聯合航空 (UAL) 2012 Q4 法說會逐字稿

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  • Operator

  • Good morning and welcome to United Continental Holdings' earnings conference call for the fourth quarter and full year 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 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 our 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.

  • Nene Foxhall - EVP, Communications and Government Affairs

  • Thank you, Brandon.

  • Good morning, everyone, and welcome to United's fourth-quarter and full-year 2012 earnings conference call.

  • Joining us here in Chicago to discuss our results are Chairman, President and CEO Jeff Smisek; Vice Chairman and Chief Revenue Officer Jim Compton; and Executive Vice President and Chief Financial Officer John Rainey.

  • Jeff will begin with some overview comments after which Jim will review operational performance, 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 would limit yourself to one question and one follow-up.

  • With that, I will turn it over to Sarah Murphy.

  • Sarah Murphy - Managing Director, IR

  • 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 tables 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 and the full year.

  • These items are detailed in our earnings release.

  • And now, I would like to turn the call over to Jeff Smisek, Chairman, President and CEO of United.

  • Jeff Smisek - Chairman, President and CEO

  • Thanks, Nene and Sarah, and thank you all for joining us on our fourth-quarter and full-year 2012 earnings call.

  • Today we reported net income of $589 million for the full year or $1.59 per diluted share delivering a pretax margin of 1.6%.

  • 2012 was the toughest year of our merger integration and it wasn't an easy year for our coworkers or our customers.

  • Despite our integration pains, we accomplished an enormous amount and we are now in a position to go forward as a single carrier and compete effectively on a global scale.

  • Our operations are running smoothly, our many product improvements are rolling out and our customer satisfaction scores are climbing.

  • I want to thank all of my coworkers for working together during 2012 to help build the base for United's future.

  • I am pleased to recognize my coworkers' hard work with $119 million of profit sharing which we will distribute to eligible coworkers on February 14.

  • I also want to thank our customers for choosing to fly United.

  • We are working hard every day to make your travel experience a great one and you will see continued improvement in our product and service as 2013 unfolds.

  • In 2013, we will live beyond our merger.

  • We will continue to deliver on our go-forward plan, the annual operating plan we use to guide our efforts and investments Companywide.

  • Our top priorities this year included running a consistently reliable airline, providing great customer service, bringing the rest of our workgroups together, continuing to invest in our people, our technology, and our product offering, and running United as a business to achieve our return on invested capital target of 10% over the business cycle.

  • We did not achieve our return on invested capital target in 2012 and we are absolutely not satisfied with the financial results we produced last year.

  • We need to generate better unit revenue and operate more efficiently and we are taking actions to address both of those areas.

  • Leadership starts at the top, and in December we reduced the number of our officers by 7%.

  • Today, we internally announced the difficult but necessary decision to reduce our management and administrative staff by 6% starting next month.

  • We have many other actions plan to increase efficiency and increase our revenues throughout 2013 and beyond.

  • I want to thank my coworkers for their professional response and empathy towards customers and fellow coworkers in the aftermath of Superstorm Sandy, which reduced our fourth-quarter earnings by approximately $85 million.

  • Our operation substantially improved in the fourth quarter triggering two on-time bonus payouts for our coworkers.

  • I would like to thank my front-line coworkers for doing a great job managing high loads during the holidays made more challenging by snowstorms that hit a number of our hubs.

  • We are back on track running a reliable operation and we will continue to support our operations through higher than normal staffing at airports, spare aircraft levels and maintenance programs over the next few quarters to ensure that our operation performs as we and our customers expect it to.

  • Customers are noticing our improved operational reliability, and as I mentioned earlier, our customer satisfaction scores continue to improve as does feedback from our corporate customers.

  • We are keenly focused on improving our customer service and we have begun a comprehensive customer service training program for our airport agents, contact center agents and flight attendants worldwide.

  • By the end of January, all airport, contact center, in-flight supervisors and peer leaders will have completed training on how to lead their teams to provide great service.

  • As we finish training the leadership, we will train all of our airport and contact center agents and flight attendants across the globe on our new customer service standards and we will complete all of this training this year.

  • United is committed to providing great customer service each and every day, and it is the responsibility of every coworker to do so.

  • At our internal leadership conference next week, we will roll out It's Our Job, a Companywide integrated approach to customer service.

  • It's Our Job includes training that clearly explains our customer service standards and expectations for front-line coworkers.

  • The program also includes an expanded outperform recognition program that rewards more employees for outstanding service and a broad-based quarterly bonus program tied to improvements in customer satisfaction scores.

  • This year, we will collect more detailed customer satisfaction data and begin customer service quality reviews across the system; improving the quality and quantity of service delivery data will help us identify areas of opportunity and future training needs.

  • Importantly, our coworkers want to provide great customer service.

  • They take pride in it and we, in turn, take pride in their efforts.

  • This year, we are making sure they will have the tools that help them do their jobs.

  • Throughout the year, we will be rolling out a modernized fully integrated suite of tools for our airport agents that expands on recent enhancements and allows our agents to provide better and more efficient service to our customers.

  • We will first implement these new tools at the gate to assist with the departure management process and improve the boarding experience for our customers.

  • Later in the year, we will expand these tools to include ticketing and check-in functions in the lobby.

  • We are also investing in our customer relationship management technology to better understand our customers' individual preferences when they travel.

  • The more we understand our customers' preferences, the better we will be able to design and offer tailored products and services that meet or exceed their expectations and improve our profitability.

  • Last year we made substantial progress in bringing our workgroups together, an important step in building our working together culture.

  • In December, our pilots ratified our first joint collective bargaining agreement, a four-year contract that marked to market the pay of our pilots while increasing their productivity and our scope of flexibility.

