聯合航空 (UAL) 2013 Q4 法說會逐字稿

Good morning and welcome to United Continental Holdings' earnings conference call for the fourth quarter and full year 2013.

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

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

(Operator Instructions)

This call is being recorded and is copyrighted.

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

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

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

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

Please go ahead.

Thank you, Brandon.

Good morning, everyone, and welcome to United's fourth quarter and full year 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, Operations Greg Hart.

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

John will follow with a discussion of our costs, 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 would limit yourself to one question and one follow-up.

I'll now turn it over to Sarah Murphy.

Thanks, Nene.

This morning, we issued our earnings release and separate investor updates.

Both are available on our website, at ir.

United.com.

Information in this morning's earnings release and investor updates, and the remarks made during this conference call may contain forward-looking statements which represent the Company's current expectations or beliefs concerning future events and financial performance.

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

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

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

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

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

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

These items are detailed in our earnings release.

And now I'd 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 fourth quarter and full-year 2013 earnings call.

Today we reported a full-year profit of $1.1 billion, an 84% improvement year-over-year, or $2.84 per diluted share.

At the beginning of 2013, we outlined three goals for United, run a reliable airline, improve our customer service, and achieve our return on invested capital goal of 10%.

We achieved all three goals for 2013, and I'd like to thank our employees for working together to make that happen.

We ran a reliable operation in 2013.

We improved our on-time performance year-over-year in every quarter and achieved top tier on-time performance among our peers in the fourth quarter.

Our entire team worked together to minimize the customer impact of the severe winter weather we experienced in December and again this month.

We made tremendous progress on our customer service in 2013, including improving our customer satisfaction scores significantly.

We continue to invest in our on-board product as well, outfitting our aircraft with the best seating options for our customers.

We now have more than 35,000 Economy-Plus seats installed on our airplanes and offer flat-bed seats on every long-haul international aircraft.

We also began installing lighter weight, next generation slim line economy seats on a number of our narrow body and regional aircraft, providing a good product for our customers while improving our operating economics.

In addition to improving our seating options, we've also installed Wi-Fi on nearly 170 aircraft, added larger bins and refreshed the interiors on the majority of our 152 Airbus aircraft, and installed in-seat power on more than half of our mainline fleet.

We completely retrofitted the interiors of all of our PS aircraft, which fly between New York's Kennedy Airport and our hubs in San Francisco and Los Angeles.

We also recently launched our in-flight streaming video product, which will allow our customers to view a variety of on-demand entertainment options on their own devices.

We made a number of improvements at our airports, as well.

This year, we opened a new terminal at our hub in Houston, made significant enhancements to our hub in Newark, and unveiled three new, modern United Clubs.

We also began piloting new self-service technology, such as self bag tagging and self boarding gates, and will roll out more of this efficient, customer pleasing technology this year.

During the second half of 2013, we released the first phase of our enhanced digital channels.

We introduced new airport kiosk software that improves customer functionality and our ancillary revenue sales opportunities, and launched an entirely new version of our industry-leading mobile app on iOS and Windows platforms.

Customer feedback on our new app has been fantastic, and we'll roll out our new app on the Android platform this spring.

We'll also be releasing our new United.com in phases this year.

For the 10th consecutive year, our MileagePlus program was named the best frequent flyer program in the world by readers of Global Traveler.

We are moving further down the path of aligning our loyalty program rewards with customer value; and on January 1, MileagePlus launched new minimum levels of revenue to qualify for each premiere status level.

Revenue tracking starts in 2014 for qualification in the 2015 program year.

Our members can now track their premiere qualifying dollars on United.com and our new mobile app.

In 2013, we invested in our employees, enhancing the tools they use to do their jobs, such as Arrow, the new intuitive front-end to our airport system, and provided new customer service training to more than 45,000 of our front line employees.

Our customers are noticing the improvements we're making in our operations, product, and service.

