聯合航空 (UAL) 2013 Q2 法說會逐字稿

Good morning.

Welcome to the United Continental earnings conference call for second quarter 2013.

My name is Brandon and I will be the 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 our hosts for today's call; Nene Foxhall and Sarah Murphy.

Please go ahead.

Thank you, Brandon.

Good morning, everyone.

Welcome to United's second quarter 2013 earnings conference call.

Joining us 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 with some overview comments.

After which Jim will review operational performance, capacity and revenue results.

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

Jeff will make a few closing remarks and then we will open the call for questions,first from analysts and then from the media.

We would appreciate it if you limit 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.

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 the United Continental Holdings and United Airlines for a more thorough description of these factors.

Also during the course of the 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.

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 our second quarter 2013 earnings call.

Today we reported a profit of $521 million for the second quarter or $1.35 per diluted share.

I want to thank all of my co-workers for their effort and professionalism as they work together to serve our customers and improve our operational and financial results.

I would also like to thank our customers for choosing United as we continue to build the world's leading airline.

During the second quarter, we demonstrated progress across all of our top priorities for 2013.

We operated a more reliable airline this quarter despite experiencing moderate to severe weather and air traffic controller delays during almost half of the days in the quarter.

We generated record second quarter revenue of $10 billion and posted a profit of more than $0.5 billion.

Heading into the second half of the year, United is well-positioned to continue delivering solid operational performance and excellent customer service and to achieve our return on invested capital target of at least 10% this year.

Our front line co-workers are focused on making our customers experience more comfortable and less stressful.

The investments we've made to support our operations and train our people are paying off.

In the second quarter we improved our on-time departure rate, reduced our maintenance-related cancellations and substantially closed the gap to the industry in the relative on-time arrival performance.

Our customer service is clearly improving and customers are taking notice as customer satisfaction scores are up substantially versus last summer.

As of today, approximately 80% of our 46,000 mainline and United Express flight attendants, airport agents and reservation agents have completed our new customer service training called, It's Our Job, and we are on track to complete the training in the fourth quarter.

Delivering excellent customer service is an absolute priority for us and we are intensely focused on continuing the momentum we have built in this critical area.

We continue to make progress toward integrating our labor groups and this month we resumed negotiations for joint collective bargaining agreement with the union representing our passenger service, fleet service and storekeeper coworkers.

We are in discussions with the unions representing our technicians, flight attendants and flight dispatchers as well, and by working together , we have the opportunity to reach additional competitive and responsible joint collective bargaining agreements by the end of this year.

Our network is the best in the business,Connecting customers to more destinations around the globe than any other airline.

Our hubs ring the United States, providing powerful international gateways.

Our network is highly attractive to business travelers and is only becoming more attractive as we continue to improve our operational performance and our customer service.

We continue to optimize our network within the confines of capacity discipline, which is core to our operating strategy.

In April we expanded our Latin America presence with new service between Washington, Dulles and Guatemala City, and service from Chicago O'Hare and Washington Dulles to San Jose, Costa Rica.

In June, we launched daily nonstop service between Denver and Tokyo Narita, using the Boeing 787 Dreamliner.

Our Denver to Narita service is a great example of how the Dreamliner opens up new profitable route opportunities.

Its efficiency, range and seating capacity are ideal for markets such as this one.

We are making investments in our fleet that will allow us to provide high quality service to where our customers want to go and enhance our already industry-leading network.

Operating efficient, reliable and customer pleasing aircraft is critical for our long-term returns.

This quarter we made a series of adjustments to our long-term fleet plan, ensuring we have the right number of replacement aircraft on order with the appropriate seating capacity and range to match market demand.

John will speak about that more in a moment.

In addition to adding new aircraft to our fleet, we are improving the interiors of existing aircraft.

United is the only UScarrier to offer flat bed seats on every long-haul international flight from the Continental US,with more than 7,100 flat bed seats in the air.

We offer global satellite-based Wi-Fi on 57 aircraft a day, including nearly half of our 747 fleet.

And we will be installing global satellite-based Wi-Fi at a rate of over 25 aircraft per month for the remainder of the year.

Toward the end of the year, we will start installing streaming video on our satellite-based Wi-Fi aircraft, marking the start of our shift toward providing in flight entertainment content for our customers to use on their own devices.

We are installing new interiors, including flat bed seats, on our PS aircraft line TransCon flights out of New York Kennedy, and expect all of our PS aircraft to have new interiors by the end of the year.

We are modernizing our product offering on the ground as well.

We completed the rollout of our new simplified boarding process at 26 airports and we've received excellent feedback from customers and co-workers on the new process.

We reduced the percentage of boarding related departure delays by more than 60% versus last year, in part due to the boarding process enhancements we made.

We expect to see further improvements as we roll it out to the majority of our stations through the end of 2013.

During the second quarter we opened a new United Club in Seattle, featuring our new modern design built around the needs of our business customer and expect to open an additional modern lounge next month in San Diego.

We continue to enhance our powerful loyalty program, Mileage Plus.

In the second quarter, we took another step toward orienting our program to better recognize the value our premiere members create for United by introducing a revenue component to our Premiere Status qualification requirements for the 2015 program year.

