the lesson learned is we will be more nimbler and quicker to react based on getting to know each other.

Okay.

Thanks.

And maybe another one for Jim and then Jeff, too, if you want chime in on this.

Back to ETS.

Obviously, you know, your political opinions or policy, legal issues aside on this, is it possible that ETS is forcing capacity discipline on this industry?

Is it, is it factoring into your A++ planning?

Has it already come into the conversation when you are planning TransAtlantic capacity for 2012?

And is it possible that this could actually be a net positive for the P&L simply because it is keeping a lot of irrational, otherwise irrational competitors from growing in your markets?

Well it is a curious thesis, Hunter, but one I don't subscribe to.

I think that it is like any other tax, right?

It will, it will size carriers because it is like any other tax.

But it isn't, it isn't sizing, for example, through matching capacity demand and being able to appropriately price the product because the price that we have to put in for the tax, of course, we don't receive any component of it and therefore it is not the same as a, as a price increase in response to market demand, et cetera.

So in terms of where it impacts the JV, I would leave that up to Jim probably to give you more color.

But clearly Lufthansa has more exposure within Europe obviously than we do.

But it's, I think it is a net negative for the industry and it is a particularly difficult thing because it is, truly is the beginning -- could be the beginning of a crazy quilt patchwork of regulation and taxation to try to remedy issues with a mobile and global emissions source, such as the airlines.

And that is clearly you know, much better handled by a IKA.

Okay.

Thank you.

Our next question comes from Glenn Engel from Bank of America.

Please go ahead.

Good morning.

You have talked about putting, I'll call, Coach Plus into the Continental side, and it sounds like you are also going to be taking seats out of the 767 as you shift them to international flights.

What does that do to overall capacity, the reduction of seats?

The -- well, obviously the Economy Plus contributes to, we're talking about consolidated capacity going forward being flat to 2012 being down domestically and up internationally, Glenn.

So the Economy, obviously the Economy Plus affects that --.

Is this a 1% hit that you offset by growth?

Or is it even less than that?

Or more?

It is about, it is less than 1%.

Probably about you know, between 0.5% and 1%.

Okay.

And again, we are working through, obviously, through with out our tech ops group on the schedule and it's how quickly we roll it out in 2012.

But you know, less than 1% I think will be the impact on 2012.

And which categories are the best opportunities on the cost side for 2012 to offset the normal inflation that you have?

Glenn this is Zane.

We are in the middle of our budget session.

So you know just for all the people at United listening, all categories are a good opportunity for improvement.

(laughter) You know, honestly, Glenn, as we balance between the integration opportunities here, as well as just the normal budgets, you know, we are going really line by line and seeing where we can be more efficient, learn from both subsidiaries and build that into plan and we are in the middle of that process right now.

Okay.

Thank you.

Our next question comes from Jeff Kauffman from Sterne Agee.

Please go ahead.

Okay.

Thank you very much.

I just wondered if you could talk a little bit about discussions you are having with your corporate travel customers.

The RFPs are out there.

People are fixing their own capital budgets for travel next year.

What industries, if you segment it this way, are you seeing some of the strongest RFP activity?

Where have you seen a little bit of weakness?

And I guess you said leisure was a little bit weak, but corporate has been okay.

Could you just give us a little bit more granularity on the discussions you are having in those markets?

Jeff this is Jim.

You know, the -- we have, obviously been working with our corporate partners in the last month or so, for lack of better words, surveying them.

And the feedback we are getting ties to kind that have stable environment for the majority of them.

That being said, you are right, they are focused on their 2012 budgets.

And so, but I think right now, it's very consistent with what we are seeing in demand that majority are kind of planning on spending you know, being relatively you know kind of like 2011 to up slightly I think if you kind of get different things all over.

Some -- and it's just like as I mentioned financial services, you get back into what we saw 2008, again not the majority, but a few of them will talk about possibly looking at their travel policies, which you know, really doesn't involve us, but you know, might be folks planning in advance, and things like that.

