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Operator
Good morning, and welcome to the United Continental Holdings earnings conference call for the first quarter of 2012.
My name is Brandon, and I'll be your conference facilitator today.
Following initial remarks from management, we will open the lines for question.
(Operator Instructions).
This conference is being recorded and copyrighted.
Please note that no portion of the call may be recorded, transcribed or rebroadcast without permission.
Your participation implies your consent to our recording of this call.
If you do not agree to these terms, simply drop off the line.
I would now like to turn you over to your hosts for today's call, Nene Foxhall and Tyler Reddien.
Nene Foxhall - EVP Communications and Goverment Affairs
Thank you, Brandon.
Good morning, everyone, and welcome to United's first quarter 2012 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 John Rainey, and Senior Vice President of Finance and Treasurer Gerry Laderman.
Jeff will begin with overview comments, after which Jim will review capacity and revenue results.
John will follow with a discussion of our cost structure, balance sheet and guidance.
Jeff will make a few closing remarks, and then we'll open the call for questions, firstfrom analysts and then from the media.
We would appreciate it if each of you would limit yourself to one question and one follow up.
With that, I'll turn it over to Tyler.
Tyler Reddien - Managing Director IR
Thank you, Nene.
Our earnings release and separate investor update were issued this morning and are available on our website at ir.United.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 evens and financial performance.
All forward-looking statements are based upon information currently available to the Company.
A number of factors should cause 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.
Unless otherwise noted, as we walk you through the numbers of the quarter we'll be excluding special charges and/or fuel hedge non-cash net mark to market gains and losses.
These items are detailed in our earnings release.
Now I'd like to turn the call over to Jeff Smisek, President and CEO of United.
Jeff Smisek - President, CEO
Thanks, Nene and Tyler, and good morning, and thank you all for joining us on our first quarter 2012 earnings call.
I want to take the opportunity to thank Zane Rowe, our former CFO, for his leadership over the last 19 years.
I wish him the best in his new role with Apple.
We have a strong and deep management team, and John Rainey was the clear choice to take over this role.
John is a seasoned professional with many years of airline experience, and my entire team looks forward to working together with him in his new role as CFO.
Moving on to our financial results for the quarter.
Today we reported a net loss of $286 million or $0.87 loss per share.
This was a challenging quarter for United, marked by rising fuel prices and revenue challenges.
While we're disappointed to report a loss of this quarter, we remain focused on turning United in a business that sustainably generates returns in excess of our cost of capital and is weather and adapt to any economic environment in which we find ourselves.
We remain committed to being the airline that customers what to fly, coworkers want to work for, and investors want to invest in.
During the quarter we successfully completed the most complex milestone of our integration; theconversion to a single passenger service system, a single loyalty program, and a single website.
The largest conversion in aviation history.
I cannot overstate the importance of this conversion and the value that will be created now that it is complete.
With this conversion behind us, we now market under a single code, and we can flow our aircraft freely across the network, matching the right aircraft to the right route, which will enable us to deliver on the significant revenue synergies we anticipate from the merger.
We will be making many network changes in the coming months, and Jim will speak about that in a few minutes.
While the conversion to Shares, our single passenger service system, was successful, and we've had solid operational performance afterward, we had a number of issues which affected some of our customers, as one would expect after a massive technology and process change like this.
We also aligned many policies and procedures between the carriers and made a number of simultaneous changes to our loyalty program.
More over, although our new website is materially more advanced than our new one, there are gaps between the old one and our new website that we will close over time.
These issues initially drove high call values, increasing wait times for our agents to answer customer calls.
As we explained last quarter, we spend significant resources to train on the new system, and policy and procedure changes.
And we increased staffing levels to support the conversion.
Even with the team's preparation, the average wait and handle times that our customer contact centers increased substantially.
As a result, in the weeks following the system's conversion we weren't able to deliver the level of customer service we wanted and that our customers have come to expect, and I apologize to our customers who were affected during this time.
As we identified the issues driving high call volumes, we remediated the vast majority of them, and our average speed of answer has fallen substantially, as have our handle time.
As our agents gain experience in the Shares system, we expect handle times to continue to fall and return to normal levels.
Despite the complexity of the conversion and subsequent issues we had, we should not lose I sight of the fact that we safely carried 22 million passengers since the conversion occurred on March 3, and our operating performance, including on-time and completion factor, has been consistent with our performance prior to the conversion.
This is a testament to the dedication and commitment of my coworkers.
One silver lining to the stress of our systems conversion is that we discovered some deficiencies in how our subsidiary carriers were dealing with customer service issues before the conversion.
As a result, we'll be making changes to items like customer messaging and information flow that will permit us to provide better customer service than we had prior to the system's conversion.
I would like to take a moment to recognize all of my coworkers, especially our reservations, customer care and airport coworkers, who worked very hard under stressful conditions, including high load factors due to spring break, to assist our customers after our systems conversion; and our technology team, who worked tirelessly to address issues we encountered and fixed them quickly.
This was a monument task, and I'm proud of the way our team performed and worked together.
We will continue to invest in our technology, and we'll deploy a new front end to the Shares system by the end of this year for our airport and contact center agents.
It will allow my coworkers to serve our customers better and faster than they've ever before.
The Shares platform is stable, dependable and advanced dueto our ongoing investment in its operating system, hardware and system architecture.
It's design gives us flexibility and can be integrated with current generation technologies.
These characteristics will allow us to operate more efficiently and will significantly increase our speed to market for new products and services.
We are already seeing the benefits of moving the Shares.
We've seen web sales penetration improved since moving to the single website, powered by Shares, and are experiencing record sells in ancillary products and services on website.
