聯合航空 (UAL) 2013 Q1 法說會逐字稿

Good morning, and welcome to the United Continental Holdings earnings conference call for first quarter 2013.

My name is Larisa, 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.

Thank you, Larisa.

Good morning, everyone, and welcome to United's first quarter 2013 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; Executive Vice President and Chief Financial Officer John Rainey; and Senior Vice President and Treasurer Gerry Laderman.

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

John will follow with a discussion of our cost and capital structure 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.

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 earning release and investor update and the remarks made during this conference call may contain forward-looking statements, which represents 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 and United Airlines for a more thorough description of these factors.

Also during the course of this call we will discover 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 through the quarter.

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.

Thanks, Nene and Sarah, and thank you all for joining us on first quarter 2013 earnings call.

Today we report a loss of $325 million for first quarter, or the $0.98 per share.

Although we are unhappy reporting a loss, we are encouraged by the progress we are making.

Our operational performance, customer satisfaction scores and unit revenue results all significantly improved this quarter, thanks in large part to the efforts of my coworkers.

Our top priorities for 2013 remain the same.

Operating consistently reliable airline, provide great customer service, and run United to achieve our return on invested capital target of at least 10%.

United's operational reliability is back on track.

Our first quarter reliability was the best in a decade, with our main line on-time performance, which includes both domestic and international flights, averaging 81%.

We have gotten back to focusing on the basics.

We are starting off right in the morning, getting first flights of day out on time.

We are beginning the boarding process at the right time so we can close the aircraft door and depart on schedule.

We are continuing to invest in preventative maintenance, spare parts and ground handling equipment to improve the reliability of our aircraft.

We are enhancing the tools our coworkers use at the airport to make the check-in and predeparture processes easier for them and for our customers.

This quarter, we began the rollout of [Aero], our new easy to use interface for our passenger service system.

Aero is an integrated front end for our airport and reservation agents, and Jim will speak about some of its benefits in a moment.

Investing in modern, efficient and intuitive tools for our coworkers is core to United's technology strategy, and launching Aero is another step forward in our plan to improve the systems our airport and reservation agents use.

In addition to providing better tools to our coworkers, we are investing in customer service training for all of our airport and reservation agents and flight attendants worldwide, including the flight attendants and airport agents at our United Express partners.

To date more than 14,000 of the 48,000 coworkers we will train have completed this interactive customer service training program.

Feedback about the program has been excellent, and coworkers who participated in the training have found the material useful and directly applicable to their work.

We expect to complete this important training by year end.

We are already seeing positive results from our efforts.

Customer satisfaction scores climbed in the first quarter, as customers experienced noticeable improvements in United's reliability, customer service and product offering.

At the start of the year, we implemented a new customer satisfaction bonus program for our coworkers.

Each quarter we will set a goal for customer satisfaction scores, and if we achieve that goal, our coworkers will earn a $50 bonus.

I'm pleased to say that my coworkers achieved our customer satisfaction goal for the first quarter, and we look forward to delivering even better customer service for the remainder of the year.

With the improvements in our operational processes and our investments in aircraft reliability and in the tools our coworkers use to do their jobs, we are confident our operational reliability and customer service will continue to improve and make United the best choice for customers.

During the first quarter, we reached tentative agreements for three joint collective bargaining agreements with the union representing 28,000 of our passenger service, fleet service and storekeeper coworkers.

We were disappointed that the agreements were not ratified by those work groups and will be in discussions with the union and the national median board on a schedule to resume talks.

Meanwhile, we are in discusses with the unions representing our technicians, our flight attendants and dispatchers and hope to be in a position to reach one or more additional joint collective bargaining agreements later this year.

During 2013, our customers will experience even more of our product investments.

Our onboard experience is now more consistent and comfortable, with over 7,000 flat-bed seats in our premium cabins and Economy Plus seating on almost every mainline aircraft.

Today we offer Wi-Fi with in-seat power on 51 aircraft, including global satellite based Wi-Fi on eight of our Boeing 747s, and we've installed larger overhead bins on 60% of our Airbus fleet.

We are in the process of completely revamping the interior of our p.s.

aircraft, which fly between JFK and San Francisco and Los Angeles.

We are installing flat-bed seats, Economy Plus seating, Wi-Fi and in-seat power throughout the aircraft, and initial feedback from our customers has been terrific.

We are investing in new airplanes and took delivery of six new fuel efficient Boeing 737-900ERs in the first quarter.

We are pleased that late last week the FAA gave the green light to Boeing to retrofit the battery system on our Dreamliners, and we currently expect to begin to fly them again domestically in May, with our first international 787 service being our new nonstop service between Denver and Narita on June 10.

The grounding of the 787s disrupted our flight plans and had an impact on our bottom line, and we are eager to get this remarkable aircraft back up and flying.

We are also improving our customers' experience at our airports.

We are rolling out a simplified and intuitive boarding process that has gone through extensive testing and will be in place at all of our hubs and many of our larger stations by the start of the busy summer travel season.

