聯合航空 (UAL) 2011 Q4 法說會逐字稿

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  • Operator

  • Good morning and welcome to the United Continental Holdings Earnings Conference Call for the full year and fourth quarter 2011.

  • My name is Michelle, and I will be your conference facilitator for 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 and 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 Miss Mimi [Foxhole] and Mr.

  • Tyler Reddien.

  • Thank you Michelle.

  • Good morning everyone and welcome to United Continental Holdings full year and fourth 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, and Executive Vice President and CFO Zane Rowe.

  • 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, balance sheet and guidance.

  • 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 yourselves to one question and one follow-up.

  • With that I will turn it over to Tyler.

  • Thank you.

  • - Managing Director Investor Relations

  • Thank you Mimi.

  • Our earnings release and separate investor update were issued this morning and are available on her 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 filled 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 table at the end of the earnings release, a copy of which is available on our website.

  • Our full-year 2011 results are presented on a combined basis for United Continental Holdings.

  • Full-year 2011 results discussed today, including comparisons against prior year will be based on unaudited pro forma financial 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 our numbers for the quarter we will be excluding special items, merger related expenses, and/or fuel hedge non-cash market to market gains and losses.

  • These items are detailed in earnings release.

  • In the fourth quarter, we reclassified revenue associated with our non-air mileage redemption through our Mileage Plus Loyalty Program from passenger revenue to other revenue in 2010 and 2011, and these results have been adjusted to reflect the change.

  • For additional information please refer to our investor update issued today.

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

  • - Chairman, President and CEO

  • Thanks Mimi and Tyler and good morning and thank you all for joining us for our 2011 full-year earnings call.

  • Today, we reported net income of $1.3 billion for the full year, or $3.49 per diluted share, delivering a 3.6% pretax margin.

  • For the quarter, we earned $109 million of profit or $0.30 per diluted share.

  • 2011, our first full year as a merged airline, was a year of many successes for the new United.

  • We received our single operating certificate, made good progress with our labor groups, delivered record passenger revenue, exceeded our goal of achieving 25% of our merger synergies for the year, and generated returns in excess of our cost of capital.

  • My coworkers worked together all year to run a clean, safe and reliable airline while integrating our two subsidiaries.

  • I'm proud of the progress we made in 2011, and I thank my co-workers for all they did for the new United this past year.

  • All their hard work paid off as we accrued $265 million of profit sharing for 2011.

  • That represents about 5% of the eligible compensation of each participant in the program.

  • My management team and I look forward to distributing profit sharing checks to what coworkers on Valentine's Day, February 14, as we share in the profit that we all helped create.

  • I have been clear that we are working hard to turn the new United into a real business.

  • That is a business that sustainably generates returns in excess of its cost of capital.

  • Sufficient and sustainable profitability will permit us to build the airline our coworkers want to work for, our customers want to fly, and our investors want to invest in.

  • There's no doubt that 2011 was a challenging year for the US and global economies marked by high unemployment, slow GDP growth in the US and across much of the globe, high and volatile jet fuel prices, the debt crisis in Europe, and the adverse impact of the tragic earthquake and tsunami in Japan.

  • Our ability to generate $1.3 billion of pretax earnings in this adverse environment is a testament to our financial and operational flexibility and company-wide focus on sustained and sufficient profitability.

  • While we made significant progress integrating the operations of our two subsidiaries in 2011, 2012 is the year that we will become one airline for our customers.

  • We will have one brand, one website, one loyalty program, and one name.

  • As I've discussed with you before, the key to our becoming one airline for customers, is our conversion to a single passenger service system which is known as Shares and is the system currently used by our Continental subsidiary.

  • Our information technology, reservations, and airport services teams have developed and thoroughly tested our conversion.

  • The Shares platform is already integrated with Continental.com which will be rebranded as United.com and will be our combined website.

  • We have devoted significant training, staffing, and technology resources to ensure the success of our conversion to shares which will take place in early March.

  • After this conversion, all agents will be able to serve all our customers.

  • We will be able to freely flow all our aircraft across our network and park at all at our gates.

  • We will have a single reservation system managing all our bookings on our website and by phone and we will have a single loyalty program and elite levels for all our customers.

  • The flexibility and functionality of shares are key to achieving our goal of delivering 75% of our annual expected merger synergies in 2012.

  • Once we have completed the conversion to shares, we will relaunch United.com which will provide us with the right platform for innovation as we continue to develop new travel options and products that our customers will value and that will contribute to our bottom line.

  • We will also launch our combined loyalty program, Mileage Plus.

  • We are making significant investments in our onboard product, airport experience, and our industry leading loyalty program, and I'm excited by what we have in store for our customers this year.

  • We began installing Economy Plus on our Continental fleet in December, and will complete our entire Boeing 757 fleet by early February.

  • By the end of 2012, we expect to have our entire mainline fleet outfitted with Economy Plus.

  • We continue to install our lie-flat seats on our international aircraft, and we expect to have virtually all of our international aircraft reconfigured by the end of this year.

  • We will be the first US airline to offer global in-flight connectivity when we begin our satellite-based WiFi installation program in the second half of 2012.

  • We will also begin a complete nose-to-tail overhaul of the interiors of our popular PS TransCon fleet later this year for flights between JFK and San Francisco and Los Angeles.

  • And when we are done we will have the best TransCon product in the industry.

  • We continue to invest in a fuel efficient fleet, and expect to bring five Boeing 787 Dreamliners into service in the second half of the year.

