聯合航空 (UAL) 2012 Q2 法說會逐字稿

Good morning, and welcome to United Continental Holdings earnings conference call for the second quarter of 2012.

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

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

(Operator Instructions).

This call is being recorded and is copywrited.

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

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

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

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

Please go ahead.

Thank you Brandon.

Good morning everyone.

Welcome to United's second quarter 2012 earnings conference call.

Joining us in Chicago to discuss our results are President and CEO, Jeff Smisek, Executive Vice President and Chief Revenue Officer, Jim Compton, Executive Vice President and Chief Financial Officer, John Rainey, Executive Vice President and Chief Operations Officer, Pete McDonald and Senior Vice President of Finance and Treasurer, Gerry Laderman.

Jeff will begin with some overview comments.

After which Jim will review capacity and revenue results.

John 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 limit it to one question and one follow-up.

With that I will turn it over to Sarah Murphy, our new Head of Investor Relations.

Thank you Nene.

This morning we issued our earnings release and separate investor update.

Both are available on our website at IR.

United.com.

Let me point out that information in this morning's earnings release and investor update, and the remarks made during this conference call may contain forward-looking statements, which represent the Company's current expectation or beliefs concerning future events and financial performance.

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

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

Refer to our press release, Form 10-K, and other reports filed with the SEC, by United Continental Holdings, United Airlines and Continental Airlines, for a more thorough description of these factors.

Also during the course of our call we will discuss several non-GAAP financial measures.

For a reconciliation of these non-GAAP to GAAP measures please refer to the tables at the end of our earnings released.

Unless otherwise noted, special charges are excluded as we walk you through our numbers for the quarter.

These numbers are detailed in our earnings release.

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

Thanks Nene and Sarah, and thank you all for joining us on our second quarter 2012 earnings call.

Today we reported net income of $545 million for the second quarter, or $1.41 per diluted share.

Delivering a pretax margin of 5.5%.

Based on our year-to-date profit, we have accrued $54 million in profit sharing for our co-workers so far this year.

This was our first full quarter operating as a single airline following our conversion to a single passenger service system.

Now all of our customers can purchase tickets through a single website, United.com, experience a single check-in process through our mobile app website or at the airport, and earn miles in a single loyalty program, Mileage Plus.

The shares conversion was successful, but following the cutover we faced a number of issues, as we identified each conversion related issue, our top priority was to improve the customer and co-worker experience, by determining the cause and quickly deploying teams to fix the problem.

We made significant progress on these issues during the second quarter, and customers calling our reservations line now experience normal wait and handle times, Mileage Plus miles for United flight now post within 48 hours of travel, and complementary upgrades for our premiere members now clear in a timely manner.

I want to thank my co-workers for working together to promptly resolve the conversion related issues and for their commitment taking care of customers during a challenging time.

Although working with a new system and implementing new processes are not easy, we are excited to begin using the share system because of the power and flexibility it provides.

We plan a number of improvements including an enhanced front end interface for our airport and contact center agents.

This new tool will make fulfilling customer requests and making changes easier and faster for our co-workers.

We rolled out a test of the first of several planned releases for our new airport interface two weeks ago, improving the speed and ease of handling premium cabin upsells, same day upgrades and stand by requests.

Our next major release occurs in October, which includes a new user friendly design and experience, easier elite recognition, automatic calculation of service charges, and better flight amenity details.

In 2013, we will implement a comprehensive new front end interface for our airport and reservation agents, which will enable us to deliver a higher level of service than we have ever been able to offer in the past.

Although our financial results this quarter are solid, our operational performance didn't meet our goal of providing the reliability that our customers expect.

During the quarter our performance declined on metrics such as on time arrival, mishandled bag rates, and cancellations.

We recognize that we added new stress to the system by simultaneously converting to a single passenger service system, implementing hundreds of new processes and procedures, rerouting aircraft across our network, and harmonizing our maintenance programs.

Those changes were in large part responsible for the degradation in our operating performance.

Pete McDonald, our Chief Operations Officer is leading an aggressive effort to address these issues.

In mid-May we launched our first wave of domestic aircraft redeployment, and are pleased with the early results on these routes.

However, our redeployment strategy brings some complexity to our operations for a period of time, since redeploying aircraft introduces a new aircraft type to a new market or hub.

For instance using Airbus aircraft in Houston, or Boeing 737's in Chicago.

Additionally that complexity is amplified during irregular operations caused by weather or mechanical issues, and during peak travel times like the summer.

To help our airports and line maintenance stations during this period of change, we are increasing staffing levels through the remainder of the year.

At our United subsidiary we had reduced the number of spare aircraft in the system as we introduced more preventative maintenance visits, and aligned the maintenance programs of our two subsidiary fleets.

We are however reversing our spare reduction decision based on the recent increase in long flight delays and cancellations on our United subsidiary fleet.

We are returning to our historical level of spares at our United subsidiary, and are increasing our line maintenance touchpoints and hours, which we expect will quickly improve our schedule reliability.

Once we are past this period of change we believe we will be able to return to a more efficient spares complement.