  • Additionally, our subsidiary United, subsidiary Continental, and Continental Micronesia flight attendants and Continental Micronesia technicians ratified a new collective bargaining agreement during 2012.

  • Toward the end of last year, our negotiations for a joint collective bargaining agreement with our airport and contact center agents represented by the IAM gained significant traction and continue on a good path early in the new year.

  • We are in expedited discussions for a joint collective bargaining agreement with our technicians represented by the Teamsters and we are also in discussions with joint collective bargaining agreements with our flight attendants and our dispatchers.

  • We understand the importance of marking to market the wages and benefits of our people and we are committed to reaching competitive joint contracts with all of our work groups.

  • In addition to seeing improved customer service this year, our customers will begin to experience the many product improvements we have discussed since our merger.

  • By the end of the first quarter, 96% of our mainline fleet will have our very popular Economy Plus seating.

  • Additionally, we have installed over 6,800 flat-bed seats in the premium cabins of our international aircraft, more than any of our US competitors.

  • In February, we will finish modifying our domestic Boeing 767 aircraft to an international configuration with fully flat-bed seats in the business first cabin, seatback audio video on demand and power outlets throughout the aircraft.

  • Customers today are using the new larger overhead bins on 70 of our Airbus aircraft and we will finish installing those bigger bins across the rest of that fleet this year.

  • We are installing global satellite-based Wi-Fi across our mainline fleet with a modest number of aircraft outfitted to date, including our first Boeing 747.

  • We are ramping up installation and expect to install global satellite-based Wi-Fi on 300 of our mainline aircraft by year-end and will continue installation next year until substantially all of our mainline aircraft have this industry-leading Wi-Fi product.

  • We took delivery of 25 new aircraft last year including six Boeing 787 Dreamliners.

  • History teaches us that all new aircraft types have issues and the 787 is no different.

  • We continue to have confidence in the aircraft and in Boeing's ability to fix the issues just as they have done on every other new aircraft model they have produced.

  • Safety is, of course, our top priority and we are working closely with the FAA and Boeing to safely return our 787 aircraft to service.

  • In 2013, we expect to take delivery of 26 new fuel-efficient and customer-pleasing aircraft including two more Dreamliners in the second half of the year.

  • At the end of last year, we opened our first completely redesigned and expanded United Club at Terminal 2 of O'Hare International Airport.

  • And we are receiving outstanding feedback from our customers on the look, feel and usability of the Club.

  • If you are passing through O'Hare, I encourage you to drop by the Club for a glimpse of the future.

  • This year we will renovate four additional United Clubs around the network with this superb new look and feel.

  • As with our operations, our service standards, and our people, we will continue to make substantial return-oriented investments in our product and customer experience this year.

  • I am confident that our focus on operational reliability, customer service, product improvement, and our working together culture will put United on the right track for creating economic value in 2013 and beyond as we become the world's leading airline.

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

  • Jim Compton - Vice Chairman and CRO

  • Thanks, Jeff.

  • I would like to take a moment to thank my coworkers for their hard work in 2012.

  • Our operational performance and revenue results last year did not meet our expectations or our potential, but we built a foundation for United from which we will provide consistent reliability, a competitive product offering, and great customer service in 2013.

  • I would also like to thank our customers for choosing to fly United.

  • We appreciate your business and are working together to make United the best airline for you.

  • Our operational performance improved in the fourth quarter and we delivered 80% on-time performance for the quarter despite the severe weather, including Superstorm Sandy and snowstorms.

  • In 2012, we paid out six on-time bonuses totaling $26 million to our coworkers for achieving monthly on-time goals including two payouts during the fourth quarter.

  • In our fourth quarter, mishandled bag ratio improved nearly 10% from the summer lows.

  • It takes teamwork, reliable fleets and the right processes and procedures to run a consistently reliable airline and we will continue to invest in those areas this year.

  • Running a reliable airline is highly correlated with customer satisfaction scores and passenger revenue results.

  • As we improved our reliability at the end of the third quarter, and throughout the fourth quarter, our customer satisfaction scores improved nicely.

  • We have recently seen encouraging progress with passenger revenue.

  • I look forward to more closely integrating the way we manage both operations and revenue in my new role.

  • Our full-year consolidated capacity declined 1.5% year over year in 2012, demonstrating our continued commitment to capacity discipline.

  • In the fourth quarter, consolidated capacity was 4.2% lower versus 2011.

  • Our approach to capacity deployment remains the same -- match supply with demand on a market-by-market basis.

  • Through this approach we are confident we can optimize our broad network and generate returns in excess of our cost of capital.

  • As we experienced merger-related operational issues last year, we took action to support our integration and our operations that did not optimize our network or revenue and that added to our costs.

  • Examples include higher staffing levels at airports, carrying a higher level of Spirit aircraft, and modestly increasing our block and ground time.

  • During 2013, as we streamline our boarding process, deliver on our new easy-to-use and more intuitive technology for our coworkers at airports and consistently deliver reliable operation, we will begin to unwind these actions.

  • Now turning to our revenue results.

  • Consolidated passenger unit revenue increased 0.6% in the fourth quarter of 2012 and 1.7% for the full year versus 2011.

  • These results include $140 million of lost revenue due to Superstorm Sandy.

  • The Pacific was our best performing geographic region in the fourth quarter and for the full year as PRASM increased 5.9% and 5.8%, respectively.

  • Both higher yields and loads contributed to this solid performance.

  • China continued to be a highlight in the fourth quarter with PRASM increasing 9% and yield increasing 5% compared to the fourth quarter of 2011.

  • Our ancillary revenue increased 2% and 3%, respectively, for the fourth quarter and full year 2012 compared to 2011.

  • Our fourth-quarter capacity reduction resulted in fewer [implements] and in turn lower checked bag and change fee revenue.