  • The Dreamliner will be a game changing aircraft and we eagerly anticipate its induction into our fleet.

  • In addition to the Dreamliners, we expect to take delivery of 19 Boeing 737 900ER's with the Boeing Sky Interior this year.

  • We are also focused on enhancing the customer experience at our airports.

  • Just this past Monday, we broke ground on the first phase of our $1 billion dollar investment in terminal B at Bush Intercontinental Airport in Houston.

  • In Chicago, we are installing additional jet bridges for United Express operation in O'Hare's Terminal Two.

  • We are refreshing the interiors of many of our United clubs around the system, and we're building a new club in Terminal 2 at O'Hare.

  • Since we merged a little over a year ago, we have already co-located operations at 66 airports and have common gate areas at more than 290 airports, making connections and airport navigation easier for almost 80% of all customers flying on our network.

  • Mileage Plus is the world's leading loyalty program and we intend to keep it that way.

  • We continue rolling out new ways for our customers to earn and redeem miles by expanding the number of business partners that participate in the Mileage Plus loyalty network.

  • The 2012 Mileage Plus program launches in early March and features a new five tier elite program that recognizes and rewards our most valuable customers.

  • We are expanding our customer service resources and the geographic footprint for our renowned global services program, our top elite tier.

  • We are also continuing to integrate our work groups and have made significant progress to better align the pay, benefits and work rules for several of our work groups on the path to negotiating joint collective bargaining agreements.

  • Our United technicians, represented by the Teamsters, recently ratified a new contract that better aligns their compensation and work rules with that of their Continental coworkers, and we will soon begin the process of negotiating a joint collective bargaining agreement.

  • We recently reached a tentative agreement with the Association of Flight Attendants for a new contract for our United flight attendants.

  • The contract is currently out for ratification and when that's done we will begin the process of negotiating a joint agreement for our flight attendants.

  • We began negotiations for a joint agreement with our ramp coworkers, and our customer service, airport, and reservation agent coworkers are currently in an election processes to determine whether or not they wish to be represented by a union.

  • Our engineers recently rejected union representation in favor of a direct relationship with the Company.

  • We continue to have productive discussions with our pilots.

  • The United Master Executive Council of the Airline Pilots Association recently elected a new leader and we believe that he has a significant opportunity to engage constructively with the Company and make progress on delivering a joint collective bargaining agreement that is fair to the pilots and fair to the company.

  • We're making significant strides towards becoming the world's leading airline, but none of it would be possible without generating sufficient profitability.

  • Returns in excess of our cost of capital allow us to invest in our product, our people, our fleet, our facilities, and our technology.

  • And ultimately provide rewards to all of our stakeholders.

  • We have much more work to do, but we are clearly on the right path.

  • Before turn it over to Jim and Zane to walk you through the numbers, I would like to extend my thanks to our customers around the globe for their ongoing loyalty and for supporting us as we work toward completing our integration.

  • We are working very hard to continue to earn your business.

  • Jim?

  • - EVP

  • Thanks Jeff.

  • I join Jeff in thanking our coworkers for their hard work this quarter and year, and our customers for choosing to fly United.

  • United's fourth quarter consolidated passenger unit revenue increased 8.2% and mainline PRASM improved 7.4% and versus the fourth quarter of 2010.

  • Yield improvements again drove our revenue gains this quarter.

  • For the full year, United's consolidated unit passenger revenue increased 9.2% versus 2010, leading the US network carriers during a challenging economic backdrop.

  • Consolidated yield for the full year increased 10.6% year-over-year.

  • Capacity discipline, fair management and United's outstanding route network drove the year-over-year yield and revenue growth.

  • Throughout 2011, we demonstrated our commitment to matching capacity to demand across the network.

  • Our fourth-quarter consolidated capacity decreased by 2.5% from the same period in 2010.

  • Domestic mainline capacity decreased nearly 5%, and transatlantic capacity declined 2% in the quarter as compared to last year.

  • For the full year, the company reduced consolidated capacity by 0.2% and mainline capacity by 0.3% year-over-year.

  • Fourth quarter domestic mainline PRASM increased 10.3% on a year-over-year yield increase of 9.8% and capacity decrease of about 5%.

  • For the full year domestic mainline PRASM increased 10.9% on a 10.6% increase in yields and a 2.8% decline in capacity versus 2010.

  • This is an excellent full-year result for the domestic mainline entity.

  • Fares throughout the year remained higher due to successful fare increases, industry-wide capacity discipline, and early network optimization from our merger.

  • Regional PRASM grew by 11.3% in the fourth quarter and 9.4% in 2011 compared to the same periods in 2010.

  • International unit revenue increased 4.3% in the fourth quarter and 7.9% for the full year versus 2010.

  • Fourth-quarter and full-year international yields improved 6.8% and 10.9% respectively.

  • International capacity declined 0.3% in the quarter.

  • Latin America again was United's best performing entity this quarter, and holds our top spot for the full year, as well.

  • Latin America PRASM grew 11.7% in the fourth quarter and 17.6% for the full year.

  • Yields grew by more than 11% in the quarter and 19.5% for the full year.

  • South America continued to significantly improve on a year-over-year basis in the fourth quarter, with premium and economy PRASM up 17% and 15.5% respectively.

  • Transatlantic PRASM increased 3.7% year-over-year in the fourth quarter with yields up 6.5%.

  • For the full year, transatlantic unit revenue grew 5.1% and yield increased by 8.7%.