Although we faced challenges this quarter, we laid the groundwork for United's future.

I know we caused some customer disservice because of all of the changes we made so quickly, and I apologize for that.

We hold ourselves to a higher customer service and reliability standard than we have delivered for our customers lately, and we will return to the level of service and reliability our customers expect.

Looking beyond that, we are investing across the enterprise to improve the product and services we offer our customers.

This will help us reach our goal of achieving sufficient and sustained profitability and generating returns in excess of our cost of capital across the business cycle.

We continue investing in products that our customers value and are willing to pay for, and are aligning our on board offerings across subsidiaries and fleet types.

To date we have installed Economy Plus seating on 86% of our mainline fleet, and plan to finish outfitting our entire mainline fleet with Economy Plus by January 2013.

Our premium cabinet flat bed seats are installed on 87% of our international fleet, including our first reconfigured and retrofitted international 767-300 AR.

We will complete installation of flat bed seats on our entire international fleet by the end of the first quarter of 2013.

We improved our premium international in flight dining experience with enhanced gourmet meals, and course by course meal service in Global First and Business First.

We began installing global satellite based wi-fi in August, introducing the product first on Airbus A319 aircraft, followed by the Boeing 747 and 737-900 ERs.

Given the size of our fleet, the installation process across our entire mainline fleet will take about three years.

United is committed to investing in a modern customer pleasing and fuel efficient fleet.

Two weeks ago we announced a narrow body aircraft order for 100 Boeing 737 Max 9 aircraft and 50 Boeing 737-900 ER aircraft.

These planes offer a significant improvement in customer experience, fuel efficiency, environmental responsibility, and operating costs, compared to the aircraft they are replacing.

We are replacing our older, less fuel efficient aircraft types, such as the Boeing 757-200's which currently fly domestically.

Together with our existing orders, our new narrow body order ensures that in the coming years United will have a highly efficient and flexible fleet that offers customers the amenities these want.

We expect to take deliver of our first Boeing 787 Dreamliner in September, first flying between our US hubs before moving to international service.

The 787 is a game changer with unparalleled fuel efficiency and customer pleasing amenities, such as large windows and a modern cabin designed to reduce the effects of jet lag.

It gives us the opportunity to operate more efficiently, while offering our customers the best airplane in the skies, and is a powerful competitive advantage, as we will be the first North American airline to fly the Dreamliner.

We are improving our global network by introducing new service.

During the second quarter, we launched new service from New York to Buenos Aires, from San Francisco to Washington Reagan National and from Washington Dulles to Manchester in Dublin.

We are also investing in our hub airports, at O'Hare Terminal 2 we are building a new United Club that will triple the size of our existing club, and will feature a modern look and feel.

And we are installing an additional 10 jet bridges at our United Express gates, enhancing our customers' experience while on the ground in Chicago.

We continue to innovate our industry-leading loyalty program, Mileage Plus, with 90 million members worldwide.

We recognize that it is a significant opportunity to create value by building the strongest loyalty currency possible.

In addition to offering unmatched opportunities to earn miles, we are committed to offering excellent air and nonair redemption opportunities.

United earned recognition as the carrier with the most award seat availability among US global airlines.

We know how important it is to our members to receive award travel, and we are proud to be the best in the industry.

In March we introduced the United Club card, the latest product in the United Mileage Plus Chase Visa portfolio.

The United Club card is a premium card offering holders a number of options to access United Club lounges across our industry-leading global network, Premiere Access, our priority airport experience, a mileage bonus when using the card, and complementary first and second checked bags.

Interest in the new United Club card is very strong, and we are looking forward to growing our card portfolio and other loyalty opportunities in the coming quarters.

We are also investing in our co-workers by giving them the right tools to do their jobs safely and efficiently, and by recognizing them for their great work.

In addition to the upcoming user interface improvements to shares, in May we opened a new network operations center, or NOC in downtown Chicago.

The NOC is the nerve center to for our airline, where we do aircraft routing, load planning, crew scheduling, and weather forecasting.

United's NOC is a world-class operation center, with the best technology and tools for our co-workers, who manage our around the clock global operation.

We are also improving co-workers access to health and wellness professionals by building an employee medical clinic at O'Hare.

During the second quarter we introduced our outperform recognition program.

The program gives customers the opportunity to recognize an employee for providing outstanding service using our mobile app.

Co-workers who are nominated by customers are entered into a drawing to win cash prizes, including a top prize of $50,000.

Any Mileage Plus member submitting a nomination is also entered into a drawing for prizes, such as Mileage Plus miles, and round trip tickets on United.

We continue making progress in bringing our employee groups together.

In June we reached a tentative agreement with our flight attendants from our Continental subsidiary.

That agreement was ratified two weeks ago, three months ahead of the contract's amendable date.

In addition, last week we reached a tentative agreement with our Continental Micronesia flight attendants.

In the last nine months we have achieved ratified agreements with five of our workgroups, including United and Continental flight attendants, United and Continental Micronesia mechanics, and Continental ground school instructors.

We continue to make progress in mediated joint negotiations with ALPO, our pilot's union.