Our new website not only helps improve our ancillary revenue results, but it also improves our direct relationship with our customers.
Our off-airport check-in percentage has increased 5 points to almost 50% of all check-ins since moving to Shares, furtherconfirmation that if we give customers the right tools, they will use them.
We plan to continue rolling out new technology to make traveling easier for our customers and to give our customers more information, more choice and more control over their travel experience.
As I just mentioned, a significant benefit of moving to Shares is our improved ability to generate substantial incremental ancillary revenues.
We will use the flexibility of the platform to deliver new pricing structures and bundling opportunities for existing products.
Shares also will facilitate fast of introduction of new innovative products, which will result in a better portfolio of offerings that our customers desire, as well as new revenue streams for the Company.
Since the launch of the single website, we have already taken the first of several plans steps to more effectively revenue manage Economy Plus upsell.
Prior to your conversion, we were limited to a single price point for every Economy Plus seat on a given flight.
Since converting to Shares, we now have ability to vary pricing based on a number of factors, including row type, seat type, days of departure and more.
Due to this new functionality, we've been able to increase the average price of an Economy Plus seat in March by 9% year-over-year, and when combine with the increasing number of Economy Plus seats available, total Economy Plus sales increased in March 37%.
Now that we have a single loyalty program, Mileage Plus, we're able to begin unlocking the significant value creation potential that exists with operating the world's largest loyalty program.
The large membership base, a highly recognized and coveted mileage currency, theleading portfolio of co-brand credit cards, and strong network of loyalty business partners provide the platform upon which we will innovate and drive incremental margin moving forward.
We designed the frequent flyer benefit structure integrated loyalty program to better recognize and reward value creating behaviors of our customers, and better strati -- I can't even say that -- to better stratify membership tiers so that benefits logically and progressively improve as higher stratus tiers are reached.
We launched the premium Mileage Plus Club card in March, building on the strong performance we're seeing for the Mileage Plus Explorer card that we launched last July.
We're excited about the opportunities we see in our loyalty business.
These include new ways to engage with membership, strengthening and expanding the network of business partners that participate in the Mileage Plus loyalty network, and increasing the utility of the currency through innovative earnings and redemptive opportunities, such as our recently launched partnership with [guilt], exclusive resorts, and Topguest, as well as the launch of our new options program, Mileage Plus Headliners, and the gift card exchange.
We believe the loyalty space has significant high-margin opportunity in the coming years, and we plan to capitalize on it.
We took a number of actions to ease the stress of our air force during the Shares, such as pulling down flight schedule, limiting our overbooking levels, and waiving certain fees following the conversion.
While beneficial to the operations, these actions adversely impacted our revenue results this quarter.
Over the longer term, however, we believe our that investment in integration and new products and services will continue drive a revenue premium to the industry.
Economy Plus seating, which offers five extra inches of leg room versus standard economy seating, is now on 75% of our combined mainline fleet, and we expect all mainline aircraft reconfigured by the end of the year.
Our lie-flat premium seat installation on our international wide body fleet is nearly complete, with the remaining aircraft to be completely retrofitted by this time next year.
We'll begin installing our satellite based global Wi-Fi network at the end of the year, which when completed will cover our entire mainline fleet.
We also continue to investment in customer-pleasing and fuel efficient aircraft.
We expect to induct five Boeing 787 Dreamliners into services this year, and we recently completely EETC transaction that financed four Dreamliners and 14 737-900ER aircrafts, and refinanced three additional 737-900ERs with the lowest blended coupon rate ever for a EETC transaction.
The Dreamliner is a spectacular aircraft and a game changer for United, and we can't wait for our customers and coworkers to experience it.
We'll be the first North American carrier to take delivery of this revolutionary airplane.
During the quarter we also made progress bringing together our employee groups.
We achieve a tentative agreement with our subsidiary United flight attendants, which was recently ratified.
We now turn our attention to joint negotiations to bring all of our flight attendants under a single collective bargaining agreement.
Our passenger service employees completed their representation election.
We've begun joint negotiations with them.
All representation issues have now been concluded with our major domestic unions, and we are any joint collective bargaining with the unions of all our major work groups.
We remain focused on bringing our work groups together as promptly as we can with responsible joint collective bargaining agreements that pay competitively, which will fair to the coworkers and fair to the Company.
While this quarter was challenging for us, we remain committed to taken the actions necessary to achieve sustained and sufficient profitability.
Now that we are one airplane with a single code, a single passenger service system, a single loyalty program, a single website, and single policies and procedures, we're on the steep backslope of our integration.
This permits us to shift our focus to expanding the products and services that customers want and are willing to pay for, and delivering on our commitment to customer service.
With that I'll turn it over to Jim and John to go over the results in greater detail.
Jim Compton - EVP, Chief Revenue Officer
Thanks, Jeff.
I join Jeff in thanking our coworkers for their hard work this quarter, and our customers for choosing to fly United.
United's first quarter consolidated passenger unit revenue increased 5.2%, and mainline PRASM improved 4.1% versus the first quarter of 2011.
Yield improvements again drove our revenue gains this quarter.
We faced a number of headwinds and challenges in the first quarter that put pressure on our PRASM results, including challenging comps, higher completion factor, and our system conversion.
We are not satisfied with our result this is quarter and are very focused on improving our performance in the future.
Over the past few months we took significant steps in integrating our revenue management and booking system, including moving to a single inventory management system and completing our conversion to Shares.
With these tools in place, our revenue management and network planning team can now seamlessly manage our inventory, identify better route opportunities, and gather a robust history of data, which we will use to make better demand forecast and revenue management decisions.