Just this month we announced new exclusive partnerships with two iconic brands, Marriott and Mercedes-Benz, further enhancing the value that our Mileage Plus program offers members.

Our new partnership with Marriott, which is called Rewards Plus, offers our Premiere Gold members and above a status match to Marriott Gold and reciprocally offers Marriott Platinum members a status match to Mileage Plus Silver.

The new program also offers members improvements in points transfers between the two programs.

Mileage Plus is the world's largest travel loyalty program with the most ways for members to earn and use their miles.

And we intend to expand the value of the program to our members and to United in the future.

We are focused on providing solid operational reliability, great customer service and a modern competitive product for our customers,creating economic value for our shareholders and providing a great place to work for our co-workers.

We made good progress on each of these fronts this quarter.

We are on the path towards achieving all of these goals.

And we will continue to work together as we build the world's leading airline.

What 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 thank my co-workers for managing our operations in the face of difficult weather conditions this quarter.

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

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

We are consistently running a reliable airline with good customer service and are now focused on becoming even more dependable and your carrier of choice.

The weather in the second quarter was extreme.

To put it in context, our operations were impacted by moderate to severe weather, 41 delays during the quarter, which was 25% higher than average.

Despite these challenges, all of our front line co-workers focused on minimizing the impact on our customers, providing good service and maintaining as normal a schedule as possible.

Excluding the impact of weather, we ran a solid operation and saw significant year-over-year improvements in our controllable completion and long delay rates.

Our investment in spare parts and return of spare aircraft to prior levels are paying off and our maintenance-related cancellations declined by 37% year-over-year in the second quarter.

We continue to define a best-in-class network to drive returns by introducing new service to meet demand and eliminating unprofitable routes.

This quarter we initiated three new long -haul international routes, including Denver to Narita service using our Dreamliner, and recently announced we will cease our Newark to Istanbul and Newark to Buenos Aires flights this fall as they did not meet our return expectations.

United has the best global network for UStravelers and we will continue to find new profitable opportunities to expand the breadth of our service for customers.

Our second quarter consolidated capacity decreased 2.1% year-over-year and we reduced our capacity in each entity except Latin America.

We expect third quarter consolidated capacity will decline 0.4% to 1.4% year-over-year.

For the full year, we expect our capacity will decline 0.75% to 1.75%.

While we expect our fourth quarter capacity will increase between roughly 3% and 4%, nearly half of the fourth quarter increase is due to lower accounts from last year given the impact Superstorm Sandy had on our operations in 2012.

Over the long-term, it is important we continue to match capacity with demand, which we define as maintaining capacity growth at a rate less than GDP.

Turning to our revenue results, we outperformed the industry in unit revenue growth for the second consecutive quarter with consolidated PRASMThe Transatlantic region performed quite well for us in the second quarter, with unit revenue and yields each increasing approximately 6% year-over-year.

We have right-sized our footprint in Europe over the last several quarters, and the improvement in our Transatlantic unit revenue results this quarter illustrates the benefit of capacity discipline.

Our Pacific unit revenue performance contracted 3.4% year-over-year, in part due to capacity growth of our competitors adversely affecting yields and in part due to continued yen weakness.

The depreciation of the yen reduced second quarter passenger revenue by about $30 million, and we expect the year-over-year yen pressure to continue throughout the remainder of 2013.

Corporate revenue continued to grow modestly in the second quarter,increasing approximately 2% versus the second quarter of 2012.

We are working to provide our customers more comfort and choice when they travel.

We offer Economy Plus seating on 92% of our mainline fleet and we are the only USairline to offer fully flat bed seats in the premium cabins on all of our long-haul international flights from the continental US.

Offering this type of product consistency helps us meet and exceed our customer's expectations when they fly internationally on United in the premium cabin.

We continue to install global satellite -based Wi-Fi, providing connectivity just about everywhere we fly, which is an important product for our business and leisure customers.

We are also investing in the technology our customers use to keep in touch with United.

This quarter we enhanced our mobile applications for iPhone, Android and Blackberry 10, including streamline user interfaces and the first phase of new self-service functionality, which customers can use to manage their itinerary if a flight delay or a cancellation should occur.

We also expect to make mobile boarding pass scanning available at all of the domestic airports we serve by this fall and will be the first US network carrier to do so.

Driving best-in-class revenue results requires a network with strong local and flow demand,the right aircraft to match the supply to demand, a competitive product, great customer service, reliable operations and a strong revenue management system.

As we met many of our integration milestones from last year, our network and our systems continued to mature.

We now have more than a year's experience using Shares, our passenger service system, together with Orion, our revenue management system, to optimize revenue over our unmatched global network by balancing local and flow traffic, both domestically and internationally, especially in our Newark and San Francisco hubs.

Turning to our near term revenue outlook; bookings continued to be solid and mix is holding steady.

We currently estimate United's third quarter consolidated PRASM to increase 3% to 5%.

In July, consolidated PRASM to increase 2.5% to 3.5% year-over-year.

Ancillary revenue continued to show strong growth in the second quarter, as ancillary revenue per passenger grew 13% year-over-year to over $20 per passenger.

The Economy Plus upsell continues to perform very well, growing 37% year-over-year in the second quarter.