At the request of the National Mediation Board, we won't be giving further details on the status of our pilot negotiations at this time.

However, we remain focused on bringing our work groups together as quickly as we can, with responsible joint collective bargaining agreements that pay competitively.

We are pleased with the progress we have made this quarter, but our operational performance and financial results are not yet where we want them to be.

We will work hard to improve our results, and I am excited by what we will deliver for our customers and co-workers as we work together to build the world's leading airline.

With that I will turn it over to Jim and John to go through the results in greater detail.

Thanks Jeff.

I also want to thank our co-workers for their hard work this quarter, and our customers for choosing to fly United.

We remain committed to capacity discipline to generate sustained and sufficient profitability.

Our second quarter consolidated capacity decreased 0.6% year-over-year.

Although the cost of jet fuel came down, we recognize that jet fuel prices are very volatile, and we continue our commitment to capacity discipline.

United second quarter consolidated passenger unit revenue increased 3%, and mainline PRASM increased 1.8% versus the second quarter of 2011.

Consolidated yields improved 1.8%, and consolidated load factor increased 0.9% as compared to the second quarter of last year.

Second quarter domestic mainline PRASM increased 1.1%, and yields increased 1.3% year-over-year.

Domestic mainline capacity decreased 0.5% as compared to the second quarter last year.

Regional PRASM grew by 8.5% while regional capacity declined 3.0% in the second quarter compared to the same period in 2011.

International unit revenue increased 2.6% in the second quarter versus 2011.

Second quarter international yields improved 0.7% while international capacity was roughly flat in the quarter.

The Pacific was United's best performing region in the second quarter with unit revenue up 6.6%, and yields up 4.9% versus the same period in 2011.

Our Pacific PRASM results include proceeds United received from a business interruption claim related to the 2011 Japanese earthquake and tsunami.

This out of period item increased our second quarter Pacific year-over-year PRASM growth by about 2 percentage points.

Japan was once again the top performing Pacific country with approximately 15% PRASM, and 11% yield growth versus the second quarter of 2011.

Japan premium cabin demand was particularly strong in the second quarter.

As PRASM increased 25% year-over-year.

Pacific capacity increased 5.6% year-over-year, as we began to lap our flight between Los Angeles and Shanghai, which we introduced in May 2011.

We continue to strengthen our Pacific route network, and this month announced new service between San Francisco and Taipei starting in 2013.

Second quarter Transatlantic PRASM increased 2.3% and yields increased 1.1% year-over-year.

We reduced our Transatlantic capacity during the quarter by 4.1% year-over-year.

As we trim capacity in the face of Europe's continuing economic challenges, while Europe showed moderate revenue growth in the quarter, India was an outstanding performer with overall PRASM up 10%, and premium cabin PRASM up 14% versus the same period in 2011.

The Latin America entity faced very challenging year-over-year comparisons this quarter.

Last year Latin America PRASM and yields increased 20% versus the second quarter of 2010.

This year Latin America's second quarter PRASM decreased 3.4%, and yields declined 7.2%.

On a two-year-over-year basis however, second quarter Latin America PRASM and yield are up approximately 16% and 14% respectfully.

Corporate customers continue to recognize United's superior network.

In the second quarter corporate revenue improved nearly 16% versus the same period in 2011, driven primarily by an increase in corporate passengers.

Second quarter cargo revenue declined 16% versus the same period last year.

The cargo business continues to struggle as the market digests increased industry capacity, particularly in the Middle East and Pacific.

Outstanding Economy Plus and Premium cabin upsell sales drove second quarter ancillary revenue up 11% year-over-year.

Our strong ancillary revenue performance this quarter is largely due to our conversion to shares, which enables dynamic pricing, improved targeting and bundling of ancillary products and services.

Economy Plus revenue grew more than 25% versus the second quarter of 2011.

As Jeff mentioned, Economy Plus seating is available on 86% of our mainline fleet.

Sales of those new seats account for roughly one-third of the year-over-year Economy Plus sales improvement this quarter.

Second quarter sales of premium cabin upsell are products allowing customers to gain access into the Business First or Global First cabins increased 20% year-over-year.

We know customers value more space, comfort, and leg room when they fly.

United leads the industry in innovative seating products.

The economic environment remains tepid, and as I just mentioned the price of jet fuel remains very volatile.

We have not changed our expectations for 2012 consolidated capacity, which we expect to decrease between 0.5% and 1.5% versus 2011.

We expect third quarter 2012 consolidated capacity to decrease between 0.7%and 1.7% year-over-year.

In the investor update we issued today, we detailed our third quarter and full year capacity outlook for all of our geographic entities.

When we reduced our full year capacity outlook in March of this year the reduction was weighted towards international flying, most notably the Atlantic.

We expect our transatlantic capacity to decrease 2.7% to 3.7% year-over-year in the third quarter and 2.1% to 3.1% year-over-year for the full year.

We continued redeploying aircraft across our domestic network in May.

We are excited about our expanded ability to match capacity with demand on a flight by flight basis, and are seeing improved revenue results in a variety of markets.

