聯合航空 (UAL) 2012 Q3 法說會逐字稿

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

My name is Brandon, and I'll be the conference facilitator for today.

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

(Operator Instructions).

This call is being recorded and is copyrighted.

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

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

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

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

Please go ahead.

Thank you, Brandon.

Good morning, everyone, and welcome to United's third-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 Chief Financial Officer John Rainey; and Senior Vice President, Finance, and Treasurer, Gerry Laderman.

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

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 each of you would limit yourself to one question and one follow-up.

With that, I'll turn it over to Sarah Murphy.

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 expectations or beliefs concerning future events and financial performance.

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

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

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

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

For a reconciliation of these non-GAAP measures to GAAP measures, please refer to the table at the end of our earnings release, a copy of which is available on our website.

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

These items are detailed in our earnings release.

And now I'd 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 third-quarter 2012 earnings call.

Today we reported net income of $520 million for the third quarter, or $1.35 per diluted share, delivering a pretax margin of 5.3%.

We achieved this result despite operational challenges and high jet fuel prices.

And I want to thank my coworkers for working together to generate more than $0.5 billion of profit during one of the toughest quarters of our integration.

I know it wasn't easy, but our recovery from a very tough summer exemplifies what makes United great -- our team working together to make our airline better for our customers.

This quarter we focused on improving our operational performance and investing in our fleet, our products, and the tools our coworkers use to do their jobs.

While we didn't do a good job with our operations during June and July, we took substantial steps during the quarter to improve our performance.

On our second-quarter earnings call, I told you that we were going to return to running a reliable airline by adjusting our airport staffing levels, returning to our historical standard for spare aircraft, increasing the number of maintenance hours and touch points for our aircraft, and rolling out the first release of our new faster and easier-to-use interface for SHARES, our passenger service system.

We did all that, and we are now running a reliable airline again.

In September, our domestic on-time arrival rate was 82%, exceeding our goal of 80% and triggering an on-time bonus for our coworkers.

Between July and September, our mishandled baggage rate declined by more than 30%.

And our mainline completion factor improved by 1.5 points to 99.4%.

In addition to improving operational statistics, our customer satisfaction scores have increased significantly since our operational difficulties the summer.

We made substantial progress with our integration during the third quarter and continue on the right path today.

However, we recognize that some of our customers chose to fly other airlines during the summer when our operational performance degraded, just like when your preferred road to work undergoes construction, you might choose to take a detour until the road gets repaired.

Well, the road is repaired.

And with our operations back on track, our unmatched global network, and our industry-leading product offering, we expect to earn back those customers who took a detour, and we expect to attract new customers as well.

I'm confident that we're building the world's leading airline, the airline customers want to fly, investors want to invest in, and coworkers want to work for.

One of our highlights this quarter was taking delivery of our first Boeing 787 Dreamliner, the first of five we expect to receive by the end of this year.

We couldn't be more excited about the benefits these aircraft will bring to our customers and the airline.

The Dreamliner offers fuel efficiency, noise reduction, and a terrific onboard customer and coworker experience.

We are in the process of completing our FAA proving runs and certification work and are pleased with the Dreamliner's early operating performance.

We will fly our first revenue flight on November 4 from our Houston hub to our Chicago hub.

In December, will begin flying our first 787s internationally on temporary routes.

And in January, we will place the aircraft on their first permanent routes -- Los Angeles to Narita and Houston to Lagos.

We continued investing in our onboard product this quarter.

We recently completed installation of global satellite-based Wi-Fi on our first aircraft.

We're undergoing final quality and acceptance testing and expect the aircraft will be up and flying with Wi-Fi in November.

Our new Wi-Fi won't be like the prior-generation Wi-Fi that you find on our US competitors' aircraft.

Our Wi-Fi is modern, global, and satellite-based, and as a result will offer speeds consistently faster than what's available in the market today.

Because it is satellite-based, our customers will be able to stay in touch virtually wherever they fly throughout the globe, a key differentiator between us and our competitors.

In addition to investing in Wi-Fi with better technology than that of our peers, we're taking a different commercial approach to Wi-Fi as well.

We own the hardware, purchased the bandwidth, and, importantly, own and control the portal customers used to access the Internet in-flight.

Ownership and control will allow us to develop a comprehensive and dynamic pricing model for Wi-Fi and onboard streaming video, grant complementary access to sites of our choosing, and establish a wide array of commercial agreements, increasing the long-term opportunities for and value of onboard Wi-Fi to United.