Our excellent ancillary revenue growth in the first half of the year positions us to exceed the 2013 goal of increasing ancillary revenue per passenger by 9%.

We are encouraged by the progress we have made on ancillary revenue to date.

We are excited about the significant runway ahead.

We believe there is considerable room for us to grow in this high margin space.

Our strategy to further grow ancillary revenue consists of three categories.

First, introducing new value add products and services by global satellite-based Wi-Fi, premiere access and annual subscriptions of existing products, such as Economy Plus.

Second , optimizing pricing on existing products through our powerful and nimble technology platforms which allow us to apply better revenue management to ancillary products, as we have begun to do with Economy Plus.

And third, maturing our customer relationship management capabilities so that we can better provide the right offer at the right time to the right customer through a wide range of channels.

In the second quarter, we signed a deal with Sabre enabling us to increase our customer's access to our ancillary products while aligning our interest in this distribution channel.

We are laying the technical foundation to offer ancillary products, like Economy Plus, on Sabre next year.

Our philosophy is quite simply customer choice and engagement.

We serve a very large customer base, flying more than 140 million passengers per year and engaging with tens of millions of Mileage Plus members, not all of whom want or value the same thing from us,and not all of whom in return create the same value for the company.

Adapting our business model to tailor the offers and the experience for our customers is critical and is one of the many ways we will be improving our customer's experience and our returns at the same time.

Customers have a choice when they fly and we want to provide the most compelling value proposition for travelers to choose United.

We will continue to invest in our reliability, our customer service, our network, our fleet, our product offering, our loyalty program and our technology to make clear that United is the right airline for the global business traveler and leisure traveler alike.

We are pleased with our relative unit revenue out performance this quarter and want to expand that leadership even further.

And by working together, my co-workers can do just that.

With that I will turn the call over to John.

Thanks, Jim.

I first want to thank all of my co-workers for working together to help United get further down the path to achieving its full potential and making this a better airline for the 140 million customers we serve each year.

Today we reported net income of $521 million and a pre-tax margin of 5.2% for the second quarter.

We continue to make progress executing on our plan.

On a monthly basis, we have improved our pre-tax margin year-over-year in three of the last four months.

Our second quarter operating margin was 8.2%, which was an improvement from the second quarter of 2012.

During the second quarter, we ran a solid operation with better customer service, made progress in improving our cost performance, made prudent, long-term investments in our aircraft facilities and technology, and improved our balance sheet by paying off a significant amount of debt.

These are the right steps toward laying the foundation we need to generate sufficient long-term returns.

Our second quarter consolidated operating expenses were flat year-over-year.

Second quarter consolidated CASM, excluding fuel, third party business expense and profit-sharing, increased 7% versus second quarter 2012,in part due to a 2.1% reduction in consolidated capacity --a much greater capacity reduction than that of our peers.

We expect our unit cost pressure to substantially subside in the back half of the year.

We anticipate that in the second half of 2013 our CASM, excluding fuel profit-sharing and third-party business expense will increase between 2% and 4% year-over-year, and continue to expect our full year non fuel unit cost to increase between 5.5% and 6.5%.

We are committed to running a more efficient operation and are making progress with new initiatives that will contribute to our goal of keeping our annual unit cost growth at appropriate levels going forward.

One area where we will become more efficient over time is at our airports.

Year-to-date we have demonstrated our ability to operate a consistently reliable operation despite high load factors and challenging weather.

As Jim said, we will continue to run a reliable operation, and by enhancing our boarding process, improving the tools our co-workers use and the technology our customers use, we will improve the productivity of our agents, permitting them to provide even better customer service while simplifying and destressing our customer's travel experience.

This week we announced early out programs for eligible frontline co-workers in the passenger service, fleet service and storekeeper work groups, contingent upon ratification of joint collective bargaining agreements.

These programs enable our co-workers to make career choices that are right for them, whether it be transitioning to a new career or early retirement.

These elective programs also enable us to better align our staffing with the workload.

We are always looking for opportunities to provide our customers and co-workers more control and choice in their experience, while managing our costs wisely.

In June, we modified the retirement program for about half of our management and administrative co-workers by freezing their defined benefit pension plan and moving to a defined contribution plan beginning in 2014.

All of our management and administrative co-workers will be able to make the best retirement decisions for their personal situations.

We are continuing to improve our fuel efficiency.

In addition to operating an increasingly fuel efficient fleet, we are engaged in a number of operational initiatives to reduce fuel consumption.

During the quarter, we announced an agreement with Altair Fuels to purchase 15 million gallons of bio fuel starting in 2014.

This agreement underscores United's efforts to be a leader in alternative fuels, as well as our commitment to the environment.

We also announced an agreement with Aviation Partners, Boeing to launch a retrofit program for our 737 -900 ER fleet in addition to the 737-800 fleet with the new split Scimitar winglet.

The new winglet design provides significant aircraft drag improvements with approximately 2% additional fuel savings for these aircraft.

We are taking prudent steps to ensure our fleet is the right one for United's long-term network strategy.

Our fleet strategy seeks to maximize return on invested capital over the life of the asset and ensures that we have the right aircraft to continue to improve our industry-leading network and the on-board products our customers desire.