We learned a number of lessons from the first round of redeployments and will apply them to our second leg, which we expect to implement with the September schedule.

Turning to our near turn revenue outlook, we estimate United's July consolidated PRASM will be roughly flat year-over-year.

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

Thanks, Jim.

Today we reported over $0.5 billion in profit for the second quarter, in large part due to the efforts of my co-workers.

I want to thank the entire team for working through challenges of our merger and integration this quarter.

For the second quarter we recorded a pretax profit of $546 million and a pretax margin of 5.5%.

Excluding the impact of our fuel hedges our pretax margin improved 2.7 points year-over-year to 6.2%.

Before I move to a discussion of second quarter results, I want to address the accounting adjustments to passenger revenue that we disclosed earlier this week.

In connection with our conversion to a single passenger service system in March, we also converted to the Continental Airlines revenue accounting system.

During the second quarter we made additional enhancements to the revenue accounting system, including a systematic reconciliation of open tickets to the general ledger balance of advanced ticket sales.

These enhancements provide for more precision in the way that we recognize revenue and rely less on estimates.

However, the timing of the implementation this quarter resulted in recording some April and May revenue adjustments in June.

Although the second quarter was not without its bumps, our results are still good by historical standards.

I firmly believe the profit we reported today is an endorsement of the structural changes we are making in this business.

Our second quarter total operating expense increased 3.4%, or $303 million year-over-year.

Our second quarter consolidated CASM excluding fuel, third party business expense and profit sharing also increased 3.4% versus 2011.

On a fuel rate and profit sharing neutral basis second quarter consolidated unit costs increased 2.1% year-over-year.

Nonoperating expense for the quarter was $235 million, about $30 million lower than the second quarter of 2011.

This decrease was a result of lower interest expense year-over-year as we continue to reduce our debt.

In the second quarter we paid down $258 million of debt and capital lease obligations, including $69 million of prepayments.

Earlier this month we also paid off two of our most costly pieces of debt on the balance sheet.

The $172 million remaining on United spare parts facility, which carried an interest rate of 12.75%.

And the $79 million remaining on United's spare engine facility, with a coupon of LIBOR plus 1,130 basis points.

These debt instruments were vestiges of a time when airlines needed to borrow money to maintain adequate liquidity.

One of our primary objectives, the strengthening of our balance sheet by paying off costly debt, and instead using the capital markets prudently to find investments in our business.

We ended the quarter with $8.2 billion in unrestricted liquidity, including an undrawn credit facility of $500 million.

We have approximately $710 million of scheduled debt maturities and capital lease payments remaining this year.

Gross capital expenditures were $500 million in the second quarter, and we continue to expect gross capital expenditures to be $2.35 billion for the full year, or $1.25 billion net of expected financing.

For the last 12 months ending in the second quarter our return on invested capital was 10% which exceeded our cost of capital for that period.

We continue to emphasize the importance of generating profits in excess of our cost of capital.

And it is part of the way that we do business.

We use return on invested capital and route analysis, fleece strategy, balance sheet decisions, and our compensation programs.

We still expect our full year 2012 consolidated unit costs, excluding fuel profit sharing and third party business expense to increase 2.5% to 3.5% year-over-year.

We expect our third quarter 2012 consolidated unit costs, again excluding fuel, profit sharing third party business expense to be up 3% to 4% year-over-year.

We have a downward bias for capacity in the third and fourth quarter.

Any additional reduction in capacity would likely result in some modest pressure to our current CASM expectations.

Essential to running a great airline, one that customers want to fly, employees want to work for, and investors want to invest in, is running a good operation.

To that end we are making investments in our business to improve our operations, which are reflected in our current cost guidance.

We also see some cost pressure in other areas which are primarily a continuation of what we experienced in the first half of the year,such as salary through related cost which are up after achieving a number of ratified labor agreements this year.

We estimate our third party business expense to be approximately $70 million in the third quarter, and $290 million for the full year.

We have hedged 48% of our expected third quarter fuel consumption and 45% of our expected fuel consumption for the second half of 2012.

Based on the forward curve, as of July 17th we expect consolidated fuel price to be $3.13 per gallon for the third quarter, and $3.22 per gallon for the full year.

Earlier Jeff discussed the importance of our new narrow body fleet order, the 100 Boeing 737 Max 9 aircraft, and 50 additional Boeing 737-900 ER aircraft are the best aircraft for our network.

It will enable us to replace older, less efficient aircraft over the next decade.

We continue to improve our fleet, and in the second quarter took delivery of six Boeing 737-900 ER aircrafts.

By the end of 2012 we expect to take delivery of an additional nine Boeing 737-900 ER aircraft, and five 787 Dreamliners.

During the second quarter we removed one Boeing 737 Classic, and three 767-200's from scheduled service.

Bringing our year-to-date aircraft retirements to 10.

In total we expect to retire 28 mainline aircraft during 2012.

Fundamental to our fleet strategy is preserving the flexibility to respond to economic conditions while balancing that with replacing older, less efficient aircraft with new generation aircraft that have better operating economics.