Since our mainline fleet is so large, with about 700 aircraft, it will take us some time to install this industry-leading Wi-Fi product across our entire fleet.

But we anticipate completing about 300 aircraft by the end of 2013.

We continue to invest in products that our customers value and are willing to pay for, including Economy Plus seating and international premium-cabin flatbed seats.

United has a history of leadership when it comes to innovative seating products.

As of today, we've installed Economy Plus seating on 90% of our mainline fleet, and we expect to complete our Economy Plus installation in early 2013.

We've installed more than 6200 premium-cabin flatbed seats on our international fleet.

And by February of next year, every aircraft flying over the Atlantic will have flatbed seats in the premium cabin.

Moreover, our entire long-haul international fleet worldwide will have flatbed seats next spring.

We're committed to investing in our coworkers and providing them the tools to give good customer service.

As I mentioned earlier, we recently launched a new interface for our SHARES system, with two powerful and intuitive apps for our coworkers to use, one for checking in customers and their bags, and one for managing departures at the gate.

We have a number of additional releases in development, and by next year we expect to have a fully integrated user interface for our lobby and gate agents that is fast, intuitive, modern, and easy to learn and use.

This quarter we reached an agreement in principle for a joint collective bargaining agreement with our pilots and are in the process of finalizing the tentative agreement.

This will be our first joint collective bargaining agreement, and we're eager to make similar progress with our other work groups.

We're currently in expedited negotiations for joint collective bargaining agreements with the IAM, which represents our airport employees, reservation agents, and stores employees; and with the Teamsters, who represent our maintenance technicians.

We've also begun the joint collective bargaining process with the AFA, which represents our flight attendants.

We want to bring our work groups together and pay our people competitively while increasing our ability to respond to market conditions to ensure United can achieve long-term success, regardless of the economic environment.

We're making these and other investments in our fleet, our technology, our products, and our people to provide a better customer experience on United and a better workplace for our coworkers, as we focus on generating sustained and sufficient profitability.

This quarter we announced a target of earning a 10% return on invested capital over the business cycle.

While there may be periods during the cycle where we won't hit our target, the entire management team is committed to achieving this goal.

And we are embedding return on invested capital in all of our important business decisions.

While our merger creates the platform for United to generate economic value over the business cycle, we recognize that our future lies beyond the merger.

We have many projects in the works that will improve our customer service, add revenue, enhance efficiency, reduce costs, and provide the returns our investors expect.

During the third quarter, we made progress in building the foundation for our future.

Although we are focused on achieving much more, we earned a respectable profit, despite high fuel prices and complex integration challenges.

We had a tough summer, but we're back on track operationally and are again providing the reliable service our customers expect of us and that we want to deliver.

We have more work to do to secure United's leadership position and achieve our long-term financial goals, but I'm certain that my coworkers are up to the challenge.

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

Thanks, Jeff.

I join Jeff in thanking our coworkers for their hard work during a challenging quarter and also want to thank our customers for choosing to fly United.

We continued our commitment to capacity discipline in the third quarter as we reduced consolidated capacity 1.4% year over year.

Maintaining capacity discipline is core to achieving our goal of generating sustained and sufficient profitability, especially in an environment of sluggish economic growth and elevated jet fuel prices.

And we will continue to be very disciplined in our capacity deployment.

United's third-quarter consolidated passenger unit revenue decreased 1.3%, and mainline PRASM decreased 2% versus the same periods in 2011.

Consolidated yields were weaker year over year, down 1.2%.

We recognize that while the industry as a whole faces largely the same global economic challenges, some of our recent relative year-over-year PRASM underperformance is related to issues unique to United because of our merger integration.

Over the past two quarters, we converted major IT systems used by both our customers and our coworkers and redeployed aircraft across our global network.

These changes affected our customers, put a great deal of stress on our operation and our people, and our operational and financial performance suffered as a result.

As Jeff outlined, we're back on track with our operational results and much improved customer satisfaction scores.

We expect to continue to run a reliable airline while offering our customers the products and services they want and are willing to pay for.

As for our revenue results, we are not satisfied with our relative year-over-year PRASM performance, and we're working hard to return to our industry leadership position.

Third-quarter domestic mainline PRASM decreased 4.2%, and yields decreased 2.6% versus last year.

Domestic mainline capacity decreased 1.7% year over year.

Regional PRASM increased 1.6%, while regional capacity decreased 1.1% versus the third quarter 2011.