  • Premium cabin demand to continental Europe and the UK was strong in the fourth quarter, with yields and PRASMs up year-over-year.

  • Middle East PRASM increased 5.3% and yield grew 6.4% with double-digit gains in the premium cabins.

  • Our Pacific network generated PRASM growth 6.4% for the full year, with fourth quarter PRASM up 1.1%.

  • Yields grew 9.3% during 2011 versus 2010 and 4.5% for the fourth quarter.

  • Our Pacific presence is unmatched in the industry and it remains one of our most profitable entities.

  • China PRASM and yields in the economy cabin decreased during the quarter, but were partially offset by higher fares, yields and PRASM in the premium cabins.

  • Corporate revenue continued to show steady improvement in the fourth quarter.

  • Corporate yields grew 9% versus the fourth quarter 2010 and revenue improved 13%.

  • For the full year, our corporate revenue increased more than 14% with double-digit yield growth and corporate fares up 9%.

  • Business today is more global than ever, and we continue to develop the United network and product portfolio to be a single solution for the corporate traveler.

  • Our corporate customer portfolio is comprised of a diverse group of industries, and this diversity provides United a unique hedge against demand volatility in any one sector.

  • We have ongoing conversations with our corporate customers to best understand their near-term travel needs and longer-term outlook.

  • Based on our most recent discussions, the majority of our global corporate accounts expect 2012 travel volumes to be flat to up and travel spent to moderately increase versus 2011 with first quarter trends expected to mimic the full year.

  • Fourth quarter cargo revenue declined 8.1% versus the same period last year.

  • We continued to feel the adverse impact of increased industry cargo capacity, particularly across the Pacific.

  • Cargo yields increased 5% percent, while cargo volumes decreased about 12% year-over-year.

  • During 2011, we generated approximately $250 million of revenue synergies, beating our expectations.

  • We expect to generate significantly more revenue synergies in 2012, enabled largely by our conversion to a single passenger service system.

  • During 2011, we reduced capacity to right-size our supply for the expected demand.

  • In light of our latest demand projections, and US and global economic growth expectations for the year, we continue to believe that we should hold our capacity flat with a downward bias for 2012.

  • We expect our first-quarter 2012 consolidated capacity to be down slightly year-over-year.

  • As a reminder, 2012 is a leap year and as a result we expect to see capacity growth in February which adds more than a point of capacity for the first quarter.

  • We look forward to converting to a single passenger service system in early March, which will allow us to optimize our combined network and match the right aircraft with the right markets.

  • While we have already done some modest optimization on a limited basis, as opportunities arise, we plan to make more material schedule changes as we move through the year.

  • A single passenger service system is not just about the schedule, however.

  • It also provides us the opportunity to introduce new ancillary products.

  • Ancillary revenue this quarter grew by 5% year-over-year.

  • And for the full year, we generated more than $2 billion in ancillary revenue.

  • Our existing portfolio of ancillary products and services led by our Economy Plus Seating is well received by our customers.

  • Once we convert to shares, we will harmonize our ancillary product portfolio and begin to roll out new products for the new United.

  • That said, core passenger demand remained stable and solid.

  • And based on our latest forecast we estimate United's January consolidated PRASM will increase approximately 11% year-over-year.

  • Domestic yields continued to show strong improvement year-over-year, and we have seen numerous fare actions recently to further improve the yield environment.

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

  • Looking further into the first quarter, we face more difficult comps in February and March.

  • Our advance booked seat factor is solid, up one point domestically.

  • However, we do see a reduction in advance booked seat factor in the Pacific primarily due to the shift of the Chinese New Year from February last year to January this year, which moved bookings earlier in the year in 2012.

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

  • - SVP, Finance and CFO

  • Thanks Jim.

  • I'd like to start by thanking the entire United team for all their effort in helping produce a strong profit in 2011 while managing through our merger integration.

  • United's consolidated operating expense increased approximately 10% or $3.2 billion year-over-year in 2011, as fuel costs increased nearly $3 billion compared to the previous year.

  • Excluding the impact of hedges, fuel prices rose 29% year-over-year in the fourth quarter and 38% for the full year.

  • Full-year consolidated and mainlined unit costs increased 10% year-over-year.

  • Holding fuel rates and profit sharing constant, consolidated unit costs were up 1.1% as we continued company-wide efforts to control costs and realize efficiencies from the merger.

  • In the fourth quarter, consolidated unit costs, holding fuel rates, and profit sharing constant were up 0.5% while we reduced capacity nearly 3%.

  • This year we made good progress integrating the two subsidiaries and generated over $400 million of synergy value, slightly exceeding our expectations established at the time of the merger.

  • In addition to the over $250 million of revenue synergies, our integration efforts yielded $150 million of cost synergies in 2011.

  • We accrued an additional $23 million in profit-sharing this quarter for a total of $265 million for the year.

  • Non-operating expense was $191 million in the quarter and $977 million for the full year.

  • Interest expense decreased by nearly $100 million this year as we delevered the balance sheet and retired some higher priced debts.

  • For the year we incurred $59 million of fuel hedge ineffectiveness expense associated with our WTI hedge position.

  • Our fourth-quarter profit was $109 million and our full-year profit was $1.3 billion, generating a pretax margin of 3.6% for the year.

  • This resulted in an 11% return on invested capital, nicely exceeding our cost of capital.

  • We are pleased with this result in light of the economic challenges we face, and it illustrates the improvements we've made managing through periods of adversity.