The new simplified boarding process will reduce the congestion and stress at the gate and improve our ability to depart on time.

Our customers are now enjoying the modern features, additional space and functionality of our newly redesigned United Club in Chicago O'Hare's Terminal 2. We plan to completely renovate three more United clubs this year.

We recently unveiled the first phase of our new Terminal B at Houston Intercontinental Airport.

The facility is customer pleasing, with comfortable space, efficient gate layout and great concession options for our customers at our important gateway hub in Houston.

While we have been spending money on projects that drive returns, we need to do a better job of controlling our costs.

We must become more efficient throughout our business in order to be globally competitive.

With the distractions of our merger integration declining significantly, and our operational performance and customer service improving, we are working to become more efficient and cost effective while still maintaining solid operational performance, delivering great customer service and increasing our revenue.

John will give a few examples of steps we are taking to reduce our costs, and Jim will talk about the actions we are taking to increase our revenue.

Some of the costs our industry faces are outside of our control.

The US airline industry is irrationally taxed, and together with our customers, airlines pay nearly $19 billion annually in 17 different taxes and fees, excluding income tax.

The federal government recently proposed a budget which would cost the US airline industry an additional $5.5 billion per year in taxes and fees, which is more money than the amount of profit the entire industry earned in 2012.

In addition to heavy taxation, our government recently implemented broad-based furloughs for air traffic controllers, which have disrupted air travel across the nation.

We are disappointed that the FAA chose this path that maximizes customer disruptions and damage to airlines instead of choosing a less disruptive method to comply with its budget obligations.

Our top priority is to minimize the effect of the air traffic controller furloughs on our customers.

Our professionals in our network operations center are working literally around the clock to minimize the impact of the FAA's irresponsible actions on our customers, and all of our coworkers are doing what they do best, safely managing our operations while delivering great customer service, despite the government imposed challenges we face.

This year we're finely moving beyond our merger, and our customers are seeing positive results from the hard work we have all put into building United.

Consistently achieving our operational, customer satisfaction and financial goals will allow us to invest in our product and service for our customers and in tools and training for our coworkers, with the goal of providing appropriate returns for our investors.

We are running United like a real business, for long-term success.

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

Thanks, Jeff.

I would like to join Jeff in thanking my coworkers for all of their efforts this quarter.

We made significant progress on operational reliability and customer service this quarter, andwe couldn't have done it without the hard work of the entire team.

I also want to thank all of our customers for choosing United.

We are working hard to win your business each and every day.

2013 got off to a strong start operationally, with the team achieving its best first quarter on-time performance in a decade, despite significant storm activity.

United averaged 81% in on-time performance in the first quarter, and we paid out $22 million to our coworkers for domestic and international on-time performance exceeding our monthly goals.

Our operational performance was particularly strong during the busy spring break travel period, which overlapped with the Easter holiday.

During last three weeks in March load factors were 87.9%, nearly 2 points higher than the comparable period a year ago.

Over this period the United team worked together and achieved an 82.1% domestic on-time performance, an improvement of 4.5 points versus the same period in 2012.

This was the first true test of our operations since last summer, with an extended period of high load factors, and not only met our goal, we exceeded it.

One initiative that will support our operational performance is the new passenger service system interface called Aero, which we rolled out to the gate agents in March.

Aero is an integrated user interface which has intuitive and practical navigation to make the functions our agents perform easier and quicker.

Hundreds of our front line agents were involve in the design and development of Aero, and it equips our coworkers with more accessible information and intuitive point and click access and also brings them added functionality.

By June gate agents will be able to perform all aspects of departure management within Aero at airports across the system.

Later this year we will begin rolling out to lobby agents, and then we'll roll it out to reservation agents beginning in early 2014.

Moving to capacity.

Our first quarter consolidated capacity decreased 4.9% year over year.

This was at the low end of the range we guided to in January, inlarge part due to higher than expected winter storm activity.

Capacity discipline remains a key tenant of our strategy, and the transatlantic region is a good example, where we reduced capacity 10.2% year over year in first quarter as we right-sized our footprint in response to the economic weakness we continued to see in Europe.

One of the benefits of having a balanced global network with strength in each entity is that we are better able to respond to any change in economic conditions in a particular global region.

We expect second quarter consolidated capacity to decrease between 1.7% and 2.7% year over year, and expect full year 2013 capacity to decline 0.75 of a percent to 1.75% versus 2012.

Full year capacity guidance was lower than we guided to in January, primarily due to the effect of the grounding of our 787 Dreamliners.

We've made some schedule changes because of our inability to put the Dreamliners into service, and we expect to resume 787 domestic flying in May, withDenver to Tokyo Narita scheduled on June 10.

We expect to fly 787s from Los Angeles to Tokyo Narita, Los Angeles to Shanghai, and Houston to Lagos in August, andhave delayed the San Francisco to Taipei route on a 777 from 2013 to 2014.

These flights represent a substantial amount of ASMs, and while the delays lower our 2000 (sic) capacity outlook, they will increase our expected 2014 year-over-year capacity.