Third-quarter international unit revenue was flat versus the same period in 2011, and yields decreased a modest 0.7% year over year.

International capacity decreased 1.1% versus the third quarter of 2011.

The Pacific was United's best-performing region in the third quarter, with unit revenue up 9.9% and yields up 7.2% versus the same period in 2011.

Pacific capacity increased 1% year over year.

China was the top-performing Pacific country, with approximately 11% PRASM growth and 8% yield growth versus the third quarter of 2011.

Japan continues to perform very well in the third quarter as PRASM and yield increased 6% and 5%, respectively, on capacity growth of 8% year over year.

We are excited to start flying our Dreamliners across the Pacific beginning in the first quarter next year, with Los Angeles to Narita and Los Angeles to Shanghai followed by Denver to Narita.

Our trans-Pacific network is unmatched, with more nonstop routes between the US and Asia than any other carrier in the world.

Third-quarter trans-Atlantic PRASM decreased 4.5%, and yields decreased 3.7% year over year.

We reduced our trans-Atlantic capacity during the third quarter by 3.7% year over year.

We've been affected by the economic challenges in Europe, and the majority of our previously announced fourth-quarter capacity reduction is to our European service.

One of the most important benefits of our merger is our ability to reduce capacity in weaker markets like the Atlantic and take advantage of stronger markets like the Pacific as economic conditions change around the world.

Latin America again face very challenging year-over-year comparisons this quarter.

Last year Latin American PRASM and yields increased more than 20% versus the third quarter of 2010.

This year Latin America third-quarter PRASM declined 8.3%, and yield declined 9.4%, with a capacity increase of 1.6% year over year.

On a year-over-two-year basis, however, third-quarter Latin America PRASM and yields are up approximately 11% and 10%, respectively.

Third-quarter cargo revenue declined 13% versus the same period last year.

The cargo business continues to struggle because of increased industry cargo capacity and the impact of our aircraft redeployment, which changes the amount of cargo space available throughout our network.

Our ancillary revenue increased 1% year over year this quarter.

As we reduced capacity and in turn have fewer enplanements, our checked bag and change fee revenues decreased.

Counterbalancing that effect is other ancillary revenue.

Seat upsell revenue, which includes Economy Plus and paid premium cabin upgrades, grew more than 25% year over year.

Economy Plus sales increased 20% this quarter, in part due to having more Economy Plus seats available on our subsidiary Continental aircraft, and in part from leveraging our ability to dynamically price Economy Plus using SHARES.

Third-quarter sales of paid premium upgrades, which is our product allowing customers to purchase access to the Business First or Global First cabins, increased about 50% versus 2011.

SHARES provides us a much more powerful platform to dynamically price Economy Plus, paid premium upgrades, and other ancillary products.

We know our customers value more space when they travel, and we're pleased to provide them with the seating options they want and are willing to pay for.

Corporate revenue increased modestly this quarter, and I'd like to take a moment to thank our corporate customers for their loyalty.

Although some customers flew other carriers during the height of our operational challenge this summer, the vast majority of our global corporate account clients chose to stay with United.

They had confidence in us, and we worked hard to improve our reliability and deliver for them.

Now with our better reliability, our unmatched route network, and improving product offering, we are confident that United is the best airline for the global business customer.

In September, we expanded our aircraft redeployment effort across our domestic network, particularly at our hubs in Chicago, San Francisco, and Washington, and are encouraged by the early results in a number of these markets.

We are phasing in redeployment more gradually than we initially planned to ease some of the stress on our operation and now expect substantially complete our redeployment effort in the first quarter of 2013.

Redeploying aircraft not only helps us improve financial performance on individual routes by better matching the right aircraft to demand, it also allows us to initiate new service to a number of destinations that neither subsidiary served prior to the merger.

Since closing the merger two years ago, we've added more than 70 new routes across the globe while reducing consolidated capacity.

In part due to the slower than expected redeployment rollout, our revenue synergy realization has been slower than we initially targeted.

Now that we restored our operational performance to expected levels, we're confident that revenue synergies will accelerate in 2013, and we remain confident that will achieve the full $800 million to $900 million of run rate annual revenue synergies we identified at the beginning of our merger.

Based on the latest GDP revisions and global economic conditions, we expect some softening of the economy during the remainder of 2012.

And the strength of any recovery in 2013 remains unclear.

As a result of this uncertainty, last month we announced a reduction to our expected remaining 2012 consolidated capacity.