Technology deployments of this scale are never easy, and we have learned much in the process.
Our new inventory management system is the leading technology available to support revenue management activity.
But after conversion to the single system, we saw a decline in connecting traffic, as we were in the learning phase of the new system, which negatively effected our load factors in the first quarter.
I'm pleased to say based on recent booking data we believe the issue is behind us, and we are now seeing connecting traffic build with historical pattern.
To support the operations around our conversion to Shares we took steps to reduce overbooking to minimize customer disruption as our coworkers got up to speed on the new system.
Now that we have over a month and a half of using the system, we have returned to historical booking levels, which will support better revenue performance in April and beyond.
We estimate that the synergy due to system conversion this quarter to be approximately 1 point year over year PRASM growth.
Even with this headwind, we expect to achieve our fully year 2012 total synergy target.
Our best tools to manage revenue, particularly in an environment of high fuel prices, are capacity discipline and putting the right aircraft in the right market to generate revenue premiums.
Our first quarter consolidated capacity increased 0.03% versus the same period in 2011,with the leap year driving the increase.
First quarter domestic mainline PRASM increased 4.5%, and yields increase 3.3% year year-over-year.
Domestic mainline capacity decreased 3% as compared to last year.
Regional PRASM grew 9% in the first quarter compared to the same period in 2011.
We successfully raised domestic fares twice since the start of the year, and we continue to focus on ensuring that we received compensatory pricing for our products.
International unit revenue increased 3.8% in the first quarter versus 2011.
First quarter international yields improved 5.6%, while international capacity increased 3.4% in the quarter.
Latin America was again United's best performing entity this quarter, with PRASM up 7% in the first quarter and yields up 6.2% versus 2011.
South America continues to fuel much of the growth in the Latin America entity.
South America PRASM and yields were up about 11% this quarter, with solid results in both premium and economy cabin.
Transatlantic PRASM increased 5.3%, and yields increased 6% year-over-year in the first quarter.
Results throughout the region were mixed this quarter, with some outstanding performers like Germany, where PRASM was up 8% and premium cabin PRASM was up 20% year-over-year, and some laggers like India, where PRASM was up only 2% year-over-year.
In light of the economic challenges Europe is facing, we continue to evaluate which markets we serve.
In the Pacific we faced a number of challenges, including increased competitive capacity to China and Hong Kong, andless exposure to the resurging Japan market relative to our peers.
Our Pacific PRASM declined 0.2% in the first quarter, and yields increased 4.1% versus 2011.
Japan was the top-performing country, with PRASM and yield increasing about 15% versus first quarter 2011.
The Australian market continues to perform well, withPRASM up 6% and yield up 9% year-over-year.
While China was under pressure this quarter, we continue to believe that unmatched presence in China is a long-term competitive advantage for United, and we are well positioned to take advantage of a growing Chinese economy.
Overall our footprint in the Pacific is unmatched by any US carrier, and the region remains one of our profitable entity.
Corporate revenue continued to show steady improvement this quarter.
As we have seen over the last year, corporate revenue continued to show steady improvement this quarter, as corporate customers respond favorable to our ability to offer the best network in the world.
Corporate revenue increased more than 10% this quarter, with yields up 4% versus first quarter 2011.
First quarter cargo revenue declined 6.7% versus the same period last year.
As in the past few quarters, volumes across most entities declined as fuel surcharges increased and air cargo demand declined.
As with passenger capacity, the Pacific saw additional industry cargo capacity come online.
Last quarter we mentioned how having a single passenger service system will provide us the opportunity to introduce new ancillary products and better target customers with our existing ancillary products.
As a result of the Shares conversion we temporarily lost the ability to sell some existing ancillary product, such as our Premier Travel and Premier Line options, andit's a top priority to fill those gaps.
Even with these temporary gaps, ancillary revenue in first quarter grew by about 7% year-over-year.
Our ancillary revenue generation through our website has grown dramatically since the conversion to Shares, with sales for the last week in March nearly double our sales in the last week in January.
Our customers continue to show they're willing to pay a premium for better seats with increases in Economy Plus and premium cabin upsell options year-over-year.
Part of our business planning at United is the ongoing evaluation of the economic demand environment.
And in March, much like we did multiple times in 2011, we announced plans to reduce our full-year consolidated capacity.
The current economic environment is still uncertain, with pockets of strength and weakness, and oil remains high and volatile.
We expect our 2012 capacity to decrease between 0.5% and 1.5% versus 2011, which will make our airline 1% smaller than we were in 2010 and 7% smaller than we were in 2008.
We expect second quarter 2012 consolidated capacity to decrease between 0.3% and 1.3% year-over-year.
In addition to cutting capacity in 2012, we will capitalize on our system's conversion and the opportunities it presents to freely move our aircraft around the network and better match capacity with demand.
Redeploying our existing aircraft across the network is a critical enabler of revenue synergies.
In the second quarter of this year, approximately 15% of our mainline departures will be redeployed flights.
Along with better matching aircraft to the right markets to improve profitability of existing routes, redeployment allows us to reinitiate new flights such as our service from Washington Dulles to Dublin and Manchester using a Boeing 757-200, and seasonal service from Houston to Jackson Hole this summer with a domestic 757.
Our redeployment plans will accelerate into the fall and winter of this year.
Turning to our near term revenue outlook, we continue to experience difficult comps year-over-year, and we estimate United's April consolidated PRASM will increase about 5%.
This PRASM estimate is preliminary, based on the data we have for April thus far.
With that I'll turn the call over to John.
John Rainey - EVP, CFO
Thanks, Jim.
This was a challenging quarter with significant integration efforts across the Company, and I want tothank the United team for doing a great job of managing through the complexities of our system integration.