  • During the fourth quarter, we implemented a second bag fee for travel between the US and Japan and are the only US carrier to apply this important cost recovery mechanism across our entire trans-Pacific network.

  • We have heard from our customers how much they value more space to work and relax when they travel, and we are pleased to offer the seating products that they value and will pay for.

  • Economy Plus continued its outstanding performance with 33% sales growth year over year in the fourth quarter and 25% growth for the full year of 2012.

  • Sales of paid premium upgrades increased 58% in the fourth quarter and 34% for the full year versus 2011.

  • A significant portion of the increase in Economy Plus and paid premium upgrade sales is due to pricing optimization permitted by our powerful SHARES platform.

  • While our corporate revenue for the full year increased modestly, due to higher yields, we are dissatisfied with the 2012 results.

  • The operational challenges we faced last summer impacted our corporate customers and our corporate revenue and share premium performance lagged our expectations.

  • Put simply, some of our corporate customers took a detour while the road was under construction and we suffered for it.

  • We are confident, however, that in 2013, we will win back those corporate customers and attract new corporate customers with our significantly improved operational reliability, our improving customer service, our competitive products and our industry-leading network.

  • We aspire to be the travel partner of choice for our corporate customers, a partner that helps them reach their goal.

  • We also know how important it is to listen to our customers and we have an ongoing dialogue with many of the travel managers at our top accounts through our Corporate Advisory Board.

  • Through frequent conversations with our Corporate Advisory Board members, we keep our finger on the pulse of our customers' expectations, experiences, and aspirations for United.

  • From our most recent conversation, we know our corporate customers are experiencing firsthand the improvements in our reliability, customer service, and product offering.

  • Route network and schedule convenience may be the most important factors when many business customers choose an airline, but we recognize the importance of running an on-time airline and offering great service with a competitive product as well.

  • United's best in class global route network is ideal for business travelers.

  • Through our international gateways in New York, Washington, DC, Chicago, Houston, San Francisco and Los Angeles, we help our customers access the world.

  • Our hubs are located in six of the eight largest metropolitan areas in the US and are uniquely positioned across the country to create an unmatched domestic and international network offering for our corporate customers.

  • We are investing more than $0.5 billion in our product, making our customers' travel expenses more comfortable, relaxing and simple.

  • Beginning this quarter, our customers are going to experience many of the product investments we have been talking about for some time.

  • United offers travelers the best options onboard for more room to work and relax.

  • Today, we have 176 wide-body aircraft outfitted with our comfortable fully lie-flat seats in the premium cabin.

  • In February, every wide-body aircraft flying across the Atlantic will have lie-flat seats in the premium cabins.

  • Our entire long-haul wide-body international fleet will have lie-flat seats by the end of the second quarter.

  • Our industry-leading Economy Plus seating is available on nearly our entire mainline fleet and on almost all of our larger regional aircraft.

  • As Jeff mentioned, we are installing global satellite-based Wi-Fi across our entire mainline fleet and early customer feedback is very positive.

  • We are the first US airline that will be able to offer our customers the opportunity to stay in touch, no matter where they are flying around the globe.

  • Our product investments are not only on our aircraft.

  • This quarter, we will introduce the first phase of a new simplified boarding process that will relieve some of the boarding stress our customers experience.

  • We are keenly focused on delivering great customer service and we are training and equipping our coworkers to be able to deliver on that goal.

  • We also continue to invest in our very popular mobile app and united.com making it easier for customers to do business with us.

  • This year, as our customers experience our improved reliability and substantial investments in our products and service while traveling on our industry-leading route network, our value proposition will appeal more than ever to global corporate customers, small business travelers and leisure customers alike.

  • We want every customer from global first to the last row of economy to get a great travel experience on United.

  • As for our capacity outlook, we have operated in an environment of slow global economic growth for the last few years.

  • And based on the latest GDP information, the 2013 outlook is similar.

  • We expect our full-year 2013 capacity to decline about 0.5% and expect first-quarter capacity to decline between 4.1% and 5.1% year over year.

  • We are committed to capacity discipline and achieving our return on invested capital goal.

  • Turning to our January outlook, we are running a solid operation month to date with our domestic mainline and on-time arrival at 84% above our internal goal.

  • And our mainline system completion factor is 99.5%.

  • And finally, we currently estimate United's January consolidated PRASM to increase about 2.5% year over year.

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

  • John Rainey - EVP and CFO

  • Thanks, Jim.

  • Today we reported full-year net income of $589 million, generating a pretax margin of 1.6% for the year.

  • While we reported a full-year profit for 2012, these results clearly fell short of our expectations and the return goals we have set.

  • However, I don't want that to take away from the tremendous efforts of our front-line coworkers.

  • They are the face of United to our customers and bore the brunt of the integration charges last year.

  • And I want to thank them for their work.

  • We are all glad to have the heavy lifting of our merger integration behind us.

  • For the fourth quarter and full-year 2012, our consolidated operating expenses increased 1.1% and 3.2%, respectively.

  • Full-year 2012 CASM, excluding fuel, third-party business expense and profit sharing, increased 3.4% year over year on 1.5% lower capacity.

  • On a fuel rate and profit sharing neutral basis, full-year unit cost increased 2.5% versus 2011.

  • Fourth-quarter consolidated CASM, excluding fuel, third-party business expense and profit sharing, increased 6.5% versus 2011 on 4.2% lower capacity.

  • Holding fuel rate and profit sharing constant our fourth-quarter consolidated unit cost increased 4.8% year over year.

  • In 2012 we continued to make progress improving bringing our balance sheet, making $1.5 billion of debt and capital lease payments including $265 million of prepayments.

  • We ended the year with $6.5 billion of unrestricted cash.