We are taking a measured approach with our fleet replacement capital plan, one that provides flexibility to respond to economic conditions and allows for a balanced allocation of free cash flow going forward.

We announced orders for wide body aircraft and 76 seat regional jets during the quarter.

Today we operate 154 wide body aircraft, with an average age of about 15 years.

In total, we now have 94 wide body aircraft on order, which will be delivered over the next 12 years, comprised of 59 more Dreamliners and 35 A350-1000s.

These aircrafts will be terrific additions to our fleet, as they will provide double-digit improvements in operating economics and superior on-board experience for our customers and co-workers versus current generation aircraft.

In addition, these aircrafts are ideally sized to fill a void in our current fleet, in terms of seating capacity and range.

It is important to balance capital demands when determining which aircraft to replace and when.

On one hand, when we replace older aircraft with a much more fuel efficient next generation aircraft, we significantly improve the bottom line.

As one data point, for each Boeing 757-200 that we replace with a new 737-900ER, we project more than a $2 million benefit annually on a run rate basis, inclusive of ownership cost.

This adds up to a fairly substantial number, as we plan to retire 73 domestic 757-200's by the end of 2015 and replace them with new 737-900ER's.

Conversely, when we identify opportunities to invest in our existing fleet and materially improve its operating economics, we can delay the capital cost of replacing the aircraft and fly them for a longer period of time.

One example is our Airbus fleet, consisting of 152 A319 and A320 aircraft.

We will be adding slim-line seats to include their per seat operating economics while providing more leg room for our customers.

We are also improving the customer experience on these airplanes by adding Wi-Fi , in seat power and larger overhead bins.

These improvements will allow us to utilize these aircraft for several more years than we had originally planned.

Given the substantial flexibility we have within our order book, we are able to optimize our aircraft delivery schedule and corresponding capital requirements as the needs of our business dictate.

We also announced an order for 30 Embraer 175 aircraft and an agreement with SkyWest to operate an additional 40 E175's under the United Express brand, starting next year.

These 76-seat aircraft are more fuel efficient and provide a superior customer experience versus the 50 seat aircraft they will be replacing and we are excited to bring them into our fleet.

As I have stated before, we intend to keep our overall fleet count roughly flat over our planning horizon of the next five years, with a measured approach to replacement over that period.

This helps smooth capital requirements, financing needs and operational training and change.

We are investing responsibly in our product, our facilities and our people.

And expect between $590 million and $610 million of gross capital expenditures for the third quarter, and approximately $2.5 billion for the full year 2013.

We continued to strengthen our balance sheet in the second quarter.

And now it is the healthiest it has been in years.

We made $540 million of debt in capital lease payments in the second quarter, including $144 million of prepayments.

Our second quarter interest expense declined 9% versus last year.

As we look forward, we expect approximately $500 million of debt in capital lease payments for the rest of 2013.

Our scheduled maturity profile beyond this year is very manageable, as well, with $1.1 billion due in 2014 and $1.9 billion in 2015.

This includes $800 million of the 6.75% secured notes, which are prepayable at par starting next September.

We seized the opportunity in May to add a benchmark issue of unsecured debt,$300 million of senior unsecured notes due in 2018, with an interest rate of six and three-eigths percent.

Importantly, we intend for this transaction to be earnings accretive and leverage neutral.

We used a portion of the proceeds of this offering to pay off a $49 million note due in 2019 with an 8% coupon, and intend to use the remaining proceeds to reduce other high interest rate debt.

We closed the second quarter with an unrestricted liquidity balance of $7 billion , including our $1 billion undrawn revolver.

Improving our balance sheet benefits all of our stakeholders.

A strong financial foundation reduces the risk in the business for our investors, increases the confidence our customers and co-workers have in our long-term success, and enables consistent investment in assets that generate appropriate returns.

Finally, while we made significant progress during the second quarter and generated over $0.5 billion of earnings, we are by no means satisfied with these results.

We are starting to see the benefits of the investments we have made and the actions we have taken, but we are in the very early stage of where we need to be.

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

Thanks, John.

This quarter we began to demonstrate the capability of the new United.

We ran a competitive and reliable operation despite challenging weather conditions.

We made significant strides in improving our customer service.

We showed the strength, breadth and balance of our global network with industry leading unit revenue improvements.

We made prudent long-term investments in our fleet, our product, our technology and our people.

We improved our balance sheet to the strongest point it has been in years.

At United, we are building the airline that customers want to fly, investors want to invest in, and our co-workers want to work for.

We have clearly turned the corner post merger, and I am confident we are on the path to becoming the world's leading airline.

With that, I will turn it over to Sarah to open up the call to questions.

Thanks, Jeff.

First we will take questions from the analyst community and then we will take questions from the media.

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

Brandon, please describe the procedure to ask a question.

(Operator Instructions).

From Cowen Securities, we have Helane Becker on-line.

Please go ahead.

Thank you very much, operator.

Thanks for the time.

I just wanted to get a little more color on the corporate business that you said . I think you talked about seeing small increases.

I don't remember the adjective you used -- but I was wondering if you could go through where are you seeing the increases?

Hi, Helane, this is Jim.

As I talked about, I said we saw a modest growth of 2% in corporate revenue in the second quarter -- fairly consistent with the growth we saw in the first quarter, in terms of growth rate.