I'm excited for the opportunity ahead of me in my new role, and I want to take a moment to thank my predecessor, Zane Rowe.
I've worked with Zane for most of my 15 years at Continental and United.
There are very few people who have given themselves more to this Company than he has.
He has been a great mentor and great friend, and we will miss him.
Moving to our results.
United consolidated operating expense increased 7.6%, our $618 millionyear-over-year in the first quarter.
Fuel costs represented over $550 million of that increase, as jet fuel prices rose 20% versus 2011.
First quarter consolidated and mainline unit costs increased more 7% year-over-year.
Our first quarter consolidated CASM, excluding fuel and third-party business expense, increased 0.7% versus 2011.
Holding fuel rate and profit sharing constant and excluding third party business expense, consolidated unit costs increased only 0.6% year-over-year in the quarter.
Non-operating expense for the quarter was $176 million, nearly $70 million lower than the first quarter of 2011.
The biggest single contributor to he decrease was a reduction of interest expense of roughly $40 million, as we continue our focus on strengthening the balance sheet.
As Jim discussed, our revenue growth faced headwinds this quarter, both from integration related activities and from more difficult comparisons to the first quarter of 2011, a period were we realized very strong revenue growth.
In January of 2011 we implemented FASB rule ASU 2009-13, a required change to our frequent flyer revenue recognition policy.
This resulted in the reduction in the amount of passenger revenue that is deferred in the future and contributed to our revenue growth last year.
This change in accounting better matches our revenue recognition to our cash flow.
All in, we recorded a pre-tax loss of $283 million for the first quarter.
While we are never pleased with a loss, the first quarter was somewhat unique in that it included our most substantive integration efforts, with backdrop of higher fuel prices and trepidation over the European debt crisis.
With all of this happening in what is already a seasonally slower period.
Our focus remains the same as it has been; on generating sustainable profits over the business cycle that exceed our cost of capital.
While painful, the integration efforts in the first quarter were a huge enabling step toward our achievement of that goal.
Our return on capital over the last 12 months was 10.5%, still in excess of our cost of capital.
Moving to the balance sheet.
We ended the quarter with $7.8 billion in unrestricted liquidity, including an undrawn credit facility of $500 million.
We reduced debt again this quarter, paying over $500 million in debt and capital lease obligations, including $92 million in pre-payments.
We have scheduled about $890 million of schedule debt maturities and capital lease payments remaining in 2012.
Gross capital expenditures were $403 million in the quarter.
As Jim mentioned we recently reduced our expected 2012 capacity guidance to a decline of a 0.5% to 1.5% versus 2011.
Despite this, we're not projecting an increase in our unit cost from our prior guidance.
As we pull capacity out of the system, we need to also take out the associated costs by an amount that is as close to CASM neutral as possible.
We are keeping our full year 2012 consolidated unit cost guidance, excluding fuel, profit sharing and third party business expense, at an increase of 2.5% to 3.5% year-over-year.
We expect our second quarter 2012 consolidated unit cost, excluding fuel, profit sharing and third party expense, to be up 3% to 4% year-over-year.
We are seeing some inflationary pressure in second quarter in salaries and related costs in the new labor agreements put in place last year and earlier this year.
Regional expense was also up year-over-year, as we restructured certain regional [flyings].
As we disclosed in our December investor update, we are now excluding third party business from our core unit costs.
Third party business expenses are those associated with activities that do not generate seat miles, such as providing maintenance, ground handling and catering services for other airlines, as well as components of the Mileage Plus program like non-air mileage redemptions.
The revenue associated with these activities is recorded in the other revenue line.
Third party business expense was $65 million in the first quarter, andit's expected to be approximately $70 million in the second quarter and $330 million for the full year.
Based on the forward curve, as of April 18 we expected our consolidated fuel price to be $3.44 per gallon in the second quarter and $3.40 per gallon for the full year.
We have hedged 37% of our expected second quarter fuel consumption at an average Gulf Coast jet equivalent of $3.18 per gallon.
We have hedged 36% of our expected fuel consumption for the second half of 2012 using a combination of collars, swaps and calls.
We continue to improve our fleet with modern fuel-efficient aircraft, and in the first quarter we took delivery of four 737-900ER aircraftBy the end of 2012 we expect to take delivery of an additional 15 Boeing 737-900ER aircraft and induct into service five 787 Dreamliners.
As a result, we expect gross capital expenditures to be $2.35 billion in 2012,or $1.2 billion net of expected financing.
We are also removing older, less fuel-efficient aircraft from the fleet.
In the first quarter of 2012 we removed five Boeing 737-500s from scheduled service.
In total we intend to retire 28 mainline aircraft with additional by the end of 2012, which includes 13 737-500s, five757-200s and five 767-200s.
I want to close by saying that I look forward to working in my new role with my talented colleagues and the team of more than 80,000 here at United.
This industry is changing, and we are changing with it.
While it is clearly too early to declare victory, we're making tremendous progress.
Taking actions that remove volatility and derisk the business will have a pronounced effect on our ability to invest in our product, to provide a stable company for our coworkers, and to create sustainable value for our shareholders.
With that I'll turn the call back over to Jeff.
Jeff Smisek - President, CEO
Thanks, John.
This was a pivotal quarter for our Company.
We now have our largest integration milestones behind us, and we can focus on unlocking United's full potential, becoming the airline that customers want to fly, coworkers want to work for, and investors want to invest in.
Sustained and sufficient profitability is the only path forward, and we're confident we'll deliver.
I'll turn it over to Tyler to open up the call for questions.