So those are the things we watch, as Jeff mentioned in his comments, that we'll watch the demand and adjust capacity.

But what we want to do is always be in kind of dialog with our corporate so that we can stay on top of it.

But right now, we see kind of stable anticipation for 2012.

Okay, you singled out financial services and I think we read the headlines and understand what is going on there.

Are there other industries that weren't really consumers of corporate travel last year that you think are in a stronger position to contribute next year?

It's hard -- the way we look at corporate travel, quite frankly, when we work with our partner is it's less about a deal and it's more about the quality of the deal.

And so, so I don't -- there is nobody that singles out and what we are trying to do is again show the value of this new network that we have and the value we bring with that and have the discussion around that and what their needs are.

And you know, I think you know, overall, the kind of across the industries we are seeing kind of the general feeling about the uncertainty of the economy and so forth playing into how they think about this.

Okay.

Well 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) Our next question comes from Josh Freed from the Associated Press.

Please go ahead.

Good morning.

Just a quick question on the 747.

I saw that in the release this morning there is five, I guess, that are non-operating right now.

It sounds like one more coming out next year.

Is that -- can you say a little more about the future of that airplane with your fleet?

And are those reductions related to the Japan situation, or is there something else driving that?

Hey Josh.

This is Jeff.

Look, the 747 has been you know a good aircraft over the years for United.

However, it is a fairly fuel inefficient aircraft.

And over time, we would like to replace it with more modern technology and we intend to do so.

We don't have an aircraft that we can replace it with right now.

And for example, we are putting streaming video in the Economy section of that airplane to improve the in-flight entertainment experience of our customers today.

But in the long run, we will be retiring that aircraft from our fleet.

Can you give us an idea of how long the long run is?

It'll take many years because we don't have anything to replace it with.

Currently we've got, we've got A350s on order that we begin to take in 2016.

So it will take at least, and of course that is just the beginning as we undertake those aircraft.

So it will be over the course of this decade, as we put those aircraft down and take replacements.

All right.

And in the short run, is any of that related to Japan demand?

Or is that a non-issue for that plane?

No, it is not related to Japan demand.

All right thank you.

You bet.

Our next question comes from Mary Jane Credeur from The Bloomberg News.

Please go ahead.

Speaking of aircraft, can you guys give us an update on when you plan to make a decision on a narrow body order?

And should we look for that before year end, or is that more likely a 2012 thing?

Mary Jane, this is Jeff.

As you know, Continental had and has a good aircraft order for its network and United has some airplanes as well on order.

But neither carrier really had the right order for the combined network.

And as we continue with refreshing the fleet and bringing in modern and fuel efficient airplanes as we continue to invest in the product, we are going to need some additional main line aircraft.

That is something that we are visiting on right now.

And when we are ready to announce something, we'll announce it.

And a quick follow-up.

We saw your friends in Atlanta scale back their narrow order and went with just 100 main line jets.

It was a little more conservative than their initial plan of maybe as many as 200 including some smaller, smaller jets.

What is your bias as you think about that order and approach it?

Are you viewing it as more of a bullish large long-term thing?

Or should we be thinking in terms of something more conservative?

Well, we are looking at -- one of the things we are looking at basically is just the fuel efficiency of modern aircraft.

Maintenance reliability, dispatch reliable, customer pleasing attributes, et cetera.

So it isn't so much a bet on the -- on, on growth as much as it is we have a lot of older aircraft coming off lease or off finance that are not fuel efficient that we do want to replace.

We'll also model obviously out where we think the number of aircraft that we will need over the long run, and, and -- but we are not really in a position to discuss that publicly yet.

Thanks Jeff.

At this time I'm showing no further questions.

I would now turn the call over to Miss Nene Foxhall for any final remarks.

Thank you.

Thanks to everyone on the call for joining us today.

Please call media relations if you have any further questions and we'll look forward to talking to you next quarter.

Good bye.

Thank you, ladies and gentlemen.

This concludes today's conference.

You may now disconnect.