As we evaluate the need to replace aircraft, we do so with an eye toward maximizing return on invested capital over the life of the asset that we are investing in.

In this case up to 30 years, as well as capital market and manufacturer constraints.

Importantly we recognize the benefit capacity discipline brings.

And we are not going to depart from the strategy.

Between our mainline and regional fleet,we have about 1,250 aircraft today.

Over our planning horizon over the next five years, we intend to keep our fleet count roughly flat.

Some of the aircraft we have on order will replace smaller gauge aircraft, and we will be installing more economical slim line seats.

Both of the which we anticipate will result in minimal ASM growth over this time period, around 1% annually.

Our current expectation for 2013 consolidated capacity is flat to up 1% year-over-year.

By preserving flexibility in our fleet we can also appropriately respond should we need to, to decrease capacity as a result of macroeconomic conditions.

I want to close by again thanking my colleagues and the team of more than 80,000 at United.

We made progress this quarter toward becoming a stronger Company.

We want to consistently earn a profit in excess of our cost of capital, reduce our debt and strengthen our balance sheet, and take a long-term approach to the investments we make in the business.

These investments will allow us to recognize our employees for the job that they do, deliver the type of product and service our customers want, and create the type of sustainable value that our shareholders require of us.

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

Thanks, John.

This quarter was a time of transition, and we had our fair share of customer service and operational issues.

Nonetheless we earned over $0.5 billion.

We have much work yet to do, but United is on the right path as we work together to build the world's leading airline.

I will now turn it over to Sarah to open the call for questions.

Thanks, Jeff.

First we will take question from the analyst community.

Then we will take questions from the media.

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

Operator, please describe the process to ask a question.

The question-and-answer session will be conducted electronically.

(Operator Instructions).

Please hold while we assemble our queue.

From Deutsche Bank, we have Michael Linenberg on line, please go ahead.

Hi, good morning guys.

I have two questions, and I think both of them are for Jim.

Jim, when I look at your investor update and I look at the forward bookings, and I look at where the loads are, they seem to be up pretty healthily on one hand.

On the other hand you gave us your view for July PRASM.

Is there a bit more stimulative-type fare activity going on in sort of the August, mid to late August timeframe?

What accounts for those differences ?

Hi, Mike, it is Jim.

As you mentioned in our investor update, we talked about some pretty good bookings and strong demand as we look forward over the next six weeks, and so forth.

The pricing environment, although stable I think we are seeing some fare sell activity both in bringing some competitive carriers bringing the AP in closer ass well as a fare that is putting some pressure on us.

From a demand perspective we actually feel pretty good.

As a matter of fact we led an increase last week , $2, $3, $5 that had a match.

The question on that is always do the sale fares, how much of that do you realize given that the sell fare activity is out there.

So I think that we feel good about demand and managing the yield environment.

Very good, and my second question and this is just a data piece.

Last year with the FAA shutdown, what was the estimate of the benefit, the revenue benefit that you got over this.

I think it was like a three or four week period?

It was a couple week period, I think July 23rd to August 8th.

We talked about a $60 million impact from that last year.

Clearly most of that is all in the third quarter.

Very good.

Thanks.

From JPMorgan we have Jaime Baker on line.

Please go ahead.

Good morning, everybody.

First question for John, just wondering if you could be any more forthright than your predecessor in terms of addressing whether or not you are accruing for higher labor costs?

Jaime, That is a tricky one.

I don't mean to be coy in anyway.

The way I have to answer that question is to the extent that we believe it is going to occur, we are accruing for our expectations.

I think you have seen a number of different ratified agreements occur this year, obviously those are reflected in our second quarter results.

We clearly want to move in a direction where we will have joint collective bargaining agreements.

We have to make some assumption about when those will occur, as well as how much they are, and to the extent that is in our guidance, to the extent that is the time horizon that we are guiding to, it is in there.

Second for Jim, but anybody can take it, but as it relates to corporate contracts, my understanding is most tend to run on a calendar year.

They are more than a single year in duration.

I am trying to assess whether some of the operational difficulties as of late might have exposed you to any potential loss of corporate customers, or is that more of a year-end-type negotiation?

I always tend to consider book a way to be kind of a short-lived phenomenon, but I do have to wonder if it could prove longer term if it does impact the corporate negotiating aspect?

A couple thoughts on that.

Corporate deals, I think your general contracts are a little bit different depending on the corporation, and when they start up, and things like that.

Your summary is a good general way to think about it.

We point to the 16% growth in corporate revenue in the second quarter.

We have had a challenging quarter, and from an operational perspective, and we don't see loss in share today.

I would say we are improving our share as people see the value of the network that it brings to them, the great loyalty program, and so forth.

My anticipation is that our investment in our operations and reliability that we are doing right now, many of the products that Jeff talked about in his comments that we are, as the operation improves and the power of the network which we can see it at a market level in the second quarter, that we don't anticipate any loss in corporate revenue going forward.

I will tell you this, our sales force is out there with the corporations all day, every day working hard.

They bring in senior management as the issues come up to work with them.