  • One of the real opportunities we have to provide value to our shareholders is to reduce the level and type of debt in our business and the costs associated with that debt.

  • We are paying down high coupon, non-aircraft debt and reducing our reliance on debt financing to run the day-to-day operations, instead accessing capital markets to fund long-term investments in our business.

  • We continued to make progress in this area in 2012, paying off about $340 million of non-aircraft debt with an average coupon of over 11%.

  • Our full-year 2012 interest expense was $122 million lower than it was in 2011.

  • At the end of the year, we reached an agreement to amend the terms of two series of notes held by the PBGC that the old United issued in its bankruptcy.

  • The first series were 8% unsecured notes that the Company was obligated to issue over time as certain EBITDAR thresholds were met.

  • The maximum amount which could have been issued was $500 million with $188 million already incurred.

  • The second series were the 6% unsecured notes also held by the PBGC, due in 2031.

  • Our recent agreement reduced the principal amount of the 8% notes to $400 million in return for issuing them now and removing the contingency and shortened the maturity of the 6% notes.

  • For the last three years, our return on invested capital has been 10.7%, above our 10% target.

  • However, for the full-year 2012, our return on invested capital of 8% was below our target.

  • We are committed to achieving our return on invested capital goal and we have taken a number of steps to ensure we do so in 2013.

  • First and foremost, we have addressed the operational issues we faced last summer.

  • Given our improved operations and increasing customer satisfaction scores, we expect our revenue performance to improve this year.

  • We also need to become more efficient.

  • We have a number of initiatives planned for 2013 that will increase our efficiency and mitigate some of the cost pressures we face.

  • As Jeff mentioned, we recently reduced our officer headcount by 7% and are reducing our management and administrative overhead by 6% through a mix of voluntary and involuntary reduction.

  • As Jim explained, we took a number of steps to address the operational issues we faced last summer and some of these actions resulted in higher cost.

  • As we consistently demonstrate our ability to run a good operation, we will increase our efficiency and we will remove the cost associated with these actions.

  • We did a good job in 2012 in achieving cost and other revenue synergies but clearly underperformed from a passenger revenue synergy perspective.

  • We are confident, though, that we will achieve the full merger synergies and look to get back on track on our passenger revenue synergies in 2013.

  • Turning to 2013 unit costs.

  • We expect full-year CASM, excluding fuel, third-party business expense and profit sharing, to increase between 4.5% and 5.5% year over year on lower capacity.

  • This is higher than our CASM performance in past years and higher than what we expect on a normal run rate basis.

  • Approximately 2.5 points of the year-over-year CASM increase in 2013 is due to labor agreements.

  • A significant portion of our coworkers had not received a pay increase for a number of years.

  • We are committed to paying our employees competitive market wages.

  • The wage pressure in 2013 has effectively a mark to market adjustment that is larger than the ongoing normal year-over-year labor cost pressure we expect to incur in future years.

  • An additional one third of a point of year-over-year CASM pressure is due to increased pension expense, which is largely a result of a lower expected discount rate.

  • We have a $2.4 billion unfunded pension obligation, and while this is a long-term obligation that needs to be managed just like debt, the accounting cost of that obligation can change significantly from one year to the next.

  • The remaining approximately 2% year-over-year increase in CASM is what we consider core CASM growth and is much more in line with what we would expect in a normal year and includes some improvements and efficiencies.

  • Despite our higher CASM growth in 2013, we remain committed to achieving a return on invested capital goal of 10%.

  • Because of the timing of some of the cost pressures I mentioned, our year-over-year CASM increase in 2013 is not evenly distributed among the quarters and is skewed heavily toward the first part of the year.

  • We expect first-quarter CASM excluding fuel, third-party business expense and profit sharing, to increase 8% to 9% versus the first quarter of 2012.

  • We are projecting a consolidated capacity decline of between 4.1% and 5.1% in the first quarter, which also puts additional pressure on our first-quarter CASM.

  • We expect CASM growth to moderate significantly in the second half of the year with an increase between 2% and 3% year over year.

  • We took delivery of 25 aircraft in 2012, including six Boeing 787 Dreamliners and 19 Boeing 737-900ERs and removed 23 aircraft from service in the year, including 19 737 Classics, three 767-200s and one Boeing 757.

  • We also sold or returned to lessors 37 aircraft that had been parked in the desert.

  • In 2013, we expect to take delivery of two more Dreamliners and 24 Boeing 737-900ERs, which will replace older, less efficient aircraft in our mainline fleet.

  • We expect to end the year with 10 fewer mainline aircraft than we started the year with a total of 692 aircraft.

  • Our 2013 scheduled debt and capital lease principal payments amount to $1.9 billion.

  • $600 million of these obligations are the secured notes that carry interest rates of 9 7/8% on the first lien and 12% on the second lien.

  • These interests mature in the back half of 2013, but allow for prepayment without penalty next month, which we intend to do.

  • We expect 2013 growth capital expenditures, including purchase deposits of $2.5 billion or $1.4 billion, net of expected financing.

  • Earnings instability and liquidity issues prior to our merger resulted in chronic underinvestment in our business.

  • To provide the product we needed to achieve our earnings and return on invested capital targets, we played catch-up with capital investment for the last two years.

  • Of the $1.4 billion in net CAPEX in 2013, approximately 40% to 50% is for items that are more one-time in nature that we don't expect to incur on a consistent basis.

  • For example, we are building a new data center and two new maintenance hangars and installing new overhead bins, slimline seats, winglets and Wi-Fi.

  • We have the need and the intent to get to a more balanced approach to cash flow allocation as we complete the integration and harvest the benefits of our merger.