We now expect fourth-quarter 2012 consolidated capacity to decrease between 2.2% and 3.2%, and our full-year consolidated capacity to decreased between 1% and 1.2% year over year.

In September, we also announced a reduction to our 2013 capacity plan.

We now expect our full-year 2013 consolidated capacity to be down about 1%.

Appropriately matching supply and demand is critical in achieving our long-term return target of 10% on our invested capital.

And we are committed to maintaining capacity discipline to help us achieve our goal.

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

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

Thank you, Jim.

Today we reported net income of $520 million and a pretax margin of 5.3%.

I want to thank the entire United team for their effort and contribution to our results this quarter.

An integration of our size and complexity takes considerable time and creates a lot of change for our customers and for our coworkers.

That said, we are starting to see many improvements from our merger -- a new narrow-body aircraft order, service to new markets, industry-leading Wi-Fi, and a new modern user interface for our share system.

During the quarter, I announced United's long-term return on invested capital target of 10% over the business cycle.

10% is the right starting threshold for us as it's above our cost of capital, and it's a return level we have not consistently achieved at any point in our history.

Our goal to create economic value runs throughout the organization.

And while it is a challenging goal, we are focused on achieving it by working together.

Since closing our merger two years ago, our return on invested capital has been 10.2%.

For the 12 months ended September 30, however, our return on invested capital was 9.3%.

We are not satisfied with the recent compression of our financial performance, and we are taking action to improve it.

Moreover, the composition of our shareholders, the owners of our Company, has changed over time.

Many of our owners today have invested in our stock because they recognize the transformation taking place in this industry and the potential for value creation that exists uniquely at United.

They expect us to earn our cost of capital and for us to manage the business accordingly.

We are identifying opportunities to improve our cost structure by sourcing services from the best providers, operating more efficiently than we do today, investing in technology that gives our customers more control over the travel experience, and resizing our footprint for the airline we are today and will be tomorrow.

Third-quarter total operating expense increased 0.9% or $79 million year over year.

Fuel costs increased 1% this quarter and accounted for nearly half of the year-over-year increase in operating expense.

Cost control and efficiency are essential to our long-term success, and our third-quarter performance reflects our efforts in this area.

We're becoming less reliance on manual processes and finding new ways to increase revenue and reduce costs through technology and doing it in a way that provides higher customer satisfaction while making the day-to-day work for employees more gratifying and productive.

Third-quarter consolidated CASM, excluding fuel, third-party business expense, and profit sharing, increased 3% versus 2011 on 1.4% less capacity.

On a fuel-rate- and profit-sharing-neutral basis, third-quarter consolidated unit costs increased 2.5% year over year.

The impact of cost synergies can be seen in our CASM performance this quarter.

Some examples include facility consolidation and harmonization of engine and component maintenance programs.

While we have captured cost synergies faster than we originally expected, we do anticipate a number of headwinds, including the cost of joint collective bargaining agreements, that will put some pressure on our unit costs next year.

We effectively managed costs this quarter while making prudent investments in our business with an eye toward improving our customers' experience.

In addition to installing Economy Plus flatbed seats and satellite Wi-Fi, we are adding larger overhead bins on our Airbus aircraft; improving the food, beverages and amenities in our international premium cabins; and building a new United Club and adding jet bridges at Chicago O'Hare Terminal 2. We will make the right long-term investments for our business that will deliver benefits to our customers, coworkers, and the bottom line.

We continued to make progress in strengthening our balance sheet in the third quarter, making $487 million of debt and capital lease payments including $104 million of prepayments.

This quarter we paid off our two most expensive pieces of debt, totaling $251 million, with an average interest rate of over 12%.

At the end of the third quarter, our net debt totaled $12.5 billion, or $16.7 billion including our pension liability.

Our unencumbered asset base at the end of the third quarter was approximately $2.7 billion.

In September, we issued a EETC with $844 million of proceeds.

This transaction will finance 21 aircraft in total, three 787 Dreamliners and 18 737-900ERs, which will be delivered between this November and July of next year.

The A tranche of this EETC priced at a 4% fixed coupon, and the B tranche priced at 5.5%, resulting in a blended coupon of 4.16%, the lowest rates in history for an issuance of this kind.

While we are focused on reducing our net debt balance, financing aircraft through capital markets remains a prudent and cost-effective use of debt.

We ended the third quarter with $7.2 billion in unrestricted liquidity, including an undrawn credit facility of $500 million.