  • Moving to the balance sheet, we ended the year with a $8.3 billion of liquidity including an undrawn $500 million revolving credit facility that we entered into during the fourth quarter.

  • The facility provides attractively priced additional liquidity while we pay down debt and strengthen the balance sheet.

  • During the quarter, we generated $265 million of operating cash flow and gross capital expenditures were $204 million.

  • We again reduced debt this quarter, paying $494 million in debt and capital lease obligations, including $71 million of prepayments.

  • For the year, we paid down $2.6 billion of scheduled maturities and debt prepayment.

  • We reduced capacity in 2011 by two percentage points versus our expectations at the beginning of the year as we responded to the rising cost of fuel and the economic environment.

  • As Jim mentioned, we currently expect our 2012 capacity to be flat to down for the year and down slightly in the first quarter.

  • We will continue to be prudent about our level of capacity deployment.

  • In 2012, we face of cost pressure as a result of our decision to increase investment in the business and inflation in certain areas.

  • We're making a number of product improvements, such as increasing staffing at the airport to enhance our customers experience, deploying Economy Plus across the Continental mainline fleet, and improving our food offerings in the premium cabins.

  • We are changing aspects of our maintenance program to improve the condition and reliability of our aircraft.

  • We will also see cost pressure in some areas, including pension expense, due to historically low interest rates, as well as wage and benefit expense, as we've made progress on a number of our labor agreements.

  • We expect to achieve an incremental $200 million of cost synergies in 2012.

  • As a result, we expect our consolidated unit costs excluding fuel, profit sharing and ancillary business expense to be up 2.5% to 3.5% year-over-year in the first quarter and the full year of 2012.

  • As we disclosed in our December investor update, we are now excluding ancillary business expense from our core unit costs.

  • The revenue associated with this is recorded in the other revenue line.

  • Ancillary businesses are those associated with activities that do not generate to seat miles.

  • These include components of the Mileage Plus Program, such as non-air mileage revenue and redemption expense, as well as services for third parties, including maintenance, ground handling and catering.

  • Ancillary business expense is expected to be approximately $65 million in the first quarter and $340 million for the full year of 2012.

  • Based on the forward curve as of January 18, we expect our consolidated fuel price to be $3.27 per gallon in the first quarter and the full year.

  • We've hedged approximately 48% of our expected first-quarter fuel consumption at an average Gulf Coast jet equivalent of $3.24 per gallon.

  • We've hedged approximately 32% of our expected fuel consumption for the full year 2012, using a combination of colors, swaps and calls.

  • We have $1.3 billion of scheduled debt maturities and capital lease payments in the year.

  • While we are committed to strengthening the balance sheet in 2012, we are also mindful of the need to invest in the business.

  • We continue to refresh our fleet with modern, fuel-efficient aircraft and expect to induct into service 24 new aircraft this year comprised of five Boeing 787 Dreamliners and 19, 737 900ER aircraft.

  • As a result, we expect gross capital expenditures to be $2.3 billion in 2012, or $1.3 billion net of expected financing.

  • As we take delivery of new aircraft, we are retiring older, less efficient aircraft, improving the operating economics of the fleet.

  • We are retiring 22 domestic aircraft comprised of 17, 737 500's and five 757 200's, as well as five international 767 200 ERs.

  • In 2012, our team of more than 80,000 at United will focus on working together to generate value for all of our stakeholders by building an airline with great service, competitive products, and an unparalleled route network.

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

  • - Chairman, President and CEO

  • Thanks Zane.

  • Our results in 2011 were solid.

  • I'm proud of what my coworkers were able to accomplish in such a challenging year, and I want to thank them all for their hard work.

  • 2012 will be a very exciting year as we substantially complete our integration and continue to build the world's leading airline.

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

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

  • - Managing Director Investor Relations

  • Thank you Jeff.

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

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

  • Michelle please describe the procedure to ask a question.

  • Operator

  • (Operator Instructions) Hunter Keay from Wolfe Trahan.

  • - Analyst

  • Thank you, good morning.

  • So, I guess after Delta got its single operating certificate, after the Northwest merger there was a little bit of revenue dis-synergies that they experienced.

  • They under performed the industry for a few months.

  • Before really starting to outperform what really amounted about a year later after SOC.

  • So, as you look at December PRASM which is a little softer -- and January came actually a lot better than I was expecting, so I will mention that -- but do you think that it's possible, or it's probable, that there was some hiccup on the revenue side because of post-SOC maybe integration?

  • I don't want to say headaches, but unforeseen difficulties.

  • Might the revenue synergies now shift to be a back half of the year?

  • Should we expect you guys to think about outperforming on PRASM maybe in the back half of 2012?

  • Maybe expect a few more hiccups over the next three to four months?

  • - EVP

  • Hey Hunter this is Jim.

  • Yes, I think a couple comments on that.

  • I would first say that I don't think there was anything that was unexpected.

  • One example I'll give you is that, in early December we moved to a single optimizer in the revenue management perspective.

  • In preparing for that what, we took a little bit more conservative view in how we would handle the bookings, and so forth, and that would have an effect on yield closer in.

  • So, not unexpected, so I want to be sure that I'm clear on that.

  • What we wanted to do was make sure that as we move into 2012 with a single optimizer -- which is now forecasting from one system, that we capture the synergies that we're expecting from that.

  • So, to your point, there are things that were happening -- you know the other piece is that we are operating on two systems in a number of areas still.

  • As Jeff mentioned in his comments, we're really looking forward to the PSS integration in March.