  • Lastly, as we have moved beyond the peak of our integration, we expect integration-related cash, special charges to abate significantly in 2013 to approximately $250 million.

  • In closing, 2012 was the toughest year of our integration, but it is behind us.

  • That said, our disappointment about reporting almost $600 million of profit for the year is a clear sign of the increasing health and stability of our industry and of United specifically.

  • It shows the progress we are making toward becoming a real business that provides consistent returns for shareholders.

  • As I talk with many of our customers and coworkers, they are encouraged by the significant progress we have made since the depths of our integration issues last summer.

  • They, like many of our investors, recognize the potential that United has in 2013 and beyond.

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

  • Jeff Smisek - Chairman, President and CEO

  • Thanks, John.

  • We have a lot of momentum now and in 2013, we are going to run a reliable airline and provide great customer service.

  • We will deliver on our go-forward plan and use our ever-improving fleet, facilities, technology, product, network and customer service to become the airline customers want to fly, investors want to invest in, and coworkers want to work for.

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

  • Sarah Murphy - Managing Director, IR

  • Thank you, Jeff.

  • First we'll 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

  • (Operator Instructions).

  • Michael Linenberg, Deutsche Bank.

  • Michael Linenberg - Analyst

  • Good morning.

  • I guess two questions here, and maybe the first one is for Jeff.

  • The -- you have the pilot deal.

  • You have that all set up but now you have to go to the seniority integration process.

  • What is the timing on that?

  • And at what point if an agreement is not reached between the two groups would we go to binding arbitration?

  • If you can just update us on that.

  • Jeff Smisek - Chairman, President and CEO

  • Well, we expect the seniority list integration to be accomplished this year and we see no -- we currently see no issues in them reaching their agreement on a timely basis.

  • Michael Linenberg - Analyst

  • Good and then, just my second question and this is for you, Jeff, as well.

  • 2012, as you indicated, was a tough year.

  • You did about $600 million of net and I look at a company like Delta who is roughly the same size as you on a revenue basis and they were $1.6 billion of net.

  • When you talked earlier about the momentum, you felt like things were really starting to turn.

  • Is that a gap that you think that you can close this year or is it more like a multi-year process to catch up with them?

  • How quickly can things improve now that you have gotten over the big hump?

  • Jim Compton - Vice Chairman and CRO

  • Yes, I think the -- as you mentioned, obviously a tough year and the biggest -- I think I would talk about them this way.

  • I think the biggest disappointment from my perspective was the revenue dis-synergies we faced last year.

  • And I think that expectations, I think you can think of one to two points in RASM that we underperformed.

  • And so my confidence, as John mentioned at the close, is that, given the stability of the operations, because I really believe predictability is important -- when you are predictable, things just operate so much better across the system and revenue flows with that -- so we are excited about 2013 given the initiative that we have in place and we feel that we will certainly close that gap.

  • But we will watch, we will work our way through the year, but we are very optimistic.

  • John Rainey - EVP and CFO

  • I would just add to that, this is John, that 2013 is clearly a year where we are focused on execution and improving our operational reliability.

  • We think though that with the route network that we have and efficiently, the employees that we have, the results will take care of themselves if we do the blocking and tackling.

  • Michael Linenberg - Analyst

  • Thanks, guys.

  • Operator

  • Wolfe Trahan, Hunter Keay.

  • Hunter Keay - Analyst

  • Good morning, everybody.

  • Congratulations on the second bag to Japan.

  • I think that is great news, Jim, but I noticed that -- correct me if I am wrong -- I don't think A&A has a second bag fee to the United States.

  • So it's a two-part question.

  • Did you ordinate with them with regard to how the JV is functioned?

  • And if they don't have a second bag fee to the US, are you just going to collect second bag fee revenue and just give half to them as they don't have to necessarily deal with the bad publicity associated with the second bag fee?

  • Jim Compton - Vice Chairman and CRO

  • I won't get into specifics of how that works.

  • I will tell you that obviously we work very closely with the A&A, they are a terrific partner.

  • And the JV has mechanisms to work through all kinds of different things that come up, and that is what we'll do working with them.

  • But again, we are seeing the JV quite frankly is delivering terrific results as we are seeing connections over in Narita using A&A and also both of us partnering with each other in the trans-Pacific.

  • Hunter Keay - Analyst

  • Okay, thanks, Jim.

  • As it pertains to the January PRASM number, as I look at the bookings that were up 400 basis points, weighted average coming into the month, and there was capacity down maybe 400 basis points or 500 basis points, I'm curious to know why the yields came in where they did in January.

  • And is the strategy right now to just fill the flight and focus on yields as the operational improvement gets better?

  • So you are just focusing more on load factors in that regard or I guess the real ultimate question is how do yields start to go up again?

  • Because that is probably going to have to provide the next leg of PRASM for you guys.

  • Jim Compton - Vice Chairman and CRO

  • That is a great question.

  • From my perspective the way I look at it is somewhat as you described.

  • I think our challenges is last year from our new management's perspective is that we actually managed less flights, that we underperformed in load factor.

  • And so as that load factor comes in, what happens is we begin to manage more flights and revenue manage analysts began to manage the buckets and so forth.

  • So not talking too much about the yield going forward, but again as our corporate customers recognize what we are doing from a reliability point of view, as those, as the demand continues to grow, we will manage the inventory to optimize that revenue.

  • Hunter Keay - Analyst

  • All right.

  • Thanks, everybody.

  • Operator

  • UBS, Kevin Crissey.

  • Kevin Crissey - Analyst

  • Good morning.

  • Thank you.

  • So is there --?

  • Can you talk about maybe if not the exact percentages, but the progression of capacities?

  • Because 2.5%, I think, is lower than what people would've thought given the capacity cuts for the quarter.