In terms of where we are seeing -- if I broke it down into strong performers versus the weak industries, obviously we are seeing good strength in business services and computer services, IT,electronics, financial services and the pharmaceuticals.

Some of the more lagging or slower performance would be in areas like aerospace and defense and some in manufacturing.

But good strength in the pharmaceuticals and the financial services, particularly.

I thank you very much.

That was my only question.

Thanks.

From Deutsche Bank, we have Michael Linenberg on-line.

Please go ahead.

Yes, just a couple of questions here.

Jim, when we look at your Pacific PRASM and it was down, how much of that would be attributable to the weakness of the yen?

What was the currency impact?

About 2% of that decline was due to the depreciation in the yen.

And then you had mentioned that the impact was $30 million.

Presumably that is more translation than demand, but as the weaker yen persists, will it be a bigger impact going forward than the $30 million?

Or will it not be as bad because you will mitigate it through capacity reduction reallocation of seats?

How should we look at that?

I think we see the impact being consistent to what we have seen in the second quarter, as we look out into the third quarter.

From a demand perspective, you are right.

In the Micronesia area, where the strong point of sale -- Japan, as the travelers make it into the US,the demand side gets affected a little bit and so forth.

But we kind of expect the same trend that we have seen in the second quarter.

Great.

My second question just for John, when we look in the miscellaneous expense of $123 million in the footnote there, there was an $81 million mark to market hit on the hedge.

How much of that is out of period?

And then what else is in that bucket?

Mike, $80 million of the $81 million are mark to market hedge losses that are out of period.

$1 million was ineffectiveness, which was recognized this period.

There are two other items I guess I would call out in non-op debt that are also anomalous and more one-time in nature; one is the write-off of the sale of the investment we had, which was about $10 million.

And there was a similar amount for costs related to the early conversion of our convertible securities that we converted during the quarter.

Those three items accounted for the majority of that.

That is one of the reasons that while we improved year-over-year on an operating margin, our pre-tax margin did not.

And we can point to those one-time items.

Thank you.

From Evercore Partners, we have Duane Pfennigwerth online.

Please go ahead.

Good morning, thanks.

Wondered if you could give some detail on the other revenue growth line and help us think about the offset in the guidance regarding the third-party business expense?

What is going on with that third-party business expense line?

And if we actually strip that out, how should we be thinking about the growth rate in the high margin other revenue growth?

Thanks.

Sure, Duane, this is John.

In the second quarter our other revenue grew in excess of 20%.

We saw strong growth there.

But to your point, part of that is related to a third-party contract we have where we sell fuel.

And the expense for that is down in other operating expense, but the associated revenue is also in the other revenue line.

If we were to strip that out, the year-over-year increase is in the mid to high single digits, in terms of other revenue.

I think that somewhat obscures some of the real progress that we are making in the general ancillary revenue category.

You might remember, we had a goal at the beginning of the year to grow ancillary revenue by 9%.

As Jim said in his remarks, we are up 13% in the second quarter.

And we are expecting that to continue through the balance of the year.

That's helpful.

Thanks.

And then you are probably unwilling to talk about CapEx longer term, and I do appreciate the detail you put out in that recent filing.

But maybe you can talk about how we should think about what we should add to the aircraft and IT CapExthat you put forth?

How should we think of the other bucket of CapEx and the growth or decline from the $2.5 billion level this year?

Thanks for taking the questions.

You are welcome, Duane.

Allow me to categorize that into two separate buckets, aircraft and non-aircraft.

With respect to aircraft, we have 700 mainline jets today, more or less.

If we fly those planes for an average of 25 to 30 years, then we need to replace 23 to 28 planes a year to stay at the same level.

And that is what we are striving for, a maintenance level of CapEx with respect to our fleet.

We do not intend to grow our fleet in the planning horizon.

So that's the level I would assume there.

With respect to the non-aircraft CapEx, we are spending in excess of $1 billion in that category this year.

And as I said at the beginning of the year, about half of that is -- are items that are once-in-a-generation type items;things like building a data center in Chicago and two new maintenance hangars this year.

So I would expect that to abate over time.

A run rate level is probably somewhere between $700 million, $800 million or slightly higher than that, but not at this level we have been this year.

When you add all of that up, is gross CapEx higher or lower next year?

We haven't commented on that.

We will give some guidance towards the end of the year.

Thanks.

From Wolfe Research, we have Hunter Keay on-line.

Go ahead.

Good morning, everybody.

Good morning, Hunter.

I am still coming up with how to think of this choppy PRASM.

It feels almost like two steps forward, two steps back a lot of over the last six to nine months.

I thought you pulled out of it in the early year and then you had a tough April and May, and I thought June looked better and now July looks soft.

You give Q3 PRASM guidance, which you don't typically do, so you must feel good about what you are seeing in the bookings?

But why is it so choppy?

Is it an operations issue?

Because I thought that was already resolved.

The on-time is there.

The pilots seem to be happy.

They are not slowing flights or anything.

Why is it so choppy?

And how should we be confident modeling PRASM performance based on anything other than easy comps going forward?

Hunter, this is Jim.