  • That will allow us to begin to capture many of these synergies across the network.

  • So, I think your point is a good one.

  • I think the synergies will begin to move quicker, obviously, after we're past PSS.

  • One of the things that -- and another example in that, is we're moving to the Continental.com site will be renamed United.com.

  • So, even though we moved past PSS, what we'll quickly do is close what we call is some of the PSS gaps.

  • So, that on United.com there is ancillary products such as Premier Line and other products like that just generate revenue that the Continental.com site did not have.

  • So, there will be that period of time that will quickly -- working with our technology folks to get those applications on to the new United.com site -- which again will give us a little bit of time to recapture that revenue move on.

  • Then, at the same point begin to introduce new products.

  • So, I don't know if that's helpful.

  • But I would say things aren't unexpected but we realize that, for operating under two systems in certain areas, it's not only difficult for our customers and our employees, that does create -- I call it some friction, some dust in the network that we're working through and we'll hit it with PSS.

  • - Analyst

  • All right Jim.

  • Thanks.

  • No that is helpful.

  • Jeff, I'd like to get thoughts on labor for a second here.

  • You mentioned the new leadership, obviously, at United ALPA -- have you had conversations with Captain Heppner yet?

  • Do you feel like many -- any ground was lost with the transition leadership, any progress you would have made under the prior ALPA administration?

  • Maybe a brief update on where you stand -- where the pilots stand on seniority list integration.

  • Thanks.

  • - Chairman, President and CEO

  • Sure.

  • Yes, I've visited with Jay all ready a couple of times -- Jay Heppner.

  • I now have two Jays, so I have to distinguish between [Pierce] and Jay Heppner.

  • I think in terms of progress lost, I think as the former United ALPA leader was winding down there was a period of time which we, obviously, couldn't really make progress.

  • Now that we have a new leader I think we can.

  • I've visited with Jay about this.

  • So, he really does have a tremendous opportunity an inflection point here to be constructive and responsible, and to move this process forward.

  • I hope that he will do so.

  • As for other details of the negotiations or the pilots discussions regarding a senior -- a single seniority list I won't comment on those.

  • I don't think it's appropriate it at this time.

  • - Analyst

  • All right, thanks.

  • Operator

  • Bill Greene from Morgan Stanley.

  • - Analyst

  • Hello there.

  • Good morning.

  • Zane, a question on the guidance -- the CASM guidance.

  • When you gave it, does that include an assumption about occurring for future labor contracts or is that something that we have to work in later as we get closer to CBA?

  • - SVP, Finance and CFO

  • Bill, it includes what we'd call our normal GAAP assumptions.

  • So, it includes what we're assuming today.

  • - Analyst

  • Okay.

  • Then Jim or Jeff, when you look back at your time at Continental -- when you were dealing with competitor bankruptcies.

  • Did you notice that there was any material corporate market share gains or did that not really play role in discussions at that time?

  • - EVP

  • Yes Bill.

  • It really didn't play a role -- we actually -- I would say I really never saw significant change.

  • I think particularly over time is, the marketplace I think understands Chapter 11 and so forth.

  • So, I think what we're seeing on the corporate side is really related to the network and the strength of the network.

  • As our sales force gets out there and communicates the value of this new enterprise going forward.

  • So, anything that we see is, really we think -- really related to that in correspondence to our sales force talking about the value of the new enterprise.

  • - Analyst

  • Yes.

  • So, if there were any gains then -- given American's bankruptcy it would probably come more from their network changing and yours having an advantage?

  • Is that fair?

  • - EVP

  • Yes I think that's right.

  • I think as the networks change as people understand the incremental value the new United now brings I think that you'll -- you should --we'll see that volume move appropriately.

  • - Analyst

  • Okay.

  • That's great.

  • Thank you for the time.

  • Operator

  • Michael Linenberg from Deutsche Bank.

  • - Analyst

  • Hello, everyone.

  • This is a question for Jim.

  • Jim you talked about the Pacific, being historically a very profitable part of the business.

  • When you look at where the bookings are.

  • They are down a bit.

  • I know you pointed to the calendar with the new year.

  • Yet, you did you did highlight in the fourth quarter I guess the Premium Cabin to China was good.

  • Domestic or the economy looked like it was actually RASM and yields were down.

  • Are we also, seeing besides the calendar, are we seeing a little bit -- maybe China in the midst of a soft landing here?

  • I mean what -- any additional color would be helpful.

  • Particularly when you look at, maybe, the Delta numbers --and maybe because they're Pacific is more Japan oriented.

  • They had a much higher PRASM gain in the quarter.

  • What can you tell us about that?

  • - EVP

  • Hello Michael, just a couple of thoughts.

  • I think, as you think about China, I think it's more related, quite frankly, to capacity.

  • So, for us in Chicago to Hong Kong, Cathay started flying in the market in September and so forth.

  • So, there's that increased capacity.

  • We have LA Shanghai flying, so over the year we started that, we started that last Spring.

  • You are right, they operate at really high revenue performances.

  • But I do think those are things that put a pressure on the PRASM in China relative to Japan.

  • Because obviously, if we look at our Japan versus China we see significant RASM relative to what we are seeing in China.

  • But I think it's more the capacity side than anything.

  • What we're really comfortable about, at this point is, one, the high level of profitability those markets bring to us.

  • We're also seeing good strength in the Premium Cabin, even as we look forward.

  • As much as you'd like to see the book load factor, I'm always a little bit more happier that it's in the leisure bookings, relative to the Premium Cabin.