  • So maybe there is something unique about January capacity, relative to the rest of the quarter.

  • Can you talk about that?

  • Jim Compton - Vice Chairman and CRO

  • Yes.

  • So, I think the way to think about the quarter for us, that 4.1% to 5.1% down in the first quarter, is February even adjusting for leap year will be the most significant capacity cut month followed by not as much but March.

  • So January is the least capacity year-over-year reduction of a quarter.

  • Kevin Crissey - Analyst

  • And then so I mean, just looking at the numbers again you guys overall, I mean so I would hope that then you would have a pickup from here because if you look at -- I don't think your comparisons are more difficult than, say, a US Airways or a Delta, but you're -- there seems to be quite a bit of continued underimprovement unless you have a significant pickup from February and March, given where their guidance is for RASM.

  • Is that fair?

  • Jim Compton - Vice Chairman and CRO

  • Yes, I think -- again, the -- when I talk about January, one data point for us is January is a little bit more difficult comp for us on a -- if you went on a two-year over two -- just to put a frame of reference on December, we are at 8% over two years.

  • That 2.5% represents a bead of that 8% on a two-year basis.

  • So any given month, I guess, is hard.

  • Things can fluctuate and change, as I think the investor updates were very -- feel good about the demand, the booking curve that we see going forward.

  • Kevin Crissey - Analyst

  • And similar to Mike's question, the way I'm thinking about it is labor's gotten their pay increase.

  • I know that they hadn't had one in a while, but you bought them a car, the pilots a car and then effectively with the amount of back pay and you are buying them a car each year in terms of forward pay.

  • The customers are getting a better product, hopefully they will get a better operation as we move forward, and yet the financial returns aren't improved, they've diminished.

  • So what I am trying to understand is whether this is a function of the challenges uniquely to your integration or if you rethink the timing of the synergies overall and whether they are more backloaded, the benefits of mergers in general.

  • Thanks.

  • John Rainey - EVP and CFO

  • I think, speaking to synergy achievement, we targeted about -- to achieve 75% of the $1 billion to $1.2 billion last year and I think we did a good job in terms of other revenue and cost synergies.

  • Those two combined amounted to about $650 million.

  • But as I said in my regards earlier, we clearly underperformed from a passenger revenue perspective.

  • We have every bit of confidence that we will achieve the full run rate of the $1 billion to $1.2 billion and actually are optimistic about that.

  • In terms of the timing, getting back to Mike's question, we would love to get that in 2013.

  • But it is also reasonable to assume that that could be a difficult bar and it could slip into 2014.

  • Kevin Crissey - Analyst

  • Thank you.

  • Operator

  • JPMorgan, Jamie Baker.

  • Jamie Baker - Analyst

  • Good morning, everybody.

  • Jeff, you and I sparred a little bit on the last conference call on the subject of pilot cost.

  • And to your credit a deal did come shortly thereafter.

  • So looking back, I respect your decision to remain tightlipped, but you can't blame me for trying the same approach as it relates to mechanics and flight attendants.

  • So --.

  • Jeff Smisek - Chairman, President and CEO

  • Fire away.

  • Jamie Baker - Analyst

  • If we set aside wages, are there any competitor work rules incorporated into the contracts that are already out there that could afford you some greater flexibility or should we simply view this exercise as one of increased expense?

  • Jeff Smisek - Chairman, President and CEO

  • No, we are trying to make sure that in return for marketing to market the wages and the benefits of our coworkers, in return we get good productivity from them, and flexibility because this is an industry that requires flexibility.

  • And we are making, candidly, very good progress with the IAM.

  • We are also making good progress with our Teamsters.

  • And I hope to be able to announce some new deals as we go forward in time this year.

  • Jamie Baker - Analyst

  • Excellent.

  • And for my follow-up, obviously unit margins lagging those of the industry, I would argue, and I sense you would agree that the only thing standing between you and margin parity is execution as opposed to being anything structurally wrong with the franchise.

  • But as we think about closing the margin gap, what are the key drivers?

  • What does the waterfall torrent look like?

  • Does fleet optimization drive a quarter of the gap and improved customer service another quarter, sending the management ranks a few points, do you have to buy an oil refinery?

  • I mean what gets you from where you are today to where Delta already is?

  • John Rainey - EVP and CFO

  • I'll take that question.

  • I think, clearly, we have got to make up a big part of that gap in terms of our revenue performance and some of that will come through corporate shares.

  • Some of it will be harvesting the benefits of the merger through redeployment of aircraft and that nature.

  • But we also have a significant opportunity in terms of becoming more efficient.

  • We have attacked some of our operational problems with, call it a blunt instrument, and we have thrown headcount at it.

  • And I think that we can be a lot more efficient.

  • We can better deploy technology, put it in the hands of the customer.

  • And I think over time we can actually see significant savings in other areas on the expense side.

  • Jamie Baker - Analyst

  • Excellent.

  • Thank you, guys, appreciate it.

  • Operator

  • Morgan Stanley, John Godyn.

  • John Godyn - Analyst

  • Just to follow up on some of the questions on closing the margin gap, as you know, one of your competitors is very focused on announcing a plan for returning capital to shareholders this year.

  • Once you do close the margin gap, is moving in that direction the next step?

  • John Rainey - EVP and CFO

  • Clearly, we have the aspiration of getting there.

  • I would remind you that Delta is two years ahead of us in their integration.

  • And the way that we've framed this internally is I would prioritize it as we want to get the operation running like it needs to be.

  • And then we want to continue to pay down a lot of the non-aircraft debt.

  • We have got a significant amount of non-aircraft debt that is coming due in the next few years.

  • And then, I think we can have a very healthy discussion about returning cash to shareholders.

  • Now I would say that I don't think all of those have to happen in a serial fashion, but clearly in terms of how I prioritize those, that's what it would be.