Turning to our revenue results.

First quarter consolidated passenger unit revenue increased 5.9% year over year.

A few items positively impacted first quarter PRASM results, including Easter shifting into March and overlapping with spring break this year, and higher than expected weather-related cancellations, which lowered capacity.

In 2012, we underperformed our peers by 1 to 2 PRASM points, and we are beginning to close that gap with our first quarter revenue results.

The depreciation of the yen reduced first quarter passenger revenue by approximately $20 million, and we expect the year-over-year yen pressure to continue throughout 2013.

Despite the negative yen impact, the Pacific continued to perform quite well for us.

The Pacific PRASM increased 7.2% year over year due to both higher yields and loads.

China was again a stand out, with first quarter PRASM increasing 13% compared to the first quarter of 2012.

Corporate revenue began slowly recovering in the first quarter, increasing approximately 4% versus 2012.

Despite the momentum we have seen with unit revenue since the start of the year, we are facing some headwinds.

Certain economic indicators, including US GDP look for the second and third quarters, have weakened since the start of the year.

We have seen some impact on our April business mix and will continue to monitor the outlook closely and make appropriate adjustments necessary.

Also impacting business mix, government contract travel declined approximately 25% in the first quarter year over year, andwe expect this trend to persist in the near term.

Government contract travel, while an important piece of business for United, represents only about 2% of our overall passenger revenue.

Competition has increased in the transcon markets, and the associated pricing actions have stimulated demand on New York to San Francisco and Los Angeles routes.

This month a competitor introduced new service on [Newark] transcon routes and lowered fares by more than 20%, which will negatively impact our second quarter PRASM.

With lower fares, demand between Newark and San Francisco and Los Angeles has increased, and we have shifted some capacity from other markets to this market to add frequencies and strengthen our position as the New York area's leading airline.

These added frequencies supplement our existing service between these hubs, as well as our popular p.s.

service between JFK and our hubs in Los Angeles and San Francisco.

Like any other company, large or small, that faces a new competitor, we will make sure that Newark transcon customers can find a seat at a competitive price on a United flight.

Part of our business plan at United is to continue assessment of economic and demand trends.

And as I mentioned, the latest macroeconomic outlook for the remainder of 2013 has softened.

We will continue to evaluate the demand environment as the year progresses, and we will respond appropriately should the conditions change.

Turning to our near term revenue outlook, yields have softened as a result of the factors I just discussed, and we currently estimate United's April consolidated PRASM to be flat to down a point year over year.

This PRASM is preliminary based on the data we have for April thus far.

Ancillary revenue continues to perform very well, with first quarter ancillary revenue up 13% and ancillary revenue per passenger up 14% versus the same period of 2012.

Our goal is to grow ancillary revenue per passenger by at least 9% in 2013, and our first quarter performance positions us well to achieve that target.

Improvements in Economy Plus and paid premium upgrades continue to drive much of the year over year growth in ancillary revenue.

Sales of the both Economy Plus and paid premium upgrades increased more than 40% year over year in the first quarter.

A portion of the increase in preferred seating sales is due to more of our customers using direct channels for booking.

The shift towards United.com and our mobile app allows our customers to take full advantage of our products and services, and it comes at a lower cost to United than other distribution channels.

We relaunched our Premier Access product in first quarter, which allows customers to enjoy the convenience of priority security and check-in lines as well as priority boarding.

Service charges related to ticketing and itinerary changes grew about 10% in the first quarter, due in large part to the improved operational performance, which reduced the need to waive these service charges.

This is an example of how running an on-time reliable airline directly benefits the bottom line.

In addition to improving our network and ancillary product offering, we are upgrading United's product in the ground and the air.

We expect to open a new United club in Seattle in the second quarter with a similar modern look and feel as the new United club at O'Hare's Terminal 2, offering comfortable space for our customers to work or relax.

We are investing in our onboard product as well, with Economy Plus on nearly all of our mainline aircraft and most of our larger regional aircraft, and lie-flat seats on 182 aircraft.

In addition, as Jeff mentioned, we have 51 aircraft with Wi-Fi today, 38 of which have global satellite-based Wi-Fi, and 13 of which have ground based Wi-Fi.

With the world's best network, our modern fleet, and leading product offering, a great team of coworkers, and a significantly improved operational performance and customer service, we are well positioned to drive strong revenue results going forward.

We are encouraged with the progress we have made this quarter, but we are not yet where we need to be.

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

Thanks, Jim.

I would like to start by thanking my coworkers for all of their hard work in the first quarter.

By working together we made significant progress in building the infrastructure we need to produce the level of returns our investors expect.

Today we reported a first quarter loss of $325 million, but during the quarter, we made significant investments in our operations, our fleet, our product offering and our people, andthese investments are the right ones to make for the long term.

We have also significantly improved our balance sheet since the merger and made more progress this quarter by paying down high coupon debt, reducing the size of our term loan, and doubling the size of our revolving credit facility.

Our first quarter consolidated operating expenses increased 2.1%.