Tyler Reddien - Managing Director IR
Thanks, 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.
Brandon, plead describe the procedure to ask a question.
Operator
Thank you.
(Operator Instructions).
Our first questions come from Michael Linenberg from Deutsche Bank.
Michael Linenberg - Analyst
Yes, actually two questions here.
John, you touched on -- you talked about some of the regional costs.
So the situation with Pinnacle and the fact that it looks like they're going away, and it looks like someone else is going to pick up those airplanes, and it seems like you may be bringing back -- maybe you've brought back Embraer 135s.
How should we think about that as it relates to -- think about it being as a cost headwind?
It appears that Pinnacle may have had a better deal that wasn't sustainable over the long term.
Is there going to be not just the cost hit, but are we going to see any revenue hiccup from them leaving the fleet?
John Rainey - EVP, CFO
Yes, Mike, I would say there are two things that will affect our regional costs going forward.
One, as you mentioned, Pinnacle is going through a restructuring, and we will transition a lot of flying that they're doing through the balance of the year.
The second piece of that, as part of the transition flying that they're doing, in the first quarter we restructured the Saab 340 flying that they were doing from us -- doing for us, from a pro rate agreement to a capacity purchase agreement.
The effect that has is we now pick up the associated expenses in the regional lines, but we also pick up the associated revenue in the revenue line were that wasn't there before.
So you'll see a similar trend year-over-year through the following quarters this year that you saw in the first quarter.
Michael Linenberg - Analyst
Who is picking up the flying?
Is it a household name?
OrI see this little company Silver is picking it up?
What can you say on that?
John Rainey - EVP, CFO
We have a transition agreement with Colgan right now, and we have not disclosed -- we're actually still negotiating who is going to be doing the flying for us.
Michael Linenberg - Analyst
Okay, very good.
And just my second question, back -- Jim made the comment -- Jim, you said it was a -- the cut over impacted your unit revenue by I think you said 1 point.
Was that just for the month, or the quarter, or is that a full-year impact?
I wasn't sure the time frame.
Jim Compton - EVP, Chief Revenue Officer
Hey, Mike, this is Jim.
It was a quarter impact, the 1 point.
Michael Linenberg - Analyst
Okay, All right, thanks.
Appreciate it.
Operator
From Rodman & Renshaw, we have Dan Mackenzie on line.
Please go ahead.
Dan Mackenzie - Analyst
Hey, good morning, guys.
New products, new revenue streams.
Can you talk about the timing for implementing some of those and perhaps some ideas on materiality?
Jim Compton - EVP, Chief Revenue Officer
Dan, this is Jim.
With the conversion to Shares and the migration to the [continental.com]site, now known as united.com, as we mentioned, therewere certain products that were sold sub-United side that weren't on the Continental side.
So there were about half a dozen -- six or seven.
An example is, for instance, United had an Economy Plus subscription that drove ancillary revenue.
Or another one is United Club online one-time passes at the clubs and so forth.
Those are gaps that we have right now, and the team is looking working over the next several months to close those gaps to capture those revenues going forward.
Dan Mackenzie - Analyst
Got it.
And just a follow-up on the reservation system cutover.
How much of a hangover effect from the inventory hold back is there, if an, as we look at April PRASM here?
I think it was 1%, if I understood correctly, for the month of March.
Jim Compton - EVP, Chief Revenue Officer
In terms of what we -- the teams' worth across the Company in terms of overbooking, most that impact is behind us.
It was early in the month of March with the March 3 date, as well as some of the spring break peak periods.
What we did is we lowered the authorization levels on overbooking to support the heavy volumes we expected over spring break and the learning curve of the system.
That tends to be mostly behind us.
The other piece of it that I mentioned on connecting traffic might have a little bit of a tail in April as we rebuild that.
We made changes to our revenue management system mid-March to begin to correct for that.
So there might be a little bit of it -- there might some tail on the connecting traffic as we kind of look at April.
Dan Mackenzie - Analyst
Very good.
Thanks.
That will do it for me.
Operator
From Barclays we have David Fintzen on line.
Please go ahead.
Dave Fintzen - Analyst
Thanks.
Good morning, guys.
Just a question on -- if I read the headlines on Europe and Asia, you'd almost think your commentary on the entities would be a bit flipped.
AndI know that there are capacities differences and growth differences, but can you kind of help us reconcile while you're seeing strength in premium Europe, and maybe how that compares to the cabin performance in Asia, premium versus non-premium?
Jim Compton - EVP, Chief Revenue Officer
I think a general statement I would say is that our premium cabin traffic is doing very well across all entities.
And if you break down the entities and you look at Japan first of all, I talked about 38% of our capacity is in Japan, and 60% in non-Japan markets.
[Not to mention] that 38%, actually 15% was our RASM growth in those Japan markets.
If our capacity was similar -- quite frankly, people compare us to Delta.
If our capacity [where] Delta has 78% of its ASNs in Japan, we would have added 9 points in PRASM to Pacific entity and so forth..
So there really is a real structural piece, andthat structural piece is the Asia piece, particularly in Hong Kong.
We faced -- we talked about increased competition in Chicago/Hong Kong, but in Hong Kong in general, industry capacity is about up 20% in the first quarter.
We're down about 2%.
We managed capacity down a little bit with holiday cancellations and so forth.
Quite frankly that has put pressure on our PRASM in that part of the world in Asia.
As we think about that part of the world, we think our footprint historically has been terrific there.
And it's been a profitable entity for us, Pacific as well as Asia.
It's unmatched, our portfolio, and with the growing economy in China we think we're well positioned in Asia.
But it was a tough quarter, and it was a tough quarter partly with the industry capacity growth.