First of all, it is -- the choppiness in PRASM is not an operational impact or so forth.

What we have seen in the past is adjustments to revenue and so forth that sometimes can drive some of that choppiness.

We have had capacity adjustments that, for instance, in the first quarter being down approximately 5%, which would obviously drive a little bit better PRASM growth versus the second quarter where capacity was down 2.1%.

The intent of talking about 3Q guidance of 3% to 5% was really -- I am going to refer back to Jeff's point about turning the corner.

If you look at our second quarter PRASM growth of 1% that was reported today, 2.1% capacity decline, the 3% to 5% PRASM growth slightly less capacity decline is another indicator of us turning the corner.

Our goal this year is clearly driving great customer service and the reliability that we have talked about.

And internally, we talk about it as beating the plan.

I will tell you when I talk about beating the plan it means everything we do.

So the team is focused on hitting the 3% to 5% guidance I gave, as well as constantly trying to beat that number.

That's kind of what we do.

I think the intent was -- to your point, was to take out a little bit of the choppiness that comes in a month to month reporting and give you a little guidance on the third quarter total and -- particularly relative to the second quarter.

I just -- I don't know, it feels to me like, to some extent, on the revenue line there might be some struggles going on the corporate side going back to Helane's first question.

I see Delta adding routes like Newark to Paris, and I believe it is an indicator which is probably a lucrative pharmaceutical route for you.

To me it implies that Delta thinks they can take advantage of your weakness.

I don't know how you would respond to something like that.

Obviously, you have network challenges every day.

Do you feel like you are communicating enough with your corporates in your key markets enough so threats like that shouldn't necessarily concern us?

One we are communicating all the time with our corporate.

I have talked about this in the past that the conversation with our corporate is very different than a year ago.

The conversations about the value of the network and what we can do in partnership for your travel needs and what you are trying to do going forward, that communication is constant and going on.

As we look at different competitive -- the Sky team, some of that capacity has been there before from Air France and now Delta is flying it and so forth.

Again, we are really comfortable with our position in New York.

As I mentioned on the call , as we have been maturing our systems here, particularly with Orion and our Shares system, what we are being able to do is better manage higher yielding traffic across our hubs, and particularly in San Francisco and New York.

So that that allows us to make the best decision on what type of traffic is going over Newark, whether it be some lower yielding local traffic versus higher yielding flow traffic.

So we are really, really excited and feel really good about our competitive position in New York.

We have competitive capacity challenges all the time.

What we do is have a strong plan that we are focused on and focused on hitting it.

Thanks, Jim.

From JPMorgan, we have Jamie Baker on the line.

Please go ahead.

Jeff, hi.

I will assume the results in the first half of this year didn't quite measure up to what the internal targets were, on say, January 1st.

Of course, I don't know that for a fact.

Correct me if I am mistaken.

But if results are below what was internally forecast, can you review for us each of the substantive steps you have taken to get results back on track?

And will these initiatives actually make up for loss ground and simply or hopefully drive improvement from here?

Jamie, the most important thing for us this year -- we focused this year on three things.

We had to get our operation back on track and we did and it has been successful.

We had many initiatives do that.

We are running a competitive operation today and it is a good operation and it is improving.

The second piece we are focusing on was customer service, because our customer service fell away last year.

There is no question about that.

We needed to get our customer service back to a -- not only competitive level, but a level of excellence.

We spent a lot of time with our folks, not only in training, but giving them the tools they need to make sure that we can get good customer service and our flights off on time.

And changes in a lot of procedures where things that passengers can see and experience, for example, the boarding process, or procedures in terms of marshalling aircraft -- marshalling them in and marshalling them out and having jet bridges on time.

That sort of thing.

There has been a lot of improvement in the customer service and operational reliability.

The third part has been to beat the plan.

We continue to be focused on that.

Are we satisfied with our financial results of this quarter, year to date?

Absolutely not.

We are not satisfied with them.

They do not represent what we can and will be.

We are really focused on that.

We have a host of activities that are going on, not only in terms of the operations in the customer service, as Jim has talked about, making sure our conversations -- and our conversations with our corporate customers today are very different from where they were last year.

Last year was a year of apology.

This year it is an opportunity for us to sell our services to our important corporate customers and make sure they understand not only the power of the network, but the investments we are making in our fleet and in our product and our technology and our people.

There is a lot we are doing.

So we are excited about how things are going directionally.

Going through these mergers is tough.

It happened to our friends earlier when they first merged.

And I am confident it will happen to our friends in the next merger.

The fact is these are tough things to go through.

But we have turned the corner behind us now, and I am excited about the direction we are going.

In terms of our performance to date -- our financial performance, no, we are not satisfied with that.

And just to press on this issue, Jeff, and I am not looking for modeling guidance here and I don't want to put words in your mouth; but given what you just responded with, is it enough that you would anticipate closing your margin gap with that of your closest competitors in 2014?

Jamie, this is John.

This is a slow process . It is one where we are making good progress, believe me.

We all here wish it were to happen overnight.

The important thing for us is to continue to see improvement.

One area that Jeff did not mention is the area of cost.

Obviously, our level of unit cost increase this year is unacceptable to me and to many others, but we have tremendous initiatives underway.

I will point to a couple of different examples.