In the two years since closing the merger, we have strengthened our balance sheet considerably, making $4.6 billion of debt and capital lease payments; maintaining a strong liquidity position, including the addition of a revolving credit facility; and increasing our unencumbered asset base by $1.7 billion.

We still have a significant amount of debt maturities and capital lease obligations over the next few years.

And while we would like to pay off all the instruments as they come due without refinancing, we will make the right decisions for the business based upon the economic environment at that time.

Gross capital expenditures were $412 million in the third quarter, and net capital expenditures were $222 million.

We are reducing our fourth-quarter capital spending from previous expectations and now project full-year gross capital expenditures to be $2.25 billion, or $1.15 billion net of expected financing.

During the third quarter, we took delivery of three Boeing 737-900ER aircraft and the first of our 787 Dreamliners.

We removed three Boeing 737 classics and one Boeing 757 from service during the quarter.

In the fourth quarter, we expect to take delivery of four more Dreamliners and six Boeing 737-900ERs.

We expect to end the year with three fewer mainline aircraft than we started, with a total of 698 aircraft.

We expect our full-year 2012 consolidated unit costs, excluding fuel, profit-sharing, and third-party business expense, to increase 2.7% to 2.9% year over year.

Notably, we have modestly lowered our full-year cost guidance even while twice reducing our expected 2012 consolidated capacity.

We expect our fourth-quarter 2012 consolidated unit costs -- again, excluding fuel, profit-sharing, and third-party business expense -- to be up 3.5% to 4.5% year over year.

Our third-party business expense was approximately $55 million in the third quarter and is projected to be $250 million for the full year.

In closing, we made over $0.5 billion of profit in the third quarter, with good cost control and a stronger balance sheet, yet our performance fell short of our expectations.

We've laid much of the foundation for our future, but recognize that we still have a significant amount of work ahead to realize our potential.

United has the very best assets in the business, the best network for customers, a strong pipeline of new products and services, efficient aircraft, and professional employees dedicated to our customers, from which we will build the world's leading airline that creates economic value over the business cycle.

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

Thanks, John.

Our merger has resulted in a lot of change for our customers and our coworkers.

And I know that the road has been a tough one.

However, we are laying the foundation for world's leading airline.

Many of the investments we've been talking about will become visible to our customers and our coworkers in 2013.

And we're very excited about delivering the airline our customers want to fly, our investors want to invest in, and our coworkers want to work for.

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

Thank you, Jeff.

First we will take questions from the analyst community.

Then we will take questions from the media.

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

Brandon, please describe the procedure to ask a question.

(Operator Instructions) Jamie Baker, JPMorgan.

A question for Jeff or, I don't know, maybe Mike Bonds if he's there.

It does appear that you're making substantial progress on a pilot contract.

Most of the language coming out of the pilots suggests that terms are largely in line with the new Delta deal.

What's unique about the Delta contract is that there are some Delta-specific offsets to what otherwise appears to be an expensive contract -- you know, a decline in 50 theaters, subleasing the 717s, more large RJs and so forth.

So I'm not asking you to comment on where your wage rates ultimately settle out; I can make my own assumptions.

But can you give us some color as to the potential United offsets that might benefit you?

I mean, you're not looking for 717s.

You already have a lot of RJs.

What can you pick up to potentially offset a several-hundred-million-dollar dis-synergy?

Hey, Jamie, this is Jeff.

Listen, we're subject to a gag order from the NMB.

So I can't comment on it.

I think that the terms of the contract will be -- in their entirety will be coming out relatively soon.

I will tell you, though, that we believe this is a very competitive contract for us.

Well, competitive in what sense?

The NMB doesn't gag you, Jeff, with all due respect, from throwing out a wish list of items that you would like to have.

No, I'm not -- Jamie, I'm just not going to go there.

We're not -- I'm not -- there's no reason for us to get on the wrong side of the NMB right now, and we're not going to do that.

Okay, so it comes down to trust us.

All right, I'll try to live with that.

Thanks.

Michael Linenberg, Deutsche Bank.

John, I want to go back to the CapEx number.

You talked about that number coming down.

What was that number previously?

And I do see in the fourth quarter it does look like that some of the net purchase deposits, it looks like they're either being refunded -- is that -- what's that tied to?

Have you pushed back some aircraft deliveries?

Can you just -- can you run through that?

Yes, you're right.

We did have a swing in purchase deposits in the third quarter.

We had almost $200 million there.

That's just tied to the timing of aircraft deliveries.