In addition, we're improving our product so that many of those flights with the 747 have been updated to IPTE, but we're not done.
For instance we'll putting streaming video within the cabin beginning this summer -- into the coach cabin that still relies on old technology from an IFB perspective.
And quite frankly our 787 order, the portfolio we will build over the next several years with five that Jeff mentioned coming this year, and then obviously the portfolio of 50 over the next several years, really is going to give us the ability to react much more to competitive environments, such as that 20%, with really a terrific airplane that will help us match capacity with demand.
So when you put that all-in together, we're very excite about our Pacific, but in the Pacific is really those structural pieces that explained our RASM.
Transatlantic, as I mentioned in my comments, we had different performance across the board, strong performance in Germany.
Some of the secondary markets not so much, so we are evaluating that.
The capacity reductions that we announced in March really do kind of address some of that toward the second half of the year, where [mainly -- many of them] are in the transatlantic with our exit from [such as] Copenhagen and then in that entity over to [Occra].
So we're actually very, very focused on that as we look at capacity.
I would say that historically our -- managing capacity is one of discipline and steady discipline.
We actually think that we manage costs better if we're not doing wild swings in capacity.
And we're able to be more predictable for our corporate customers, for the markets, for the customer, as well as just in general the marketplace and so forth.
So we'll continue that discipline capacity, but I think you'll see it be stable.
Not to say that we won't, as I mentioned, look at markets and move markets.
But I think we're happy with our position in the transatlantic right now.
Dave Fintzen - Analyst
And just as you look at the transatlantic, are there point of sales differences that -- strength in the US economy is maybe offsetting the recession in a lot of Europe?
Is there anything visible from that macro-perspective?
Jim Compton - EVP, Chief Revenue Officer
Yes, the US point of sale continues to be strong for us, and my comments on the premium cabin really drives that.
We're seeing strong [strength] in the premium cabin driven by the corporate business revenue going forward.
But a good US point of sales.
Dave Fintzen - Analyst
Okay.
Just a quick one on that 15% re-deployment statistic that you had for 2Q.
How should we think about that long term?
Does it ultimate become -- is it 40% of the network when you get it fully optimized, and where are we in that process?
Jim Compton - EVP, Chief Revenue Officer
The team is very early in the process, obviously, with the second quarter being 15%, which is one of our -- as we get excited about the ability with this network to drive these synergies.
Quite frequently we're working through those numbers.
It will accelerate, particularly in the second half of the year, but the network -- where -- ultimately we'll watch the marketplace and keep managing that.
SoI wouldn't want to commit to where that actually ends up, but it will accelerate in the second half of the year.
Dave Fintzen - Analyst
Okay, great, appreciate the color, guys.
Operator
From Morgan Stanley we have Bill Greene on line.
Please go ahead.
William Greene - Analyst
Yes, hi there, good morning.
I wonder if you can talk a little bit about the New York market?Delta talked about big wins that they feel they're getting as a result of the slot swap.
Do you think maybe the cutover caused you to have some market share slippage at all in New York, or are you not seeing an effect from them?
I'm curious how New York it performing?
Jim Compton - EVP, Chief Revenue Officer
Hey, Bill.
This is Jim.
No, we're not.
Are strong New York based, with our hub in Newark,has worked as well for us.
And actually we'veseen corporate revenue in the first quarter grow out of New York, as well as our share.
And so we're seeing good progress as the sales team gets out and talks about the value of this new network.
We're getting great response from our corporate partners across the system, but also particularly in New York.
William Greene - Analyst
Okay.
And then secondly if US Air were to leave the Star Alliance, does that have a material impact at all on your P&L.
Jeff Smisek - President, CEO
Hey, Bill, this is Jeff.
I'm not going to speculate on what ever should happen there, butUS Airways is a good partner of ours, and if they were leave the Star Alliance it would have an impact on us.
And that would be, on piece, negative to us.
On the other hand if they left as a result of a consolidation, I think that would be very good.
And it would be very good for the business and very good for the industry.
And consolidation, as you know, has worked well for this business, and I thinknet to us, if US Airways was leaving for a consolidation that seems to be [in the lost] in the news today, I think net-net that would be positive for United Airlines.
William Greene - Analyst
Okay, that's great.
Thank you for the time.
Operator
From Wolfe Trahan we have Hunter Keay on line.
Please go ahead.
Hunter Keay - Analyst
Hi, everybody.
A couple of questions for you on -- well, I guess just one on cost.
On fuel specifically.
Fuel prices up about 20%.
Guidance looks a little unfavorable, which I realize could be a timing issue when you price it out where the strip was.
But yesterday I asked US Airways if they would change their position on hedging if they were involved in consolidation, and it seemed to me that their answer was basically, no, we think hedging does not make a lot of sense.
So I guess my question for you is, given your balance sheet particularly, whichwould invite commercial risk taking, do competitor hedge books factor into your decision to hedge to the degree that you do, or is it more an internal risk tolerance decision?
John Rainey - EVP, CFO
That's a great question, Hunter, and they absolutely do.
Fundamentally, I think like you believe as well, we think that fares in this industry over a longer period of time need to respond to cost inputs.
And our competitors need to have the same pressure in terms of those cost inputs for that to happen.
Clearly we don't want to get too far out of balance with what our competitors are doing.
That said, we have a pretty consistent policy with respect to our hedging.
It's not really taking speculative positions.
It's one more of risk management.
I think that in this industry, when you're selling tickets out six to 12 months in advance, you're then exposed for movements in fuel prices after those tickets are sold.
And that's why you see us hedge in that time period, to protect against that and guard against volatility in our earnings.