We made a number of decisions to accelerate certain expenses into the first quarter, including preventative maintenance work as we prepared our operations for the summer peak.

First quarter consolidated CASM, excluding fuel, third party business expense and profit sharing, increased 11.1% versus 2012, in large part due to a 4.9% reduction in our consolidated capacity.

Holding fuel rate and profit sharing constant, our first quarter consolidated unit cost increased 7.2% year over year.

The increase in first quarter CASM, again excluding fuel, third party business expense and profit sharing, is slightly below the guidance range we provided in our March investor update.

At the end of the quarter we signed a contract extension with the maintenance provider that resulted in more favorable terms and muted some of the increase in the first quarter maintenance increase.

Our cost increase was higher than what is acceptable, and we are committed to becoming more efficient in every aspect of our business.

The achievement of our long-term financial goals relies on providing the best product and service to our customers and doing it in a far more cost effective manner than our first quarter results reflect.

As we previously announced, we are in the process of reducing management administrative workforce by 6% and are about two-thirds through that process.

We have now expect our full year capacity to decline further than we had anticipated, due in part to the grounding of the 787.

And we need to reduce our costs commensurate with that capacity decline.

As our operations continue to improve and become even more stable, we will run them more efficiently, which will permit our people to focus even more on delivering great customer service every day.

Concurrently, we are investing in technology for our customers, like our mobile app, and tools for our coworkers, like Aero, the enhanced front end to our passenger service system, to make the airport experience easier and more efficient.

Another example of our commitment to efficiency is fuel consumption.

In addition to operating a fuel efficient fleet, we have several operational initiatives underway to reduce fuel consumption.

We are constantly looking for opportunities to improve in this area, because even small improvements have a meaningful impact on the bottom line.

For example, this quarter we became the launch customer for the new split scimitar winglet developed by Aviation Partners Boeing, which will help us to further reduce fuel burn on our Boeing 737 Next-Gen fleet by up to 1.8%.

For the second quarter we expect CASM, excluding fuel, third party business expense and profit sharing, to increase between 6.7% and 7.7% year over year.

We expect full year CASM, excluding fuel, third party business expense and profit sharing, to increase between 5.5% and 6.5% year over year on lower capacity.

Our full year CASM guidance is higher than our original expectation at the start of the year because of a lower capacity outlook and the impact of accelerated deceleration from an agreement to sell aircraft to FedEx.

We reached an agreement during the first quarter to sell up to 30 Boeing 757-200 aircraft to FedEx and delivered the first aircraft to them this week.

We had planned to retire these aircraft in the coming years, and this agreement will permit us to accelerate the elimination of older, less efficient aircraft from our fleet.

As a result of this agreement, we accelerated the depreciation on some of these aircraft, which will increase depreciation expense by approximately $80 million in 2013,$12 million of which was in the first quarter.

While the accelerated depreciation will adversely impact 2013 earnings, this agreement results in a positive economic outcome over the time period that these aircraft are replaced and provides a better product for our customers.

It's another indication of how we are managing the business with the focus on creating long-term shareholder value.

During the first quarter we took delivery of six new Boeing 737-900ERs and retired two Boeing 757-200s and three 737-500s.

In the second quarter we expect to take delivery of six more new Boeing 737-900ERs and retire 12 mainline aircraft, including the last five Boeing 737-500s and five Boeing 767-200s.

We made substantial progress in strengthening our balance sheet in the first quarter, and our capital structure is the best it's been in years.

We made $1.3 billion of debt and capital lease payments in the first quarter, including $1 billion of prepayments.

During the first quarter we took two actions that significantly improved the health of our balance sheet.

First, in February we redeemed $600 million of secured notes with interest rates of 9.875% on the first lien and 12% on the second lien.

Second, we replaced our $1.2 billion term loan that was due in February of 2014 with a $900 million term loan due in 2019.

The interest rate of this new financing is LIBOR plus 300 basis points, subject to a 1% LIBOR floor.

In conjunction with our term loan transaction, we replaced our $500 million revolving credit facility with a new $1 billion revolver.

The combined term loan and revolver transaction improved our unrestricted liquidity position by $200 million and results in a more efficient source of liquidity.

We closed the first quarter with an unrestricted liquidity position of $6.4 billion, including the new $1 billion revolver.

In addition to our strong liquidity position, our unencumbered asset balance has been increasing as we pay off the related secured debt.

We estimate our current unencumbered asset balance to be in excess of $4.5 billion.

Improving our balance sheet is good for all of our stakeholders.

It lowers our interest expense, allows us to focus on long-term investments that improve the experience for our customers and coworkers, and makes us a better, less risky investment for our shareholders.

As we look at our debt maturity profile over the next five years, we are confident in our ability to manage our annual debt service.

We have approximately $1 billion of debt and capital lease maturities remaining in 2013, with approximately $500 million due in the second quarter.

We have $1.1 billion of maturities due in 2014, and $1.9 billion due in 2015, which includes $800 million of 6.75% preferred notes, which become prepayable at par in September of 2014.