Our customer satisfaction scores continue to climb, and in the fourth quarter they improved by 25% year-over-year, exceeding our goal.

We now have joint collective bargaining agreements with a majority of our represented employees and are working to reach competitive contracts with our remaining representative employee groups.

Our earnings growth improved throughout the year, and our fourth quarter profit was our highest fourth quarter profit since merging.

By working together, our team met our 10% return on invested capital goal for 2013.

2013 proved to be a pivotal year, as we moved past integration and focused on building a strong foundation on which to grow.

With the accomplishments of 2013 behind us, we've raised our goals for the quality of service we provide and the level of efficiency throughout our business for 2014 and beyond.

This year, we'll build on our employee service skills with our next phase of customer service training and new measurements of our service consistency.

We will continue to install satellite based Wi-Fi on our mainline aircraft at a rate of one aircraft per day.

We'll also continue installation of our on-board streaming video on mainline aircraft that don't have seat back inflight entertainment.

Our customers will see the results of more investments at our airports this year, as well.

Tomorrow we'll celebrate the opening of our ultra-modern Boarding Area E at our powerhouse West Coast hub in San Francisco; and later this month, we'll open a new Global Services lobby at Newark.

In the second quarter, we'll move into our brand new Concourse B in Boston and the new Terminal 2 at London Heathrow.

Our customers will enjoy new United clubs in both Boston and London, and we'll continue to renovate other lounges across our global network, as well.

We are also installing power poles or power bars in the gate areas at all of our domestic hubs this year, as so many of our passengers are now traveling with personal devices that they'd like to charge up before or between flights.

Later this year, we'll begin a major, multi-year renovation at our Los Angeles terminals, which will improve our customers' experience and make our operations more efficient.

We'll further improve our fleet by introducing 63 new highly efficient and customer pleasing mainline and regional aircraft this year.

These new aircraft will not only improve our customers' on-board experience and our reliability, but will also improve our fuel efficiency and in turn, our bottom line.

We're also going to improve the quality of our processes and procedures, with the goal of making United much more efficient.

Now that we have solid operational performance and improving customer service, we're taking a careful look at each aspect of our business to improve the quality and efficiency of everything that we do.

To that end, we've launched an internal program called Project Quality to identify and implement lean techniques and continuously improve the processes throughout our operations and management functions.

As we outlined at our investor day last November, our goal is to reduce our annual costs by $2 billion and generate at least $700 million of additional annual ancillary revenue within four years, and the dedicated Project Quality team will lead that multi-year effort.

In 2013, we worked hard to give our customers a reliable and flyer friendly travel experience and to improve our financial results.

This year, we'll continue to focus on operations, with a goal to be top tier in reliability.

We will focus on deepening the level of customer satisfaction and aim to improve our customers' experience on United at every stage of their travel.

Finally, we continue to focus on expanding our earnings materially and exceeding a 10% return on invested capital.

We have a lot of work ahead of us to deliver the financial results we are capable of, but I am confident that we have the plans, the people and the focus to reach our long-term potential.

With that, I'll turn the call over to Jim and John to go through our full-year and fourth quarter results in greater detail and the plans we have in place to grow our earnings in 2014.

Thanks, Jeff.

I'd like to take a moment and thank our employees for all they did to improve United's performance in 2013.

We ran a good operation and delivered better customer service, both of which are critical for our customers and for our success.

At United, we strive to be flyer friendly by running a reliable operation and giving great customer service.

I'd also like to recognize the men and women on the front line who managed through the extreme winter weather earlier this month.

The storms and sub-zero temperatures that began on January 1 and lasted seven days were among the worst weather events in our history and resulted in more than 6,300 canceled flights.

Thank you for taking care of and reaccommodating our customers and taking care of each other during a very tough operational period.

2013 was a foundational year for United, and we made solid improvements in our operations and revenue results.

We invested in our people, operations, customer service, technology, product and network.

This year, we will continue to invest, and we will further leverage our existing assets to improve the quality of our airline.