I talked about in my prepared remarks, the early out.

This is very good for employees and it allows them to transition to another career or retire early.

And it is an opportunity to lower our wages as well as right size the workforce in particular locations.

Maintenance is another issue.

This is an area where we have been dealing with some of the issues with an older fleet and an unreliable fleet.

We spent more there than what we plan to, going forward.

It is one of the key areas we will see improvements in as we begin to take delivery of new planes.

And then I would point to fuel, as well.

I talked to the capital investment we are making in winglets.

This is a capital investment that provides a return on invested capital many times in excess of our 10% goal.

And it pays back very promptly.

There are a lot of different areas where we believe we can really begin to improve, relative to our competitors.

That said we recognize that, like a lot of this merger it will take some time.

Thanks for the clarity, gentlemen.

I appreciate it.

Take care.

From Bank of America Merrill Lynch, we have Glenn Engel on-line.

Please go ahead.

Two questions, please.

One is for Latin America, and for Europe and Asia, can you go through which of the countries outperformed or did worse than the average, like Heathrow versus the rest of Europe?

And the second question on the wage side.

When you look at this year, how much of the labor cost impact has been from harmonizing contracts?

And what percent of the labor cost has that route represented so far?

This is Jim.

Let me take the entity performance first.

Starting with the Transatlantic, we actually saw that strong Transatlantic PRASM growth was well spread and particularly to London, as you mentioned, as well as to Germany.

We worked really hard with our partners and the team with Tonza.

We are seeing good strength to our German markets.

But also, quite frankly, the strength is widespread within Europe, both London to Paris and so forth.

-- and we are very happy with that.

In Latin America, the weakness was more in South America, with the rest of Latin America actually performing quite well.

But in South America, with some yield pressures, as a result of some of the capacity, put some pressure on us in the Latin America division.

But it was mostly in South America -- the weakness.

In Asia, we saw yield pressure into Australia . Obviously, we have already talked a little about the yen and the impact to the Japan.

Asia and China held up very well.

But between the Japan with the yen depreciation, into Micronesia, and the impact of the transpact of that, as well as the -- some yield pressure in the Australian market.

Glenn, on your question about wages, approximately two-thirds of the increase in our wages line this year is related to collective bargaining agreements.

We are committed to getting to market base pay with all of our labor groups.

That's been the approach we have taken from day one.

But just as so, we are committed to getting to a market based allocation of resources as well.

This is an area of opportunity for us going forward, as we begin to become more efficient in our operations.

So the two-thirds of the labor cost tied to the wage increases -- but you have only increased pay in roughly half of your workforce levels?

Glenn, we have actually, with the exception of our airport agents, which we do have an accrual in the books for, we have reached collective bargaining agreements with all of our major work groups.

In those they received a pay increase.

We still need to go through the JCBA process with some remaining work groups, but that should not result in the type of pay increase that you saw with the pilots.

The pilots we took a different approach where the first step was to get the JCBA.

You are saying going forward, at some point, we should see productivity to offset the further wage increases?

That's correct.

A lot of the investment we made in the operation took place with more heads in the third quarter last year.

In the third quarter of this year, we should get pretty close to our productivity level last year . And the fourth quarter, you will begin to see year-over-year improvement.

Thank you very much.

Thank you.

From Barclays, we have David Fintzen on-line.

Please go ahead.

Good morning, everyone.

Just to follow-up on some of the cost questions and maybe take a little bit of a step back -- John, you mentioned 2% to 4% CASM ex fuel in the second half.

Obviously, there are a lot of structural initiatives underway.

If you think out over the next couple of years, obviously old United was through bankruptcy and you've been through the merger for awhile.

Are those structural initiatives enough that we should be thinking inflation -- less than inflation on CASM ex fuel with the capacity declines we'll see?

Or is that 2% to 4% more of the run rate we should be thinking about?

Or something inflation plus over the next couple years in CASM?

Can you help us -- well, just the next -- enough of a horizon so we have a sense of run rate?

Sure, Dave.

We are not going to manage this business on a run rate basis with 4% annual CASM growth, period.

We absolutely need to have, in a capacity flat world, CASM growing as something other than inflation.

We will see cost pressures in all the normal areas that are more difficult to control, like landing fees and other rent.

With different initiatives, like the fuel efficiency and putting technology in the hands of our employees and customers, we can drive huge savings to the bottom line each year.

And we have got several of those initiatives already in place.

And hope to begin to see those take affect next year.

On a run rate basis, we should absolutely be held to the standard of keeping our CASM ex fuel growth at something less than inflation each year.

From Morgan Stanley, we have John Godyn on-line.

Go ahead.

Hi, everybody.

Thanks for taking my question.

Jeff and Jim, both of you mentioned a lot of commentary about the attractiveness of the network to business travelers and improvements that you are making to appeal to the corporate traveler.

We have seen Delta make improvements of their own and the Virgin Atlantic concept they have going on.

We know new American is on the horizon and their synergies are related taking to corporate travel market share back.

I was hoping you could just shed some light on how you see the corporate travel competitive landscape evolving from here?

And should we be envisioning a more competitive travel market or is the pie getting bigger?

Any color there would be helpful.

Hi, John, this is Jim.