We expect approximately $530 million of gross and $340 million of net capital expenditures in the second quarter.

For the full year, we expect gross capital expenditures of $2.5 billion, $1.7 billion net of financing.

Our full year CapEx guidance is consistent with prior guidance from a cash flow perspective, but reflects a change in the way we being for the return of purchase deposits based upon how we finance aircraft.

While we reported a loss for the first quarter, our plan for 2013 remains the same; to generate a return on invested capital of at least 10%.

We intend to recover the revenue we temporarily lost last year, strengthen our balance sheet and aggressively manage our costs.

We are running this business to consistently create economic value for our shareholders and make United a great place to work and an even better airline to fly.

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

Thanks, John.

None of us is happy with our first quarter financial results, but all of us believe that our operational and customer satisfaction results for the quarter offer proof that we are taking the right steps in building the foundation for our future.

We have high aspirations and the focus and the determination to achieve them.

Not only do we want to create the world's leading airline, but we want to create an airline that is actually a real business, a business that consistently invests in its product and customer service, a business that invests in tools and training for its coworkers, a business that competes and wins against its competitors, and a business that consistently earns a sufficient return on its invested capital.

We still have much work ahead of us before we can achieve these goals, but we're confident we're on the right path.

I will 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.

Larisa, please describe the procedure to ask a question.

Thank you.

(Operator instructions.) The first question comes from David Fintzen from Barclays.

Hey, good morning, everyone.

A question for Jim.

You kind of walked through some of the moving parts of RASM in the quarter from comp to weather and the like.

I'm curious on two pieces potentially.

One is, can you quantify what you think the weather -- I don't want to say benefit, but the weather impact to RASM in 1Q was?

And then is there anything you can disclose in terms of corporate share, and how much corporate share gain -- or do you think there's corporate share gain that's happening as you start to bring some of that business traffic that was on detour back on to the system?

Yes, David, this is Jim.

Weather related capacity was down about a percent, and so we haven't assigned a RASM contribution to that, but clearly that was one of the pieces of it.

We talked about the Easter shift, and we estimate that to be about 0.5 to 1 point of that RASM, so that piece we feel pretty comfortable with identifying.

In terms of corporate, what I would like to say is that what we are hearing from our corporations, first of all, and from our corporate travel managers is they are clearly recognizing the work the team has done in operations and to bring back reliability.

And we are getting that feedback as we continue as always to have dialogues with -- through the quarter.

From a share perspective, we are seeing that recovery of the revenue that we lost last year, and so when you ask where is that share gain, I would say that share gain is positive versus where we were off last year.

We still feel like we have a lot of work to do and upside in terms of regaining what we lost last year, as well as by, again, as I have talk about before, the dialogue with the corporations is not about the operational difficulties that we had last year.

It's really about how we can bring value to their travel needs.

And we think that will have upside to us in the future also.

Okay.

That's helpful.

Thanks.

And then maybe just a quick one for John.

Just you have -- we have the CapEx guidance for this year, but just any sense how we should be thinking about CapEx and beyond this year?

Well, David, we talked about when we gave our CapEx guidance at the beginning of the year that there was a disproportionate amount of one-time items in this year, and I think we said it was roughly half of our CapEx was more anomalous, once in a generation type item like building a data center or two new maintenance centers -- or maintenance hangars like we are this year.

Going forward from just a run rate perspective, we are going to continue to focus on a fuel efficient fleet.

We have 700 planes, and if we fly those planes 25 or 30 years, we will replace 25 to 30 a year.

So from a fleet CapEx, that's what a normal run rate will be.

That's going to be a little bit lumpy from one year to the next.

I think the real area of improvement is in the non-aircraft CapEx, and I would expect that to come appreciably.

We still do have some CapEx needs related to this integration.

One of things we are doing is sticking two airlines -- putting two airlines together.

So it's not going to plummet next year, but we expect it will come down in the very near future.

Okay.

Great.

That's very helpful.

Thanks, everyone.

John Godyn from Morgan Stanley is online with a question.

Hey, everybody, thank you for taking my question.

Jim, I just wanted to follow up on some of your PRASM commentary there.

Just clarify two things.

I think you just mentioned that you weren't quite at that 2% run rate, even though we have seen some of these months show very strong PRASM, like we did in March, that's not representative of yet being at that2% gap that you are looking to close.

And then secondarily, when we think about the nature of that 2% that you estimated for last year, I think not all months are created equal.

As we look into the summer, isn't that gap -- I mean, is it fair to assume that gap that could be closed could be significantly more than 2%, just because that period was particularly soft last year?

I'm just curious what your thoughts are.

Hey, John.

I think it is a good point that you allude to.

I think looking at RASM month to month basis, there's all kinds of things that can affect any individual month.

So when we talk about the 1 to 2 points last year , it's really a smoothing over the year of what we will thought we lost, right?

And so we talked about a year ago at this time, the first quarter, with some items related to our cutting over to our revenue management system to a single optimizer.