We are working through that.

I don't see any loss in share today, and don't anticipate any.

Hi, this is Jeff.

Let me add in as well, we know what we did to get us into the operational issues we have had.

And we know how to get back out of it, and we will.

We have got a lot of focus and attention throughout the organization.

I believe that we will restore our operational integrity in fairly short order.

So we are very focused on it.

Excellent.

I appreciate the answers.

Thanks, guys.

From Wolfe Trahan, we have Hunter Keay on line.

Hello, good morning everyone.

I want to push a little bit on this execution issue that we have been seeing here, and Jeff or anybody, I am wondering if you can give us a specific benchmark now that we can look for from you guys to achieve, maybe before then end of this year, or the next 12 months?

You don't have to answer this question right now on the spot, but maybe at some point in the near future whether that is PRASM outperformance relative to peers, a joint labor contract from a major work group, a target debt level, just something that we can put a marker down and say this is the goal, and this is a reason to be excited about owning this stock right here.

Hunter, this is Jeff.

I appreciate that.

Operationally it is very clear we have 80% on time performance as our goal.

We haven't made that lately, but will work hard to achieve that.

We have stumbled a bit on some of our completion factors, as well we have brought down the spares on our United subsidiary as we were funding some preventative maintenance.

We over rotated on that.

And we are going to reverse that, we are going to add the spares back.

It is more costly to do it.

But the first thing about running an airline, is you have got to run a really good airline.

We have to restore that, we know how to do that.

In terms of debt, I will put that back to John, but we clearly have a focus on improving our balance sheet.

We are over levered, as this business generally is, and we need to reduce that.

Reducing debt is a gift that keeps on giving.

In terms of our joint collective bargainers, we are very focused on that.

These things do indeed take time.

We are in a lot of simultaneous negotiations.

I can't talk about our pilot negotiations because the NMB has asked us not to do that, and I want to honor their request.

But as you can see from the individual deals we have got, we know how to do them and how to get them, the costs of those are already in our numbers, and we are very focused on moving forward and getting joint collective bargaining agreements.

I think it is important for our co-workers.

It is important for bringing our cohorts together, and it is important for developing the culture of the combined airline.

Hunter, this is John, I just want to follow-up on Jeff's comments on the net debt capital structure.

I certainly want to be a little more transparent, and that is my intention over the course of the balance of the year to help let you guys know how I am thinking about this.

If you look at the progress we have made just in the last two years.

I know a lot of people focus on net debt.

We have reduced our net debt by $4 billion over that time period.

When you talk about the affect that has on the P&L, we have got $200 million of interest expense that has gone away over that period of time.

The way I think about that, those are savings that go to the bottom line that are not dependent upon some load factor assumption or take rate.

Those are recession proof savings that are there year-in and year-out.

It is the gift that keeps giving, as Jeff says.

So it is clearly what we want to continue to do.

If you look at our maturity profile over the next four or five years, we have got a significant amount $3.5 billionto $4 billion of nonaircraft debt that we need to pay off.

I think we can vastly improve the quality of our balance sheet over that period of time by generating cash flows to payoff that kind of debt, and get down to a more reasonable capital structure for a company.

I don't necessarily have a target that I want to share in terms of debt to capital, but I think we all know directionally that number needs to go down.

Just a follow-up and I will ask a true follow-up, and in that same vein, John, if you put out a debt target or some sort of ideal capital structure ratio, I realize that things change.

Most people can accept the fact that oil can go up, or terrorism can happen, or something bad can happen.

Why should an equity investor feel comfortable, your stock is trading at like 4 times earnings, why should an equity investor feel comfortable sticking their neck out, and saying I am going to invest in this over the long run.

I think that multiple will go higher than 3 to 4 times.

If you guys are not willing to stick your neck out and say three years from now, if everything unfolds as we expect it to, our net debt level it $8 billion, or something like that.

I don't think the equity markets will reward you with multiple expansion, until you feel comfortable putting that out there yourself.

Would you disagree with that?

No, it is a very fair point Hunter.

I certainly don't want to put out numbers that I think allow you to back into what we are expecting for our free cash flow and therefore P&L, but I think being more transparent and letting you guys understand how we are thinking about this, and I think more importantly perhaps prioritizing how we think about this, I think from an equity investor perspective, when we talk about multiple expansion.

One of the best things we can do right now is delever, and take a lot out of the risk out of the business.

Clearly in terms of prioritization, that is what we want to do first.

Going forward as our thoughts evolve, and as there is more certainty and less volatility, we will feel more comfortable with providing more specific details.

Okay.

Thanks very much.

From Morgan Stanley we have John Godyn on line.

Please go ahead.

Hi everyone.

Thanks for taking my question.

First, just one for John, and then one for Jim.

John, you had this comment in the release about earning a good return on invested capital versus your cost of capital, which is a great result.

I know there is a lot of debate out there on how to calculate ROIC in airlines.

Just want to get a better sense of how do you it, and how conservative you are?

Do you consider cash as working capital?

And do you take into account the unfunded part of the pension?

Okay.