  • - Analyst

  • Okay.

  • Then just as a follow up on that.

  • Your ATI JV with All Nippon, that is now up and running right?

  • One I just -- I want to get a confirmation on that.

  • What have you seen since you've started to integrate that?

  • Does that include the Chinese routes, or is it just purely the US and Japan?

  • - EVP

  • It's the Japan routes in there.

  • As well as the Singapore, Taipei, I'm getting a list of the different Hong Kong markets that are also in that.

  • So, it's a basket of different markets out there not totally inclusive of all of the Pacific.

  • I would say that it's like the Transatlantic.

  • It's a phase in type of JV.

  • So, a lot of the teams have been working very closely on some of the harmonizing some of the pricing.

  • Quite frankly, getting to know each other and how to -- how each Company thinks about the marketplace.

  • As we talk about the US point of sale and ANA learned from that and we learn a lot from ANA on the Japan point of sale.

  • So, a lot of great work.

  • But it's a phased approach and it's very early into the phase.

  • - Analyst

  • Okay.

  • Very good.

  • Thanks.

  • That's all I needed to know.

  • Appreciate it.

  • Operator

  • Duane Pfenningwerth from Evercore Partners.

  • - Analyst

  • Good morning.

  • Just wanted to follow up to an earlier question regarding your systems cutover here in the first quarter.

  • Is there a period of time around that where you might throttle back or maybe not be able to push as hard on revenue as you might otherwise?

  • So, I understand there's synergy potential that you can't realize today that's on the other side of this.

  • But I'm just thinking as we think about the cutover, is there a migration period where you might have to not push as hard as you otherwise would.

  • - Chairman, President and CEO

  • Duane, this is Jeff.

  • Around the date of the cutover, we are taking some of the load off the airports.

  • But that's for a very short period of time.

  • We're also, obviously, staffing up for that period of time.

  • We've got a large number of people around the system who are experts in SHARES -- that we call success teams around the system.

  • So, we're confident about the cutover.

  • But I think that portion of it is actually fairly modest, in terms of the revenue effect.

  • - EVP

  • Yes Duane.

  • This is Jim.

  • I would just add my comments about moving to a single optimizer, right?

  • One of the reasons we wanted to move quickly working with our technology partners and the revenue management folks is, so that we can be up and running as quickly as possible.

  • So, we're actually -- the forecasting we're doing for demand is now an improved system -- a one system across the whole network.

  • So, to Jeff's point it's really around the dates of PSS itself.

  • - Analyst

  • Okay.

  • Thanks very much.

  • Operator

  • Glenn Engel from Bank of America.

  • - Analyst

  • Good morning, a couple of questions.

  • When you touched on the under performance of the Asian routes but the European routes, also, looked lower than the ATA data.

  • Can you talk about what was driving that?

  • - EVP

  • We reduced capacity 2% in the Transatlantic with about a 3.7% increase in RASM.

  • The way -- so, I think in the Transatlantic, really across our whole system as you think about capacity discipline.

  • What we've always -- very much adhered to capacity discipline but also stable capacity.

  • Not having really big swings in capacity because we think over the long-term that's the best way to manage the revenue.

  • We're very much -- know that this network we have, you can't duplicate it.

  • The reason you can't duplicate it, is because it's built for a global network.

  • It's built because of those gateways that we have in particular.

  • So, we take a long-term view of these markets rather than a shorter term view that we feel really confident about.

  • I also think that, as we move across PSS the way we are thinking about it, is that we'll begin to see how traffic flows across the network, right.

  • As we watch how traffic flows across the network when we're on a single code -- a single optimizer, we'll keep our due diligence on watching capacity.

  • But we also, want to see where that traffic is going to flow as we move forward.

  • - Analyst

  • Did you say how much the yearly Chinese New Year is benefiting January's PRASM?

  • - EVP

  • Yes.

  • No I can't comment on that.

  • - Analyst

  • Finally on the cost side, I'm looking at the non-fuel CASM growth of the mainline up about 5%, and the non-fuel CASM of the regional down about 6%.

  • What's driving that big divergence?

  • - SVP, Finance and CFO

  • And what period are you looking at?

  • I don't think -- there's nothing there that --

  • - Analyst

  • This is the forecast.

  • - SVP, Finance and CFO

  • Right.

  • So, there's nothing there that's out of the ordinary, more than what I talked about with some of the pressure that we've seen on salaries and benefits line.

  • The natural shift that you see as you move more internationally -- as we will through the course of the year, we expect to see a little bit of cost pressure across the line items but nothing more than that.

  • - Analyst

  • But why would the regional be down so much?

  • - EVP

  • That may just be a little bit of a mix issue as well with some of the higher gauge regional aircraft, and just shifting a little bit across the fleet there.

  • - Analyst

  • Thank you.

  • Operator

  • Jamie Baker from JPMorgan.

  • - Analyst

  • Good morning everybody.

  • Jeff, on the subject of the March cutover to SHARES, you spoke about having tested everything already.

  • I'm sure you have.

  • But my question is what happens if the cutover doesn't go as planned.

  • I can't help but think of that scene from War Games where they couldn't shut the computer off.

  • Can you cut -- (laughter)

  • - Chairman, President and CEO

  • Jaime, a couple of things.

  • One, we've had four full-scale dress rehearsals.

  • All the data transfers and all the things are appropriate.

  • We have a numerous amount of support, both from Travelport, which runs Apollo our former PSS, and HP that runs SHARES for us, as well.