And we talked about that, as well as some conservative booking around March 3 in PSS as contributing to a 1 point RASM negative to us.

And as you went through the year, I think different issues came up for the Company.

As you went into the second quarter and some of the stress that we put on our customers and our employees through the integration, the complication of the integration also affected our performance.

And then to your point in the summer, particularly in July, our operational reliability hit its lowest level.

So I think getting back to where I started, I think that we really feel that the 1 to 2 points in lost RASM points and that revenue associated with that was with a number of things last year with the integration of the airline.

And we feel comfortable we are on track in terms of regaining that as first seen in our first quarter RASM performance, but still we know we have a lot of work to do and really focused on getting all of that back, and again, building on the strength of the network.

Great.

Thanks.

And, John, just one on costs.

I know that this year is a transition year with is CASM ex-fuel inflation, but when we just take a step back and think about what a normalized CASM ex-fuel growth rate trend should be in a flattish capacity environment, how should we think about that?

John, probably two-thirds of our CASM increase on a full year basis is related to some of the mark-to-market on our new labor agreements, and that is clearly more one-time in nature.

Going forward, you will see more normal standard yearly increases, and so I think this is clearly a blip for us.

I think in a flat capacity environment, we ought to be ought to be trying to maintain our unit costs to something at an inflation level or below.

That's very helpful.

Thank you.

Mike Linenberg from Deutsche Bank is online with a question.

Yes, hey, and good morning, everyone.

I have a couple here.

A couple carriers around the world who fly the 787 have publicly indicated maybe what the impact was to them.

I suspect that's not your style, and some of these are much more aggressive in going after the manufacturers for penalties, but when we think about the March quarter, how much of an impact did the 787 grounding have?

I mean, you have already given us the capacity revised number, which for the year it's a 75 basis point hit, but is there anything else you can say about maybe additional costs incurred, carrying a core of 787 pilots, not being able to fly some of these markets, maybe some revenue impact?

Anything that you can give us on that front would be great.

Yes, Mike, this is John.

In terms of the costs that we can specifically ascribe to the grounding of the 787, we took a special charge in the quarter, which included about $11 million related to the 787.

clearly there's some other kind of revenue impact, if you will, which is much smaller and it's not necessarily included in the special charge.

But we are excited to have the plane back and get it back flyng next month.

It is a great airplane, and Boeing has been a great partner with us, and we fully expect them to continue to be.

Okay.

Great, John.

And then just my second question, and this is to Jim.

We have the capacity plan, which is -- which has been revised lower.

As we look at the business that you have to and from Japan, you do carry a fair share amount of Japanese leisure traffic.

I know we are heading into the peak summer season, isthe biased with respect to capacity, is it to the down side where we think about where the yen is, where the forecasts are for the yen later this year, and as a result what that will do to the demand from Japanese travelers to US dollar denominated destinations like Guam?

Yes, hey, Mike, Jim.

I think our capacity and guidance is right in line with kind of where we expect the yen to be and the demand associated with it.

The Japanese -- those packages, particularly to Guam, are bought in yen denominated, and so we think our capacity is lined fairly well in terms of the demand, in terms of the passenger traffic to there.

But your point, as always, when I make the macro assumption that we will monitor the environment and so forth, we'll do that at a region level also and make sure that we adjust capacity based on the demand that we're seeing.

Okay.

Jim, just asking it another way, is it -- does the forward schedule actually already incorporate some draw down in capacity in some of those markets?

No.

At this point, it's still our plan that we have had for this year.

Okay.

Very good.

Thank you.

Hunter Keay from Wolfe Trahan online with a question.

Thanks, good morning, everyone.

Good morning, Hunter.

Correct me if I'm wrong.

I may be looking at this table wrong, so please, first of all, tell me if I'm incorrect, but it looks like if rent goes up by $40 per barrel, you are only saving $0.09 on your hedge book.

And I look at $110 million of hedge losses being run through the P&L, it just -- I think it begs some questions on the strategy between keeping premium cost down and hedging against these spikes that may be exogenous driven.

So I guess the question here is what is the hedging, and I see stuff like this, sshould I think that maybe it's open to changing?

Yes, I -- first of all, Hunter, I would say that we always look at what's going on in the oil market, and we are -- we take into account changes in the oil market with respect to our hedging strategy.

What we have done over the last year probably is more what I would describe as hedging with a range bound mind-set in terms of what happened to fuel.

If you look at 2008, 2009, fuel ran up to $140 or whatever it was -- jet fuel, I think was at the $170 level -- and clearly that created some demand destruction, and you saw new sources of supply come on.

And it appears now that the range that oil is trading in is much closer in.

And so what we have done with our hedge book is reflect that, and so you see us taking these three-way positions where we might buy a call at, say, for example, $110 Brent and then sell it at $125.

And so we are protected in that range from $110 to $125.

And so in your question -- your example, yes, if it goes to $140, we're not protected at that point, but I think what we have seen is that there's a certain amount of demand destruction that occurs at that point, and that's not something that can be sustained.

And I think to insure for that is very expensive.