A lot of questions there, John.

Let me first say that we recognize there are a lot of questions in this area.

I think going forward we are going to just actually put this calculation in our earnings release.

That will address a lot of the concerns.

I will quickly try to hit on most of your questions there.

We take on an invested capital perspective, we are simply taking total assets and add back noninterest bearing liabilities and then we capitalize our operating leases.

Importantly and it gets to your other question, by calculating it like that effectively assumes that our pensions are part of our debt.

We treat that just like any other interest bearing liability we need to earn a return on.

Was there another question you asked that I missed?

No, that max a lot of sense.

Cash.

In terms of cash, we think the right way to think about that in this business is there is not an excess cash that we should not have to earn a return on.

Said differently, we need to burden ourselves with earning a return on all of that cash.

And can I ask a clarification on demand trends from Jim?

You mentioned the economic environment is tepid, but also that demand remains strong.

So far throughout earnings way heard some airlines calling for continued strength even in the face of ugly headline macro.

But others actually acknowledging that they have seen macro weakness hit the bookings.

Just to make it clear, where do you stand on that, and can you give us a sense as to what extent July PRASM reflected macro weakness first, maybe on-timers like July 4th placement, FX, anything with tough comps, and things like that?

John, this is Jim.

So we are seeing demand being relatively stable.

When we talk about the economy being tepid, we are very much aware of particularly Europe and so forth, and keeping our eyes on that, which is why some of our capacities in the fourth quarter have been a recognition of that already.

Kind of that softness that is in the economy we are obviously watching to see where that turns.

But we do see the leisure bookings over the next six weeks, which is the really still the summertime being quite strong based in our investor update with the load factor.

As it turns to July, the Wednesday Fourth of July that you mentioned is an impact to July RASM year-over-year.

When it is that Wednesday there is significantly less business traffic that happens, and it is very much a leisure week more so than when the Fourth of July falls more toward the end or beginning of the week.

Also I mentioned the FAA issues last year where the ticket tax that began last week of July.

So year-over-year that is a comp.

And then lastly although I will take this opportunity to wish the best to the US Olympic team, which we partner with the United States Olympic Committee, the Olympics are a leisure week.

They are in London, a leisure couple of weeks.

They are in London, and we obviously have a significant business presence in London, so that is also putting pressure on our RASM year-over-year.

That is really helpful.

Thanks a lot.

From Bank of America, we have Glenn Engel on the line.

Please go ahead.

If I am looking at your RASM relative to the industry, Latin America you underperformed 7.5 points this year after outperforming 2 last year.

Domestically you underperformed 5 points this year after outperforming 1.5 points last year.

Transatlantic down 3 versus the industry versus flat last year.

If you are not losing share why are you underperforming the industry so much?

In Latin America, is there something like your mix, like Mexico, that is holding you back?

Hi Glenn, this is Jim.

Very strong comps last year, particularly in Latin America beginning in the second quarter period.

That was true for the industry and they were up 18.7.

It doesn't account for a 7 point gap?

If you went back last year with our 20% growth which was significantly better than some of our competitors in Latin America.

I think our comps are actually stronger, the difficult comps are stronger for us in the Latin division.

On some of the other carriers, actually our length of haul RASM versus the industry on a consistent basis, kind at the margin relative to the first quarter, we continue to close that relative to the industry.

So we actually see good progress.

The challenges that we have talked about in the second quarter are there.

But the network, we see benefits coming from the merger as the individual hubs and making progress on there.

Some of that underperformance frankly were the really strong comps last year.

And within regions, Atlantic, Latin America is there any, within region differences among countries and stuff like that would cause performance to be different?

I think that we are seeing a little bit more softness in London, relative to some other parts of Europe and so forth.

Latin America had some very strong comps, particularly in Central America last year, so that is where some of the weighting down in terms of digging into those entities.

And the other revenues that were so strong, are we going to see continued strength in the second half on that line?

We are obviously very optimistic.

We are seeing great take on our Economy Plus and front cabin upsell, we are taking somewhat of a conservative approach of selling Economy Plus, so that as we work with the ops group and roll out that reconfiguration, as we mentioned we are 86% done.

We actually given the trends that we have seen and the acceptance and the value that the customer sees on that are very optimistic about that Economy Plus and our upsell products.

I am sorry, does that show up in passenger revenue or other revenue?

That is in passenger revenue.

That is in passenger.

This is John, I would add too, in the last call I talked about the accounting affect of 2008, the EITF 2008-1, that creates a geography issue where some of what was formerly booked in passenger revenue, is now in other revenue.

That is some of the affect that you are seeing.

You should expect a continuation of that as well.

Not to take away from what Jim was saying that we are seeing in all aspects of our ancillary revenue a good uptick.

Thank you very much.

And our last question from Barclays, we have David Fintzen on line.

Good morning everyone.

Appreciate that there is a lot on the plate in terms of integration.

I am curious with Delta now moving to upgauge regional.

I am curious as you look out over the next few years, do you need to rethink sort of the shape and scope of your regional operation, or are you happy with where it sits?