In total, I would say that we've recognized in advance that this year was a bit of a bow wave with respect to capital spending for us.

You'll see some of that bleed into next year, but we certainly want to get back to a more normalized level of capital spending over time.

Okay, good.

And then just my second question, I did see that it looks like in the [forge] schedule you're adding some service to -- it looks like additional service to Heathrow, at least I think it's incremental, out of Dulles and Houston, or maybe it's reallocating some other flights.

If it is incremental, are the slots for that -- are those slots -- have you purchased those slots like you have in the past, or are those slots being leased, if it is incremental?

Hey, Mike, in terms of -- in Heathrow, it would -- what -- I guess I'm trying to zero in on what period you were thinking about or looking at.

I think it's in the spring, where you're adding another flight from Houston to Heathrow and another flight from Dulles to Heathrow?

Yes, so what we have in there incrementally is a third trip on Houston to Heathrow at that time period as we put 3 767s into the market.

Okay.

And is that an incremental slot?

Because in the past, you've purchased slots, and slots typically comp --

It's an incremental slot that we've been able to hold onto.

Okay.

Okay, very good, then.

Thanks.

Helene Becker, Dahlman Rose.

Thanks very much, operator.

I appreciate taking the question.

Just a couple of points of clarification with respect to -- I think you said on the pilots that you were in negotiations or finalizing language.

Do you have a timetable of when that is done?

Helene, this is Jeff.

Yes, we're finishing up the wording on the tentative agreement, and we anticipate that the tentative agreement to be out quite soon.

Okay, thank you for that.

And then just one quick follow-up on average fare for the main line.

It's kind of flattish year on year.

I mean, are you seeing evidence that you can push that higher, looking out to fourth quarter and next year?

Hey, Helene, this is Jim.

Obviously, I can't comment on future pricing.

Although last week we did increase domestic fares $2, $3, $5 one way, ultimately at the end of the week, the industry matched.

So we're always looking at the demand capacity and how that's -- and then pricing relative to that demand capacity level in terms of where it sits.

Okay, that's very helpful.

Thanks.

Hunter Keay, Wolfe Trahan.

Thanks a lot.

A couple questions for John, I believe.

John, I appreciate the commentary about your shareholder base.

I think that's right in terms of the people sort of waiting around for this transformation.

So as your ROIC has started to lag a little bit your target, why not give some thought to giving them some money to stick around?

And by that I mean I understand the value of deleveraging the balance sheet.

But if you look at just from an academic perspective the fact that your cost of debt is about a third of your earnings yield, and you have a lot of cash on your balance sheet to play with, why not think about maybe initiating a buyback with, say, 100 -- I mean, $1 billion or so, because of the simple math that exists between rewarding equity holders and the accretion that should basically impact your EPS from the earnings yield versus the cost of debt, which is now again at this point about 3 times higher?

Or is it more just let's get the balance sheet in order first before we even think about returning cash to equity holders?

Well, Hunter, I think that, first of all, it is something that we think about.

We need to get to a point in this business where we are directly returning cash to shareholders.

I don't think we're there yet.

If you look at the progress that we've made over the last three to four years reducing our net debt balance, it's decreased by almost $4 billion.

But as pure financial theory would suggest, our equity values probably should've gone up as well, and they haven't.

They haven't for us and they haven't for the industry.

And so that suggests that there's still some instability, at least the market believes that, in our capital structure today.

So I think in terms of prioritization, we need to continue to improve our balance sheet.

We need to get rid of a lot of the debt that is the chain around our neck that is -- it's non-aircraft debt.

And we've got a significant opportunity at United.

We've got about $3.5 billion of debt maturities over the next few years that have nothing to do with financing aircraft.

I think as we begin to improve and strengthen our balance sheet, and then I think you should see earnings multiples improve in this business.

We would have hoped we would have already seen it because we think we've made significant progress.

But once we take care of those things, I then think that you could have a more serious discussion about a share buyback or beginning to distribute a dividend.

Okay, all right.

Thanks.

And on fuel, without advocating for a policy, you look at US Airways and they're going to pay the cheapest for jet fuel per gallon, again, for anybody.

I think that's like four out of the last eight quarters.

At what point do you think that stops becoming a fluke, and at what point do you think that that is a legitimate trend that has merit that's something worth considering?

I mean, is there going to be say, like, okay, we need to look at -- we need to make sure this happens for three years, or we need to make sure this happens for 10 years.

I mean, at what point does it stop becoming a fluke if it continues to happen?