  • John Godyn - Analyst

  • Thanks.

  • And, Jim, just to follow up on some of the PRASM questions, which I guess suggests that maybe Jan was a little bit weak, I know you can't give numbers for all the sort of comps issues, but is it fair to say that it sounds like the completion factor that you are looking at for Jan and shift in Chinese New Year are maybe bringing Jan a little lower than maybe people would have expected.

  • And as we look into February, certainly again the shift in Chinese New Year, the easy comps, perhaps depending on how the completion factor fares and maybe some accounting adjustments are actually going to just naturally create a very big bump to PRASM.

  • Is that a fair way, kind of framework for thinking about it?

  • Jim Compton - Vice Chairman and CRO

  • First of all, the completion factor is exceeding our expectations.

  • The operation has been stellar this month from a completion and so we are generating the ASMs from a completion factor point of view.

  • The second point is on the Chinese New Year's, a little bit of -- is a good point also, a little perspective is January last year we canceled 25 round trips because of the Chinese New Year and the trans-Pac to support, but become very much not a business travel period.

  • That has shifted to February.

  • And so is the Pacific capacity, you know, is running kind of a more normal time with the Chinese New Year's being in there.

  • So both of those things affect what exactly what you are talking about.

  • John Godyn - Analyst

  • Thanks.

  • And I couldn't help to notice that the advanced book factor for the Pacific was up meaningfully.

  • Is it fair to say that you are seeing evidence of some of this leisure reacceleration that we might be seeing in other data and other companies we track?

  • Jim Compton - Vice Chairman and CRO

  • In terms of leisure in general?

  • John Godyn - Analyst

  • I just mean in terms of traffic levels and demand.

  • Jim Compton - Vice Chairman and CRO

  • I think what we are seeing is an ongoing -- we are seeing the ongoing kind of general economic environment that we saw in 2012 and seeing still good demand, really, in all the booking windows going out.

  • John Godyn - Analyst

  • Thanks a lot.

  • Operator

  • Barclays, David Fintzen.

  • David Fintzen - Analyst

  • Good morning, everyone.

  • You mentioned, I figured, Jim, you mentioned sort of corporate customers are on a bit of a detour.

  • I'm just -- I'm curious, obviously there is a lot you can do to improve the operation, but if they are off-line someone else, how do you make sure they know what you're doing?

  • And the piece of that is if you are hitting your on-time performance targets, is it really your targets that matter or do you think you have to make sure that you are towards the top of the industry so that you can maybe show a customer who has gone somewhere else that you're competitive in terms of the operation?

  • I'm curious how you think about that both in terms of the outreach and in terms of the absolute performance and the relative performance on the on-time side.

  • Jeff Smisek - Chairman, President and CEO

  • This is Jeff, and then I'll kick it back over to Jim.

  • It is a combination of things.

  • It's not just the on-time performance.

  • You need to be reliable, and different levels of reliability above 80% have diminishing returns.

  • But it's really also as I say, it is many, many different factors.

  • Also very important is the customer service which is why we are focusing so heavily on customer service this year.

  • As you know, I mean, you all fly, good customer service can take even a delayed flight or a flight where there's an issue on board the aircraft or a broken piece of IFE or something and good service can turn that into a really good flight.

  • You can also have a perfectly on-time flight on a brand-new airplane and everything works and if you are not getting good service it is going to be a crappy flight.

  • So we are also focusing very, very heavily on customer service both at the airport, on contact center agents, on flight attendants, and I think that's -- and you can see that in our improving customer satisfaction scores.

  • And I believe those scores will continue to improve.

  • We have an enormous amount of focus on it, including we are going to be -- we are going to have a broad-based quarterly bonus program for all of our coworkers based on improvements in customer satisfaction scores.

  • So we are going to focus heavily on that and as people fly us, the word does get out and we are significantly better today for sure than we were in the summer.

  • And I believe this time next year we will be significantly better than we are today.

  • And with that, I would kick it over to Jim.

  • Jim Compton - Vice Chairman and CRO

  • I think as we mentioned in the comments that the last year, the integration put a lot of stuff on our employees and our customers.

  • I will tell you that in that group of employees that a lot of stress was on was our sales force.

  • And our sales force literally was always out there with our corporate partners and travel managers.

  • The difference is the conversation was a little bit different than what we had hoped for.

  • The conversation was about some of the integration issues and so forth.

  • What has happened with the on-time performance in the fourth quarter, the improvements we are seeing now, they have really -- the sales force has always been very present with our corporate travel partners and now what they are doing is again talking about the network.

  • The value of the network that it brings to them, what it can do for them in their travel mates.

  • So I guess the point is how did they -- the awareness that things are back.

  • I think the awareness is proven by the fact that they've -- the sales force is out there communicating.

  • I mentioned a couple of the forms we do it with advisory boards, but really every day, they are calling on their customers and letting them know where we are at and how we can help them in their travel needs.

  • David Fintzen - Analyst

  • Great.

  • And I appreciate that.

  • And maybe just a quick one now that the pilot contract's done and you have this scope relief on the RJs, and is that something that we should look for, reasonable change -- reasonably large changes in 2014 or is that a smaller component?

  • I am just trying to get a sense of what your opportunity is to offset some of these higher labor costs down the road with -- similar to what Delta is doing.

  • Jim Compton - Vice Chairman and CRO

  • The new contract as it relates to regional does present us with a tremendous amount of flexibility to be competitive in the 70 seat market.

  • Really the first phase of this year, quite frankly, is with the new agreement is being able to redeploy the current 70 seaters that we have across the system to optimize the network, some of the things we talked about in terms of synergies for the first year.

  • But as you move into 2014, then we will be able to take that second phase.