  • An enormous amount preparation.

  • We also, of course, being prudent, have the ability during the conversion itself to roll back.

  • We also, have some ability to roll forward that is to do some postponement, as well if we need to.

  • So, we have -- we've been pretty thoughtful, careful, and conservative in this.

  • We are exceedingly well-prepared for it.

  • There are literally thousands of people who have worked on this -- not only from a technology perspective, but the training of our United coworkers who have traditionally been working on Apollo, being trained into SHARES.

  • A large number of Continental people in our success teams literally around the globe for assistance.

  • So, I'm confident that this will go as planned.

  • But as you point out, being prudent -- we also, have scenarios in case we have some unforeseen issues.

  • - Analyst

  • Perfect.

  • That is what I hoped to hear.

  • Second, just on the ancillary business expense, based on the restatements for last year.

  • It doesn't look like these expenses -- I guess this is to Zane -- that there's any particular seasonality to them.

  • Is that the right way to be thinking about growth in the business going forward?

  • - SVP, Finance and CFO

  • I think that's right Jamie.

  • I think we touched on the Mileage Plus component as being a great growth story.

  • This portion of that will, actually, not have the same seasonal attributes that I would say the portion, obviously, tied to the airline does.

  • So, you are exactly right and that's where we expect to see the growth and expense.

  • See the [commencer] growth in revenue, obviously, on the other revenue line.

  • - Analyst

  • Okay terrific and thank you very much gentlemen.

  • Operator

  • Kevin Crissey from UBS.

  • - Analyst

  • Hello, thanks.

  • Your CapEx number is what I would've thought, but it's a decent size number with the fleet changes.

  • How should we think about your maintenance CapEx when I look at Delta running at $1.3 million, $1.4 million overall.

  • You guys running higher than that now.

  • What is maintenance CapEx?

  • Would you expect to be able to generate free cash flow with your current CapEx for '12?

  • - SVP, Finance and CFO

  • Kevin, I would break out the aircraft portion to what I'd even call aircraft related and other CapEx.

  • So, obviously, even as you separate the acquisition of the new aircraft for this year, you still have a slight bow wave given all the improvements we're making in the in the products and all the improvements we're making, really across the fleet.

  • Whether it's operational improvements or otherwise putting lie-flat beds on some of the wide bodies and narrow bodies.

  • So, I would separate that.

  • We're clearly in a bow wave.

  • We've also, spread out our CapEx a little bit.

  • We ended up a little bit lower than our guidance was for last year.

  • So, we're pretty comfortable with where we are, although I'd tell you we're little a bit higher than where we'd be normally.

  • The big bump up, you see this year is driven by the 787's and, obviously, the 73's.

  • - Analyst

  • In terms of the ability to generate free cash off of that type of CapEx?

  • - SVP, Finance and CFO

  • We're still comfortable with what our projections are and our ability to generate free cash flow.

  • Yes.

  • Obviously, it depends upon your definition of how you think about the new aircraft acquisitions but we are quite comfortable with those decisions.

  • Obviously -- and especially with the 787, it truly is a game changer and I think you'll see the difference on the operating line items.

  • - Analyst

  • Thank you.

  • Operator

  • Gary Chase from Barclays Capital.

  • - Analyst

  • Good morning, everybody.

  • Wanted to see if I could just ask one of Jim.

  • In the fall went and started with reasonably comprehensive shift in the network as you were cutting capacity domestically.

  • Just wondering what your experience is with revenue retention there?

  • Wondering if you feel like there are incremental opportunities to do that, while -- without sacrificing revenue and driving that home on the RASM line?

  • - EVP

  • A couple comments.

  • I think, in terms of revenue retention, I think the revenue retention is there.

  • I think it depends on the market and what we did -- or certain markets that we [upgauge] with capacity given the new fleet that we have and to a certain extent it's also, like that piece of the upgauge is like a new market.

  • You want to it to spool and build, and so forth.

  • And it does, you work that and build it.

  • Also, as the revenue management system learns about the capacity changes.

  • But from a retention point of view we saw no loss in revenue given aircraft relocation.

  • I think a lot of things we did also, were to drive RASM, was to do some day of week things.

  • Particularly around holidays and Thanksgiving and things like that.

  • That historically weren't done on one subsidiary that was done on the other.

  • So, all in all the changes we've made have worked pretty well.

  • - Analyst

  • Do you think they picked up immediately or is there some learning curve associated with that as well?

  • - EVP

  • Well I think there's clearly, to be frank, that there's some learning curve -- depending on the market.

  • Again, we're right sizing it.

  • So, again in a market where the gauge went down and the demand was there.

  • Obviously, we saw the revenue performance relative to ASMs pretty immediately.

  • But where you're upgauging you actually do need time to work and to let it spool up.

  • - Analyst

  • Just a quick nit.

  • There's nothing in last year's January that would've affected this comp, right?

  • - EVP

  • No.

  • - Analyst

  • Okay.

  • Thanks guys.

  • Operator

  • 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 from the Associated Press.

  • - Analyst

  • Can you say a little more about the switch over on the website?

  • You mentioned that you're going to be taking Continental.com and a renaming that as United.com.

  • Is there something in particular about the current Continental site as opposed to the current United site that you are interested in maintaining?

  • What is it that the customers are going to see, I guess, once you make that switch and why go with the Continental version rather than the United version?