The way I think about it from our perspective and a capacity discipline philosophy, is demand is measured by GDP growth faster than capacity.

I think the pie is growing.

And that is dependent on the strength in the economy.

That allows us to manage that demand much more appropriately and manage the mix up.

That is just business traffic in general, but corporate is a piece of that.

Within that, the way we think about corporate is -- again, our conversations with our corporate travel partners are about the value proposition that we bring to them and trying to price it according to the value proposition.

So it is competitive.

It will be competitive . We think our value proposition -- when it is our turn in front of the travel manager, is a pretty powerful one, given our network and given the systems that we have in order to make sure that the capacity is there for them and so forth.

I don't know if that answers your question other than it will be competitive.

We believe we have a terrific value proposition with the leading network that gives us some really good position in the competitive environment.

Thank you, ladies and gentlemen.

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

We will now take questions from the media.

(Operator Instructions).

From Wall Street Journal we have Susan Carey on-line.

Please go ahead.

Good morning.

I just wanted to verify a couple of points on your RASM guidance.

Maybe I misunderstood.

You are saying that you are having your third quarter forecast is PRASM growth of 3% to 5%?

Hi, Susan.

Our guidance on the third quarter is 3% to 5%.

That's the range.

And I mentioned that July was running at approximately 3%.

And did you give us a full year?

No, we only went out through -- the guidance was only through thethird quarter.

And your third quarter capacity is going to fall by 0.4% to 1.4%?

That's correct.

And full year 0.75% to 1.75%decline?

Yes, that's correct.

Thank you, I just want to make sure.

And my second question would be for John . I am just not aware of the two programs you announced on the labor side, the early out programs -- the volunteer early outs for CSA's and ramp.

I believe you said these elective programs are subject to new JCBA's or just CBA's?

And also I wanted to know a little more about the modification program for half of the management and admin folk.

Can you spell those out a little bit more?

Sure, Susan.

The early out program, you are correct, it is contingent upon achieving a joint collective bargaining agreement.

Both the dollar amount and the number of employees that will participate in that is yet to be determined.

We just announced that.

But this is a an opportunity where the company can benefit immediately through lower wages and it provides a good option at the election of our employees.

We are very excited about that.

With respect to the pension, you are seeing a general trend across all industries and companies moving to defined contribution programs.

And as part of the merger, we needed to align the retirement programs for all of our management and administrative co-workers.

This was a step in that direction.

What we have elected to do is move the Continental side of the management and administrative to defined contribution program as well.

And on identical terms as the UAL side?

Yes, that's correct.

So the Continental folks are moving to the United DB plan?

United -- no, defined contribution plan.

The DC plan, okay.

And this is already -- this has already been done?

Yes, we just announced this.

It will begin to take effect next year.

All right.

Thank you very much.

Good talking to you, Susan.

Thanks, Susan.

From Bloomberg News we have Mary Jane Credeur.

Hi, gentlemen.

Could you elaborate a little more about your thinking on capacity?

Some of your peers across the industry -- most of your peers across the industry are going to be up a little bit the back end of this year.

Granted, some of that is issues unique to them, up gauging aircraft and longer stage lengths.

But why is this decline right for you?

And are you risking potentially leaving some business on the table?

Hi, Mary Jane, this is Jim.

Our capacity guidance and philosophy hasn't changed at all . It is geared toward that capacity discipline and making sure that supply and demand are inline.

As you mentioned, we had some impacts obviously last year from Superstorm Sandy on the East Coast in our base, so that we do have some capacity growth in the fourth quarter coming this year, with nearly half of that the result of that.

But if you look over the long-term -- our long view, as John also mentioned that our fleet count will remain relatively stable over the next five years and our capacity will be very stable.

Nothing about our approach to capacity has changed and don't anticipate that to change, given our fleet order and our five-year plan.

But we do have that issue in the fourth quarter where the comps from last year are driving some capacity growth.

And we have time for one more question from the media.

From the Associated Press, we have Josh Freed on the line.

Please go ahead.

Hi there.

Can you say a little more about what you have in mind when you talk about doing revenue management on ancillary products, as have you on Economy Plus?

Can you help me understand where you are headed with that?

Hi, Josh.

This is Jim.

The ancillary group and the merchandising group works very closely and actually have broadened some of the talent from revenue management into that group to assist in this area.

A year ago, for instance, in Economy Plus, we would have had one price point.

Today we have multiple price points.

That's a result of our transition to the Shares PSS system, giving us the ability to begin to segment the customers and offer different price by where the seat is, by day of week, by market and so forth . So some very initial revenue management principals, particularly on the pricing side,we are already applying.

And I think we are seeing great results as we talked about the 37% growth in Economy Plus sales I talked about earlier.

Our goal is to continue to build on that and to -- without giving any specific initiatives, revenue management is all about appropriately segmenting the -- what customers are looking for and what they value and pricing that accordingly --understanding that demand and pricing that.

And we think some of the revenue techniques we do in the traditional way, in terms of managing fare and inventory, we are going to be able to do in the ancillary side and drive some of that great result even further.

We are out of time now 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.

We look forward to talking to you next quarter.

Thanks.

And this concludes today's conference.

Thank you for joining.

You may now disconnect.