Well, first of all, let me say I agree with the underlying premise of your question.

It would be great if we will could get to a point as an industry where we could better pass along our cost inputs, particularly fuel being the single largest expense that we have.

We are unlike some of the other industries that people are quick to compare us to in terms of rail and freight in terms of how far out we sell tickets.

And we're exposed to that fuel price volatility.

I think hedging is one of those things where it's -- you know, there's perfect visibility in hindsight.

We had over $500 million of hedge gains last year.

I think if you're comparing to US Airways, a couple things I'd point out.

One is that there are geographic differences with respect to where we buy fuel.

We have 50% of our capacity that's international.

We buy a lot of fuel in New York Harbor and on the LA, which is much more expensive than Gulf Coast jet.

So on just a pure unhedged basis, we're always going to have a bit of a premium to them.

But we would think we would also get a revenue premium by serving those markets.

But in terms of what we're doing from a hedging perspective, we are thoughtful about this.

And we recognize that historically we've spent a couple hundred million dollars a year in hedge premiums.

And given what's happened to fuel more recently, we've tried to achieve the same amount of risk management, but by spending less premium.

And that's why you've seen our hedge policy or our actual instruments change a little bit over the last few years.

But, you know, I think it's important for us to continue to protect against some of this short-term volatility.

So absent the ability to pass along a fuel surcharge in the very immediate term, we're going to continue to hedge.

Okay.

Thanks a lot for the time, John.

John Godyn, Morgan Stanley.

Thank you for taking my question.

Jim, as we look forward, I think one of the things that's sort of unique about United is how easy your comp is in December.

Is the right framework to be thinking about the world and sort of holding macro constant and so on and so forth, is the right framework here that as we lap that comp, there's going to be sort of a natural mathematical significant reacceleration in PRASM, or are there some sort of non-economic puts and takes that I should be thinking about in December?

John, it's Jim.

You're right.

As we -- if you went back to our first-quarter earnings call, we talked about some of the issues that we faced in the first quarter and also in December, for instance as we integrated two revenue management systems and we talked about some yield degradation in the month of December.

So that, to your point, is clearly out there on a year-over-year basis.

I would tell you that those systems have matured now.

Now that's one source of data versus two systems feeding the demand forecasts and so forth.

So that has matured, and that is operating at a much higher level than what we talked about in the first quarter.

In terms of getting down to whether specifically outperformed, I'm reluctant to talk about that.

We recognize that we're not satisfied with our revenue performance in the third quarter, that we had dis-synergies.

And quite frankly, we know we're working really hard to get those synergies back.

And so there's the timing.

We're obviously very confident we will, but that timing -- so it just makes it hard for me to comment on saying a specific time when we would begin to outperform.

But clearly the things that you mentioned and I just talked about happened in December and the first quarter.

Okay, that's really helpful.

And John, if I could ask a question about cash flow in 2013, in 2012 you had a number of sort of one-time items that were cash hits that kind of depressed the cash flow profile integration, some of this stuff recently announced with the labor.

As you look into 2013, it seems like some of these should roll off very naturally and create a pretty big tailwind for cash flow.

Outside of the PBGC issue, am I on the right track, or are there things in 2013 I should be on the lookout for?

I think you're absolutely on the right track.

If you look at our initial guidance with respect to the one-time integration expenses, we've realized a lot of those already.

And I think you would expect to see those wind down appreciably next year.

That said, we still have to achieve some labor agreements and there are a few other blips out there.

You mentioned the PBGC, no, but that's non-cash.

I think in a directional sense year over year, definitely you would see stronger cash flow next year as it relates to some of the one-time items.

Okay.

Thanks a lot.

David Fintzen, Barclays Capital.

Hey, good morning everyone.

Maybe a question for Jim.

I know there's obviously a lot of noise in the data in terms of your on-time performance and some of the systems integration.

But I'm curious, as you're starting to put in some of these aircraft -- some of the moving aircraft around and sort of hitting the results, just curious how you think about the spool-up of those benefits.

Is there -- is it pretty front-end loaded when you make these network changes, or is there a time lag we should be thinking about to sort of get some history into the revenue management systems and really optimize the outcomes?

I think the -- it depends on the case that we're talking about.

Clearly if you redeploy and you're putting capacity that's greater than what was in that market before, there's a little bit of a new market spool-up that is applied to that.

So there is a timing issue to that.

It's different by every market, David.

So it would be hard to kind of talk about it as one point.