David, good morning, this is Jeff.

We are in negotiations with our pilots, and I don't want to talk about that, but we have said previously that part of the negotiations are having a competitive contract.

A competitive contract includes competitive scope.

The larger regional jets, that are flown on a United subsidiary today for example are a very attractive product offering both First Class seats, Economy Plus and Economy, and it is important that we have a competitive scope provision as part of our negotiations.

That is all I can really talk to you about right now.

And when you say competitive, given your network and you are less connection oriented, your hubs are in bigger cities.

Is it what happens at American that is a little more pressing on the competitive side, or Delta, or both?

Well, I view the competitive landscape across all of our competitors when it comes to regional aircraft that is a more domestic issue than our global international competitors.

We have to look to Delta, we have to look to American, we have to look to everyone.

If I can sneak one in on the Atlantic book load factor.

A month or so ago it was down 2, now it is flat.

You have the London commentary Jim which I appreciate.

Should we read anything into that, or is that some of the fare activity in the sales that Jim you were talking about earlier?

Being flat now --

Being flat versus 2. Is that the margin, should we read that as the Atlantic outlook a little better ex London?

Well I think the adjusted capacity even as we move through the summer slightly and so forth.

I think the demand is relatively stable, and it is us trying to better match the capacity with demand.

There is a little bit of fare pressure in some markets.

There is a little bit of revenue management, looking for opportunity to take some marginal traffic that otherwise I think is closed on that load factor.

Great.

Appreciate the color, guys.

Thanks, David.

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).

Please hold for a moment while we assemble our queue.

And from Wall Street Journal we have Susan Carey on line.

Please go ahead.

Good morning everybody.

Have I two questions.

First of all I wonder if you can run me through this issue of the United spares?

You pulled it down to what, and you are bringing it back up to what?

I am sorry, Susan, you are very faint, and it is very hard to hear.

Can you speak a little more loudly, please?

Okay.

I am wondering if you can give me a little bit more flavor on the issue of the United spares being taken down and being pulled back up?

Like how many, or what was that all about?

Oh, I am sorry.

Spares.

Spares, oh, we misunderstood.

Actually I will ask Pete McDonald, who is our Chief Operations Officer to take you through the details.

Susan, United on the United side of the fleet, we traditionally had run with 15 spare aircraft across the various fleets in total.

Mainline?

Yes, mainline.

Excluding regional.

As part of the tech ops harmonization, as you know the Continental side had a very, very good completion factor.

One of the best practices that Continental had used was this preventative process of these preventative service lines where you produce time in the schedule where aircraft will go in there on a preplanned basis and have work done.

That was a big contributor to the high completion factor.

United adopted that, and we had to hire mechanics and inventory and so forth to support those lines.

To pay for that we reduced the spare aircraft on the United side expecting that we would see similar completion with that process.

Unfortunately the health of the United fleet wasn't ready yet for that kind of reduction in the spare complement, so we are and have done some of the replacement of those spares.

We expect that to continue for some period of time.

We don't want that to be the long-term strategy for our fleet, and expect over time to go back down to the sort of 9 level we anticipated for this year.

Thank you.

And I would like to ask one other question.

This is out of left field if you will excuse me.

Now that Japan Airlines is out of bankruptcy and in the midst of its turn around, we are wondering what its significance is to US competitors, and whether it has had any impact on United and its partnership, or if the AA joint venture with JAL has had any impact on your operations to Japan?

Hi, Susan, this is Jim.

Obviously it is a competitive business, and every competitor we watch, and so forth.

I will tell you as we build the joint venture in the Pacific with ANA, a great partner, and our ability to kind of bring more fare product, consistent fare product, better connections in Tokyo, using ANA, we actually feel really good with our position to be able to compete in that market with any carrier.

Thank you.

And our final question from the Associated Press, we have Josh Freed on line.

Please go ahead.

Hi there.

Can you say a little more about the slim line seats that you are putting in, which aircraft, and what the timing is for that?

Sure, this is John.

We are going to begin installing them on our Airbus fleet.

We are actually making a number of investments in the 319's and the 320's, including bigger overhead bins, better lighting, the slim line seats, and in all 20s wi-fi and in seat power.

All of which will make that a much better aircraft for our passengers and better customer convenience.

That is where we are starting.

We will evaluate that as we look at our other fleets, I don't know that we have committed to anything at this point.

Importantly what that allows us to do is, one it is a much lighter seat.

And so we get an appreciable amount of fuel savings.

And then of course, you are able to put more seats on the plane which is better from a revenue perspective.

As we begin to get experience with that seat, and install that on the Airbus, we will roll that out, and give you guys a lot more detail about that.

How many more seats on the plane?

About six.

Six.

Alright.

And is that related at all to the recall issue from a couple years ago, or is that a totally separate thing?

It is entirely separate.

Thank you.

As we are out of time we will conclude.

Thanks to all of you on the call for joining us.

Please call media relations if you have any further questions.

We look forward to talking to you next quarter.

Good bye.

Thank you, ladies and gentlemen, this concludes today's conference.

You may now disconnect.