Hunter Keay - Analyst
Okay, John, thank you.
A couple of years ago when Spirit -- maybe a year and a half ago or so -- when Spirit announced they were charging for carry-ons, congress summoned a number of airlines CEOs to basically promise congress that they would never do the same thing.
Jeff, you were running Continental at the time.
You were conspicuously absent.
Was that a scheduling conflict, or is there any particular reason why you didn't show up for that hearing?
Jeff Smisek - President, CEO
I guess I never received the call.
I don't recollect.
Hunter Keay - Analyst
Okay.
I guess I'm reading too deeply into it.
Thanks for the time.
Jim Compton - EVP, Chief Revenue Officer
Thanks, Hunter.
Operator
For Evercore Partners we have Duane Pfennigwerth on line.
Please go ahead.
Duane Pfennigwerth - Analyst
Thanks, good morning.
Just following up on the regional question.
Can you talk about your commitment to the Q, to the Q400 specifically, and is that some of the flying you're transitioning, or would you expect that to be replaced with RJs?
Jim Compton - EVP, Chief Revenue Officer
Well, the Q400 is a plane that works very well for us,particularly in some of the shorter-haul markets in some of our hubs like Houston and Newark.
I think that we're going to continue to have that product.
In terms of the mix of that versus RJs,I can't speculate on that right now.
Duane Pfennigwerth - Analyst
So even though Pinnacle is winding it down and returning them, you expect to have Qs in your fleet.
Is that fair.
Jim Compton - EVP, Chief Revenue Officer
Yes.
Duane Pfennigwerth - Analyst
Okay.
And then just on the Asia-Pac capacity trends, any relief on the horizon as you look over the June and September quarters.
Jim Compton - EVP, Chief Revenue Officer
Duane, I'm sorry, I missed that.
Duane Pfennigwerth - Analyst
Just the competing capacity trends, the pressure that you're seeing in Asia-Pac, do you see any favorable relief on the horizon as you look out to the next couple of quarter with respect --
Jim Compton - EVP, Chief Revenue Officer
The competitiveness pressure will be there.
I think from our perspective, LA-Shanghai [we lap] in May, so a little bit of an offset there.
ButChicago-Hong Kong, for instance, [cafe] started last September.
So that pressure will be there in the near term.
Operator
From Dahlman Rosewe have Helane Becker on line.
Please go ahead.
Helane Becker - Analyst
Thank you very much, operator.
Hi, everybody.
Thanks for the time.
Can you just -- maybe this is for Jeff -- there is a bit of a battle brewing in Houston with the city council set to consider next month whether or not they will approve the airport Hobby suggestion that they build an international terminal?
Can you just talk about your thoughts with the opposition that you talked about and so on, and how that changes your views towards Latin expansion?
Jeff Smisek - President, CEO
Helane, just to be clear, this isn't us fighting Southwest flying internationally.
We clearly compete against Southwest, and we do it very well every day.
Intercontinental Airplane is a significant hub and a tremendous engine of the economy in Houston, and we and other airlines and the city have made a lot of investments in IH, and it's become a premier international gateway.
It's a superb hub.
It works very well.
It's a high -- it's a very -- it has a great deal of connectivity.
It's a high connecting hub.
And weneed those connections -- we and other carriers who operate there -- to fill the planes obviously to make all of the broad array of flights that we offer and competitors offer at IH.
And that airport has -- clearly has excess capacity for International flying.
I mean, there are gates that have only one flight a day, literally.
So there's plenty capacity and plenty of FIS capacity as well for the traffic.
Our issue, really, is splitting the hub, turning -- having two hubs -- in effect, Houston competing against Houston versus Houston competing against Atlanta or Miami or DFW.
From a public policy it's a huge mistake.
Clearly if that were to occur it would reduce the flight opportunities at IH.
It would result loss of air service, it would result in loss of jobs, it would result in wasteful spending, and it would be extremely bad public policy for the city of Houston to do that.
Helane Becker - Analyst
Okay, got you.
Thank you for some of that.
Some of that I didn't realize before.
The other question I have is with respect to your unit revenue growth.
And maybe this is one for Jim or John.
Are you concerned about the fact that your unit revenue is growing kind of half the industry average right now?
Jim Compton - EVP, Chief Revenue Officer
Helane this, is Jim.
Yes, I think -- obviously we're always focused on our relative performance, but I also think that we are historically a high RASM carrier that ran historically high RASMs last year.
When I think of our percentage growth and our relative percent, I actually want to think about it over a longer period of time.
And so when I think about that, I think about where we are in the integration, as I mentioned earlier in the redeployment and so forth.
I think -- we're obviously very focused on that.
From my perspective I'm comfortable with it, and because of where we've come from, our high levels, and what we have coming forward, we get really excited about it.
John Rainey - EVP, CFO
Helane, this is John.
I would just add to that that the change in frequent flyer accounting for us does affect our year-over-year RASM results.
For the full year it is a little bit less than 1 point, but the effect of that will become more pronounced in the second quarter where it's over 1 point of RASM headwind, and then as we go through the balance of the year.
Helane Becker - Analyst
Okay, and when does TSA pre-check come to Newark?
By any chance do you know that.
Jeff Smisek - President, CEO
Helane, it's rolling out, and we'd like it in all of our hubs as quickly as we can get it.
I think it's a tremendous program, and I've got to commend John Pistole for focusing on the importance of thoughtful security.
So I think that we'rebig supporters of it, and we want and will be participating in it, and we are working closely with TSA to get it done as quickly as we can.
Operator
From JPMorgan we have Jamie Baker on line.
Please go ahead.