Our hedge book today, we are about 34% hedged over the next 12 months, and we have spent $11 million or $12 million on the hedge premium.

So I think it's a prudent use of our cash, considering that this is almost $13 billion of our cost structure, and it is something I think we are pretty thoughtful about.

What you are seeing in respect to the possible hedge loss, that's simply a mark-to-market swing from one month to the next, and we have seen prices come down appreciably here in the last week or so.

And so as we mark-to-market that hedge position that doesn't get hedge accounting, that's going to swing the other way.

We had a $50 million positive swing, a gain this month, that could bounce back.

This is one way that we try to minimize and mute the volatility.

As I said, fuel efficiency is another way.

We spend a lot of capital and focus on that.

And then lastly, I think, we continue to believe that as an industry we need to be able to price to our cost inputs, and that's one of the benefits I think that we have seen with some of the consolidation is a healthier, more structurally sound business.

Okay.

No, thanks, John.

That's helpful.

And in terms of another question, maybe for Jim or Jeff even, I'm a little surprised to hear you guys mention specifically the Newark-San Francisco route, given that I kind of thought that it would be -- your network would be big enough to absorb turf defenses like this without it showing up.

Some the pushback that I get a lot when I push a bulk case for airlines is this whole concept of the barriers to entry and the airlines defending turf.

And with the realization that this is obviously a trunk route for you, and it's of utmost strategic importance for the long term, it's clearly not helpful for [your row] right now.

And I guess the question is how long are you willing to defend this turf?

How willing do you think Virgin is to stay here and bleed losses for an extended period of time before something actually has to give?

Hey, Hunter, Jim.

The way we think about the market is obviously it's -- when we have seen competitors come into a market and lower prices significantly, it generates a lot of demand.

And it's unique to us because we have such a great presence in both the LA basin, the San Francisco Bay Area, and we talk a lot about our presence in New York.

But prices that have been lowered as much as -- starting at 20% down.

When you have great presence in those markets, it is generate a lot of demand.

And so the way we look at it is that we want to make sure that as we generate significant demand that customers who want to fly United have a seat and they can get it.

I will say that we don't -- we think about that in terms of also our kind of overall strategy of capacity discipline.

And so as you can see, as we manage ourselves in that market, we haven't changed our guidance in capacity, and we find ways to do it across the network that quite frankly every day is what we do is try to optimize the market.

AndI think that's what our goal is, and that's what we are trying to do when someone stimulates that much demand is make sure we have a seat for our passengers.

Okay.

Thanks, Jim.

Glenn Engel from Bank of America is online with a question.

Good morning.

Can you talk about labor?

There was a flight attendant agreement that didn't end up happening.

Do you end up keeping that in your accruals even though the agreement was rejected?

And where are we in terms of which groups have had their wages harmonized, which still have left, and where are we on integrating contracts?

Glenn, this is John.

The agreement that there was a TA, or a tentative agreement, that did not ratify was for the employees are represented by the IAM, which is our customer contact and the airport agents.

That did not ratify, to your point.

We are still optimistic that we will get a deal there.

I think that any time that there's -- something like that is voted down, we want to take into account the reasons why it was voted down and see if we can reshuffle the deck chairs and get something that is good for our employees and good for the Company.

So to the -- we still are optimistic about that, and there is still some amount of costs in our guidance for the full year for that.

With respect to --

Was that not reflected in the first quarter as well?

It was reflected in the first quarter, because we had an expectation that it would ratify, and that's one of the reasons our cost guidance came in slightly better than what we expected when it didn't.

Okay.

Thanks.

And the rest?

Yes, with respect to the other labor groups, obviously we've got -- made a significant achievement with our pilots in getting a JCBA there.

We still need to get -- while we have had individual labor agreements with each of the two sides on the flight attendant side as well as the mechanic side, we are working through the joint collective bargaining process there.

I don't really -- I can't real live give you an idea in terms of timing, but it'ssomething that we clearly recognize our employees want and we want.

I think all being part of one team and being under -- all rolling together is an important aspect of getting these two groups together.

Thank you.

Jamie Baker from JPMorgan is online with a question.

Hey, good morning, everybody.

First question relates to H7N9.

It doesn't appear that the virus has driven any revisions in your schedules or your business plan, but in the event that we have a repeat of SARS, could you remind us what your network options are?

What level of capacity can you pull down before you start jeopardizing slot and route rights?

Would capacity more likely be grounded, or should we assume it's redeployed?

Just I wonder what network contingency you might be thinking about.

Hey, Jamie, this is Jim.

It's similar to H1N1 years ago.

We actually have good flexibility in order to adjust our capacity.

To this point, as you mentioned the current flu, we're not seeing any significant booking away or any significant impact due to it.

Obviously we will watch and monitor the CDC very closely and work with the field and so forth, but based on past experience, we have had tremendous flexibility to adjust, and I think obviously with the breadth of the network now the flexibility is more enhanced in today's environment than even years ago.

Yes, that's a good point.

It was a premerger phenomenon.

The second question for Jeff.