  • - EVP

  • Well the main reason -- the fundamental reason is we've moved to the SHARES passenger service system and the Continental.com works, obviously, off of the SHARES system.

  • So, the main driving force was the overall system that we moved to that being SHARES.

  • Both websites are terrific websites.

  • In the marketplace they both get really high satisfaction rankings from the research and so forth.

  • Both sites have lots of functionality, lots of different applications and so forth.

  • So, but really the movement to Continental.com was driven by the fundamental fact that we're on the SHARES network.

  • - Analyst

  • All right.

  • Have you said how long you expect that you'll have integration expenses that were at the level that we saw in this most recent quarter.

  • I think it was $173 million.

  • Is that the kind of thing we're going to see for many quarters to come?

  • Or at what point does that taper off?

  • - SVP, Finance and CFO

  • Josh, we don't typically forecast that portion of the expenses.

  • But obviously, as you would expect, at least through the first half of this year you would expect to see a similar run rate, I would say.

  • - Analyst

  • All right.

  • Thank you.

  • Operator

  • Mary Jane Credeur from Bloomberg News.

  • - Analyst

  • Hello, Jim.

  • I've got a question about the outlook for the rest of the year in Europe specifically.

  • I know you guys addressed that a little earlier on the call and in the Investor Outlook.

  • But it sounds like you are a little bit more optimistic than you were on the last call and that seems to align with what we heard out of some of your peers.

  • Can you elaborate more about Europe?

  • Have things bottomed and are they looking better than they did?

  • - EVP

  • This is Jim.

  • I think the -- focusing specifically on Europe we do see the book load factor down year-over-year.

  • We are seeing strength in the Premium Cabin versus the Economy Cabin.

  • Which does say that the challenges in the Euro Zone from the economics and so forth, is having more of a difficult time on the leisure traffic.

  • But clearly the business traffic particularly out of the US is still relatively strong.

  • As we look at -- as we talk to our corporate travel partners.

  • But the -- there is a softening in demand because as a result of the issues that are happening in Europe.

  • - Analyst

  • A question about the New York market.

  • There's a lot of activity happening there.

  • Delta and US Airways got their swap approved and their about to pull the trigger on those schedule changes soon.

  • You know Delta's got that new JFK terminal that will open soon.

  • American Airlines has been a little distracted by the bankruptcy.

  • What does all this mean to the new United for both business and leisure passengers out of New York and are you winning market share there?

  • - EVP

  • Our market share is very steady.

  • We do see SHARES shifting among other carriers, but our market share is very steady in the New York area.

  • For us it's business as usual.

  • We've been there a long time.

  • We've been in markets.

  • We've invested in the facility, we continued to invest in the facility over the years with lounges and so forth.

  • So, for us it's kind of business as usual.

  • At the same time knowing that it is a competitive marketplace.

  • So, our sales force is out there, as I mentioned earlier, talking about the value of this network and the value it brings to the enterprise.

  • New York, for us, is actually a very interesting market, that's different than other folks, right?

  • In terms of our ability to use that facility.

  • It's more than just about the local market.

  • It's a terrific connecting hub and it's a connecting -- most of the connection through our hub are actually international.

  • So, we're the only carrier that has really what I call a true connecting hub -- single connecting hub in New York.

  • So, for us that strength we see steady market share as I mentioned.

  • We think the benefits of the network, and as we get past PSS, we'll actually bring more value to the customer New York.

  • - Analyst

  • So, you anticipate that market share climbing in the next few years?

  • - EVP

  • We're about managing toward returns.

  • So, I want to be careful when I talk about market share because what we're really trying to do is generate stable and sustainable profits.

  • Our New York strategy's going to play in that just as much as it plays across our whole network.

  • - Analyst

  • Great, thank you Jim.

  • Operator

  • Ronnie Crocker from Houston Chronicle.

  • - Analyst

  • Thanks.

  • I've a question about Houston, specifically.

  • When you talk about the capacity and what happened in 2011, which forecasts in 2012.

  • What do you see -- where does Bush Intercontinental stand -- I'm sorry Bush International Airport stand?

  • How did the Latin American growth affect that?

  • - Chairman, President and CEO

  • This is Jeff.

  • Our Houston hub is our largest hub, by departures.

  • It's an incredibly important part of our network.

  • It's our gateway to Latin America.

  • Latin America, right now, is a very strong entity for us.

  • We've had significant year-over-year unit revenue growth.

  • It is an important market for us.

  • It will remain an important market for us.

  • You've seen us recently announce new international service out of Houston.

  • We started Houston-Lagos.

  • We've announced Houston-Auckland.

  • I think you will continue to see Houston be very important to the new United.

  • - Analyst

  • So, do you see any flights being cut out of here?

  • When these five new Dreamliners arrive, how many of them will be flying in or out of Intercontinental?

  • - EVP

  • This is Jim.

  • A lot of those schedule plans aren't formalize now, but adding on to Jeff's [point] now, that we recently launched Houston to Lagos.

  • Just last week our Chief Operating Officer there was breaking ground on Terminal B Phase 1 expansion.

  • So, to Jeff's point, it's our biggest hub.

  • Quite frankly, our corporate travel business -- the biggest sector is our energy business.

  • So, Houston is really important to us and it's going to be really important to us in the future.

  • - Analyst

  • Okay.

  • Thank you.

  • Okay with that we are out of time.

  • So, we'll conclude.

  • Thanks to all of you for joining us today.

  • Please call Media Relations if you have any further questions.

  • We look forward to talking with you next quarter.

  • Goodbye.