Jamie Baker - Analyst
Actually, I was also going to ask about pre-check, because it seems that like you did with Wi-Fi, you have ceded a permanent advantage to American and Delta, but I assume that's not a permanent decision then, Jeff?
Jeff Smisek - President, CEO
No, absolutely not.
Now that -- we're in position to do it now, and we'll be doing it.
And, Jamie, I hope you qualify.
Jamie Baker - Analyst
Please don't interfere with that process.
My primary question is to Jim.
You've guided in enable an April RASM figure that looks like it will be worse in the industry.
So the statement that things are snapping back and returning to normal is a little bit difficult for me to reconcile, only because we've been assuming that portions of the RASM deficiency were self-inflict.
You add some helpful disclosures on Asia, and I appreciate that.
The competition has suggested that May is tougher than April, but June should at least equal April, maybe even improve on April's results.
I know you don't want to give RASM guidance, but --
Jeff Smisek - President, CEO
Hello?
Jamie.
Jamie Baker - Analyst
Guys?
Jeff Smisek - President, CEO
We lost you there.
Jamie Baker - Analyst
Sorry about that.
Structurally for the next quarter is there anything unique to United that wouldn't allow you to kind of move along the RASM change trajectory that the competition has laid out?
Jim Compton - EVP, Chief Revenue Officer
Jamie, this is Jim.
Yes, I think that the -- obviously there were industry comps last year that were very strong.
There are comps that John just talked about [that's for us].
Obviously you're right, not commenting about RASM going forward.
May was a very strong industry RASM last year, and for the industry more so than June, as you described.
So I think from that sense we face kind of the same profile for us.
And thenthe question is are some of the other comps that are unique to us, how that fits into that.
Operator
Thank you, ladies and gentlemen.
This concludes analyst and investor portion of our call today.
We will now take calls from the media.
(Operator Instructions).
Our first questions from comes Josh Freed from the Associated Press.
Please go ahead.
Josh Freed - Media
Hi.
You mentioned that there are some of the ancillary products, if I understood you right, that are not available right now on the new -- kind of newly revamped website.
So to the extent that's the case, does that mean those products don't exist right now in terms of being available for new sales, orthey still available through other channels?
Jim Compton - EVP, Chief Revenue Officer
This is Jim.
They are not available through other channels.
What we want to do is not -- is move them to the web as well as the kiosks at the airport, and that's the PSS [gap] that That's what [Steve] is working very hard to close.
I want to say that from a -- again, we're excited about it because the ancillary products that we have are actually growing at an extremely rate, and so overall ancillary revenue growing very strong rate -- as we mentioned, at 7% in the first quarter.
Josh Freed - Media
Sure.
Do you have an estimate for how much it's hurting that growth or hurting revenue to not have those available right now?
Jim Compton - EVP, Chief Revenue Officer
Yes, we wouldn't disclose that.
It's not a really significant number, but it's part of a portfolio of products that customers enjoy in terms of building the experience.
Really the goal for us is to bring the product so the customer can participate and have choices.
And so there are about a half dozen of them, all at different levels of performance, and -- but I wouldn't want to mention what those are doing.
Josh Freed - Media
All right, thank you.
Operator
From Wall Street Journal we have Susan Carey on line.
Susan Carey - Media
Good morning.
This is probably a question for Jim.
I'm trying to under -- I just want to make sure I understand this.
You are saying you had a 1 percentage point of RASM reduction in the first quarter due to these various issues; the Shares conversion, what's going on in Asia Pacific, and the revenue management cutover.
But I'm wonderingif you could help me a little bit more on the latter.
I go you integrated the [calc] revenue management system into the United system.
I'm wondering when you did that, and what caused this reduction in your connecting traffic, and how much of that was a factor in this 1% reduction in RASM?
Jim Compton - EVP, Chief Revenue Officer
So it's about half of the effect in terms of the connecting traffic, of the total.
We could work it off line.
It's very technical.
Not to skirt the question, but revenue management systems are very sophisticated systems, and I think I would use a lot of time trying to explain it, but we probably help with that.
Susan Carey - Media
Okay, thank you.
Operator
From Bloomberg News we have Mary Jane Credeur on line.
Mary Jane Credeur - Media
Hi, I wanted to elaborate on Jamie Baker's question.
I think a number of us still have a little bit of bafflement over the explanation for that April RASM forecast.
Can you talk a little bit more about what your biggest concern is about those underlying trends?
Are there one or two facets that you can point to that give you the most heartache about it?
That's less than half of your next biggest peer forecast.
It's significantly smaller than what Airways forecast.
Jim Compton - EVP, Chief Revenue Officer
This is Jim.
My concerns are really kind of how quickly he can begin to innovate and chase the synergies and so forth, which we're actually starting to do now.
So the underlying trends in April, that's where we're at.
We actually are comfortable with where they are given where we are in the migration -- in merger and so forth.
What the team is really focused on, one, closing, as Jeff mentioned a lot, about the gaps that we learned about customer service due to the cutover.
As well as the [spooling] the synergies associated with optimizing the network that I mentioned in my comments, that we're moving to 15% of the flights -- of the mainline of flights in the second quarter will be redeployment.
So concerns I have are really just the team staying focused on achieving the things that we said we were going to achieve, and we feel really good about that where we are at, and very excited about what we have coming forward.
Nene Foxhall - EVP Communications and Goverment Affairs
Okay with that we're out of time, so we're going to conclude.
Thanks to all of you on the call for joining us today.
Please call media relation it is you have any further questions.
We look forward to talking to you next quarter.
Good-bye.
Operator
Thank you, ladies and gentlemen.
This concludes today's conference.
You may now disconnect.