On the other hand, obviously we redeploy aircraft where the demand is not as great, and we get the smaller aircraft on that route.

And the returns are immediate.

So it's a little bit mix of both.

I think as I mentioned in my comments, we started to do a nice step-up in redeployment in the month of September and at the same time ran an 80% on time, with the great work by the operations team in reliability.

So although we've slowed down that pace of redeployment, as we continue to finish that up in the first quarter of 2013, we do expect those benefits to accelerate in 2013 on the redeployment as we've now got the reliability back on track.

Okay.

And then just on the redeployment, if memory serves, it started more domestically oriented and then it was going to shift more international into next year, is what I recall.

I'm just curious; I would presume some of the international would be slowed down as well?

Yes, we've been doing both, quite frankly.

Houston-Lima is a very early redeployment aircraft.

New York to Buenos Aires is -- we moved aircraft out of Dulles.

But you're right.

And then also there's been a lot of domestic redeployments with the 737-900s and next-gen airplanes moving to the West Coast and getting on some longer-haul markets.

So it's a little bit mixed bag of both.

But there will be more both as we kind of accelerate in 2013.

Okay, great.

Thanks for the color, appreciate it.

Dan McKenzie, Buckingham Research.

On the corporate travel book away that resulted from the operational difficulty, how much of that impacted PRASM exactly in the third quarter?

Or if you don't have that, how much are we really talking about?

And I was getting pulled away from the call, so I apologize if you already gave that to us.

You know, we haven't put a dollar figure on that.

Clearly, internally, we know where we expect to be from a revenue performance point of view.

And so really, quite frankly, right now is our salesforce throughout the process and currently is working with our corporate partners, our business travelers, to, one, talk about the value of the network in light of the new reliability and so forth.

So there's a lot of moving pieces as we move through the summer.

So it would be hard to put a specific number on exactly what that is.

But clearly it was a negative number for us in the third quarter.

And material, I guess maybe that's the point; the fact that you're talking about it suggests that it's a pretty big number at least, right?

You know, it was a significant number.

Okay, fair enough.

So I know you're not ready to comment a whole lot on 2013 capacity.

But I am seeing seats for the first quarter down significantly more than down the 1% that you folks are guiding to for the year.

And I'm just wondering, since the data is public, I'm wondering if you can help us understand how first-quarter capacity ties to the full-year outlook, and also just a little bit about the thought process behind that?

So as we've guided the full year 2013, we're guiding toward 1% decline in capacity.

As we move through the fourth quarter and into December, we will give a lot more firmer guidance on that first-quarter capacity.

But at this point, we are guiding toward 1% decline, and that's kind of where we're at for the full year in 2013 right now.

Okay, understood.

Thanks, Jim.

Duane Pfennigwerth, Evercore Partners.

A question on the operational improvement since July.

How do you measure the underlying trend adjusted for changes in utilization?

It seems like we've been in a less demanding utilization period here in September, October.

So how do we think about the underlying trend as you prepare for a seasonally stronger period late this quarter?

Duane, this is Jeff.

No, that's fair.

I mean, it's -- and it also depends on lots of sort of random events, as well as weather.

But we're very focused on making sure that we can maintain our operational reliability during period of more stress, holiday periods, certainly going into next summer as well.

We continue to take actions to make sure that we are prepared for that and that we're prepared to continue to deliver on reliability.

Okay, thanks.

And if I could just ask a follow-up with respect to systems, I assume no airline is ever truly done with systems upgrades.

But in terms of high-profile IT integration projects, what is left to be done, and can you give us a sense of timing?

Thanks.

Sure.

We have a very big project that will come up in terms of integrating our aircraft maintenance systems.

We're going to do that on a fleet-by-fleet basis over a considerable period of time.

It's a monumental project, and it's a multiyear project.

We also have to integrate our HR systems as well, and we have other systems that, as you said, they just continue on and on.

So we will continue to have it.

None of those systems, however, has the high profile of our passenger service system, our SHARES system, which powers not only everything that the customer does, but our website and our loyalty program as well, which is a massive system, nor does any of those require the level of retraining that the SHARES system did.

So in my judgment, we're over the really tough hurdle of IT.

But there's a considerable amount of IT.

And I will tell you that putting the two maintenance systems together is going to take a considerable period of time.

And it is a monumental task.

But that can be staged on a fleet-by-fleet basis over a considerable period time.

That's a multiyear project.

Thanks very much.

Thank you, ladies and gentlemen.

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