If air travel didn't take so long, I would do more of it, and I would be willing to pay more for it.

The most recent and best example of an initiative that actually improves the value proposition of air travel is precheck, and that's not even an airline idea.

It's a government program.

It is not perfect, but it does make things faster, and I would argue that that's the -- speed is the business that you are in.

So programs like global services, concierge key, very lavish benefits, they make the time allocated to air travel more pleasant, but it doesn't decrease the time.

Do you think there's an opportunity for an airline to ever come up with a program that actually improves on the amount of time travel takes, or do we have to rely on the government to figure this out for us?

Well, there's a couple of things, Jamie.

First of all, as you probably know, we -- since the -- since 9/11, we have been working with the government to have a more logical and layered approach to security, and you will recollect the old trusted traveler idea.

Well, precheck is essentially that.

Finally.

It's taken the government a long time.

As we do not control the TSA, and all we can do is talk to them and plead with them.

But I must say I commend the TSA for coming up finally with precheck.

It's an excellent product, and I would encourage every traveler who qualifies for it to do it, because it's superb, it's like the good old days, and it does indeed save time.

We offer premier line and premier access to our customers, which speeds them through our premier lines, through security, and also at boarding at the gate.

So we are very conscious of our customers' time.

We do it -- that's why we also do our very best to run a reliable operation, to minimize the delays, and to get people where they want to go on time.

Okay.

Thanks for the input.

Thank you, ladies and gentlemen.

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

We will now take calls from the media.

(Operator Instructions).

Mary Jane Credeur from Bloomberg News is online with a question.

(Inaudible -- no mic) [situation], and can you quantify how many flights you are seeing delayed on any given day?

What it looks like look like at peak time versus nonpeak?

And what will happen when we get a big nasty thunderstorm on Monday morning?

Mary Jane, I'm sorry, you faded out at the beginning, but I assume you are talking about the air traffic control furloughs?

Yes, sir.

Yes, sure.

Right now, let me -- first of all, let me tell you that I think everyone knows that this is very frustrating for everyone, for our customers, for our coworkers, and we are doing our best to help our customers.

As I mentioned earlier, we've got great folks not only in our network operations center but our airports working to minimize the impact on our customers.

And so far, we have been able to limit the flight cancellations to our regional operations, not the main line, because that affects fewer passengers because the regionals carry fewer passengers than the mainline.

But the delays are indeed affecting our mainline operations.

At United we -- this is so far affecting about 20,000 passengers a day, and of course all of our competitors are experiencing similar effects, because this is a network business.

We are working with A4A, the Airlines for America, which is our industry association in DC.

Andthis is clearly a network business, andthe cancellations and delays will be cumulative the longer this goes on for us and for all of our competitors and for all of the customers nationwide.

It's going to have --if it continues on, it will have an adverse effect on the industry and the economy as well.

And you and I both know there's got to be a better way.

Look, they there are very good folks in Washington who understand what's happening, and they want to fix, and we are working with them in every way we can.

But one thing I just want to make clear to you is that this isn't the fault of the air traffic controllers.

They are doing their very best to manage flights under difficult circumstances, and I want them to know that we support them, and we appreciate all they are doing to minimize the impact of the furloughs.

And do you think that we'll have other -- there's talk just this last day or so of a legislative solution possible percolating.

Do you think that will come to fruition?

Well, we are certainly hopeful that it will.

We are certainly working with the good folks in Washington to make that happen.

I mean, this is really important for our nation.

This is something that, if it continues, it will damage our economy.

It will damage jobs.

This cannot continue, and I hope the good folks in Washington that we're working with will get that legislation drafted and passed on the President's desk.

Great.

Thank you.

Josh Freed from the Associated Press is online with a question.

Hi.

Further on the air traffic control situation, do you get any kind of heads up or guidance from FAA on where they should be?

To what extent are you able to plan ahead?

I mean, do you get six hours notice, 24 hours notice on furloughs?

Maybe you can tell us a little more about that.

Well, we obviously are kind of with it as much as we can be, and we have morning calls with them, but these are a bit like pop-up thunderstorms that are not predictable.

The problem is there's no consistency to it, and it's very hard to plan for, Josh.

The result of that is you can't effectively pull down schedules like you could in a storm system, where you can see it coming and then you can take action ahead of time.

This is -- this pops up around the country fairly randomly.

And that's what makes it so difficult, and that's what makes it, candidly, so much harder on our customers.

All right.

And do you think it will continue [that] you will be able to prevent cancellations on the mainline, or is it doubtful that will -- do you think it will eventually start to hit the mainline more?

Josh, I don't know.

It just depends on how this falls out.

I think we will be a lot smarter over time.

I hope we don't have to be smarter over time.

I hope that our -- the folks in Washington will realize how severe this is.

I believe they are realizing it and will take action to stop it.

All right.

Thanks.

You bet.

Okay.

With that, we are out of time, sowe'll conclude.

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

Please call media relations if you have further questions, and we look forward to talking you to next quarter.

Good-bye.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.