  • But this year will be about using the aircraft that we have and redeploying, but that contract does create a tremendous amount of flexibility for us to be competitive in that space.

  • David Fintzen - Analyst

  • Appreciate the color.

  • Operator

  • We have time for one last question.

  • Evercore Partners, Duane Pfennigwerth.

  • Duane Pfennigwerth - Analyst

  • Good morning.

  • Just wondering when you'd think you'll be able to expand margins year-to-year?

  • With this first quarter CASM guidance, do you think revenue can be good enough to start that process this quarter?

  • Jim Compton - Vice Chairman and CRO

  • I don't want to comment on revenue.

  • I think as I alluded to earlier, in response to Mike, we are extremely focused on execution.

  • We have a plan, we are following that plan.

  • I think that if we execute on that and we do the things that we are capable of and you combine that with the product that we are providing and the network we have, I think that you will begin to see margin expansion.

  • Clearly, we want it as badly as our investors and our employees want it.

  • And I think that 2013, as I said, it is an important year for us as we are beginning to put all these different items in place to enable us to achieve that.

  • Duane Pfennigwerth - Analyst

  • And I will ask one follow-up, just in terms of your -- the difference between your first-quarter CASM guidance and your full year, what are the things that drive that moderation other than just more ASMs?

  • Jim Compton - Vice Chairman and CRO

  • Well, you are right.

  • ASMs is a significant piece of that, but probably two thirds of the cost guidance in the first quarter -- or the cost increase -- is related to labor and that is simply the anniversary effect of lapping some of the labor agreements last year as those were put into place during the year.

  • So labor is a piece of that.

  • The only other thing that I would call out as significant is we have got a higher than normal volume of engine events on our B2500 engines in the first and second quarter.

  • So I would expect maintenance expense related to those items to be up $30 million to $40 million each quarter.

  • But that tails off in the back half of the year.

  • We actually see some improvements.

  • Duane Pfennigwerth - Analyst

  • Thanks.

  • Operator

  • Thank you, ladies and gentlemen, this concludes the analyst investor portion of our call today.

  • We will now take calls from the media.

  • (Operator Instructions).

  • Josh Freed, Associated Press.

  • Josh Freed - Media

  • Has either Boeing or the FAA given you any guidance at all on when you can expect to get your 787s flying again?

  • Jeff Smisek - Chairman, President and CEO

  • No.

  • Josh Freed - Media

  • Okay.

  • And are you -- what are you hearing from your pilots on the subject of the 787?

  • I mean, is there any -- are they seeking any additional safeguards that might be in addition to whatever the FAA comes up with?

  • Is there any pushback from them at all on 787?

  • Jeff Smisek - Chairman, President and CEO

  • Look, Josh, safety is obviously very important and I am confident that when the regulatory authorities and Boeing working together determine the cause of the battery issues and the fix for it, that we will implement whatever that fix is under the [Air President's] directive that will permit us to fly the aircraft safely again.

  • So there's no distinction between us and our products with respect to safety.

  • Josh Freed - Media

  • very, very quickly, can you put any numbers on the headcount reduction?

  • I know that you gave in terms of percentage, can you say any numbers about the number of people you expect to end up cutting?

  • Jeff Smisek - Chairman, President and CEO

  • It is over 600.

  • Josh Freed - Media

  • Thank you.

  • Operator

  • Wall Street Journal, Doug Cameron.

  • Doug Cameron - Media

  • Following up on Josh's question, Jeff, and you won't be [unsurprised] but it's obviously no one is going to fly the 787 until the industry is convinced that it's 100% safe.

  • Jeff Smisek - Chairman, President and CEO

  • We are having a hard time hearing you from this end.

  • Doug Cameron - Media

  • Right, how can I do this?

  • Is that any better?

  • Jeff Smisek - Chairman, President and CEO

  • That is much better.

  • Thank you.

  • Doug Cameron - Media

  • Excellent.

  • This is for Jeff and Jim.

  • Obviously the industry is not going to fly the 787 until the industry is 100% confident it is safe to do so.

  • But how do you and other operators start going about convincing the traveling public that that is the case?

  • Jeff Smisek - Chairman, President and CEO

  • I think once the NTSB or JTSB get together -- and FAA work together to determine causality and Boeing fixes it, we are done.

  • Because, look, the aircraft is a terrific aircraft.

  • And customers love the airplane.

  • And I have no doubt that customers will flock back to that airplane as soon as we get it back up again.

  • But, this is a problem that Boeing and the regulatory authorities need to deal with.

  • They should deal with it.

  • We support them.

  • We will give them every bit of assistance that we possibly can because we too want to get the airplane up and flying safely and I am confident that will occur.

  • I don't know when that will occur, but we will learn more with time.

  • Doug Cameron - Media

  • What gives you that confidence though?

  • Jeff Smisek - Chairman, President and CEO

  • Well, look, in terms of they will find a fix.

  • I mean history (multiple speakers).

  • Doug Cameron - Media

  • No, the confidence discussed (technical difficulty).

  • Jeff Smisek - Chairman, President and CEO

  • Well, look it is a terrific airplane.

  • Ask anybody who has flown that airplane.

  • It is spectacular.

  • And once this particular issue is solved, it is solved.

  • And it is just a matter of whatever time it takes to solve it.

  • Doug Cameron - Media

  • I've been on one.

  • Anyway, I will let you move on.

  • Nene Foxhall - EVP, Communications and Government Affairs

  • With that, we are out of time so we will conclude.

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

  • Please call Media Relations if you have any further questions and we look forward to talking to you next quarter.

  • Goodbye.

  • Operator

  • Ladies and gentlemen, this concludes today's conference.

  • Thank you for participating.

  • You may now disconnect.