We are already seeing early returns from many of our investments, but we have much more work do to reach our full potential.

We ran a consistently reliable operation in 2013.

We exceeded our goals for on-time performance in six months of the year.

Our fourth quarter mainline on-time performance was 80.6%, which was top tier among our peers.

We recognized our employees' great work with $19 million in on-time incentive pay outs for the fourth quarter and $54 million for the full year.

We are also improving our customers' experience by reducing controllable delays and cancellations.

For example, in the fourth quarter, we reduced maintenance cancellations by 14% year-over-year.

In 2014, we are focused on running a highly reliable yet much more efficient operation.

Our goal is to deliver top tier reliability for our customers, while improving the processes and procedures that we use throughout our operations.

We're modernizing airport infrastructure to better accommodate today's traveler, enhancing the tools our employees use, and more appropriately matching staffing with workload throughout the operation.

For the full year, our consolidated capacity declined 1.4% year-over-year.

2013 was the third year in a row where we reduced capacity.

Let me assure you that we will continue to be disciplined in how and where we deploy capacity.

Over the next four years, we expect our consolidated capacity to grow less than GDP.

In 2014, we expect our capacity to increase between 1% and 2% year-over-year, and this new capacity will be highly efficient.

Our modest capacity growth will come from replacing older aircraft with new, fuel efficient and larger gauge aircraft and by adding slimmer next generation economy seats.

Our global network breadth will grow as we add new service in 2014, making United even more flyer friendly.

We will enhance our leading route network in 2014 by adding non-stop service on international long haul routes such as San Francisco to Xiangdu and Taipei, Houston to Munich, Chicago to Edinburgh, and Washington to Madrid.

San Francisco is the continent's premiere West Coast gateway to Asia.

This year, we will serve eight Asian destinations non-stop and provide one-stop connectivity from over 80 cities to Asia.

Our new Boarding Area E at San Francisco will be customer-friendly in every sense of the word.

It will offer an up close view of the airfield and the Bay Area from a 23-foot high window wall, state of the art workstations, healthy and local food offerings, and enhanced seating options.

Our two new non-stop flights from San Francisco to Xiangdu and Taipei are good examples of the second phase of our Pacific network strategy.

First, we built the best trans-Pacific network by flying to the most cities in Asia, with the most non-stop flights of any US carrier.

We've launched those non-stop flights out of business-centric hubs like San Francisco, New York, Los Angeles, Chicago, Houston, and Washington, DC.

Now we are beginning to introduce non-stop service to secondary cities in Asia, making travel even more convenient for our business and leisure customers alike.

We expect first quarter 2014 consolidated capacity will increase between 0.3% and 1.3%.

The severe winter storms in January reduced first quarter capacity by approximately 0.6 points and this impact is included in our current guidance.

It is important to note that this year the industry will face operational challenges due to FAR 117 and the new 1,500 minimum flight hour rule for new pilots.

FAR 117 is the FAA's new regulation regarding flight time and duty rules for pilots.

This new regulation decreases the utilization of pilots and our flexibility in managing irregular operations.

Our flight operations and network operations teams are working together to reduce the potential impact on our customers by adding buffer to crew schedules, enhancing tools to monitor schedules, and hiring additional pilots.

We expect that the combination of these new regulations will have a disproportionately greater impact on our regional partners, as mainline carriers hire regional carrier pilots due to the decreased productivity required by FAR 117.

We are working to adjust our planned schedules to compensate.

Shifting to our revenue results, our fourth quarter consolidated PRASM increased 3.2% year-over-year.

Our revenue results improved throughout the quarter, particularly as we captured strong traffic and generated high yields during the Thanksgiving and Christmas holiday periods.

Part of this strong performance is due to flexing our capacity up more than 20% on the peak days during these holiday periods and flexing down our capacity more than 40% on the off-peak days.

We also coordinate closely with our joint venture partners on holiday schedules, providing more options for our customers while producing a better financial outcome for the JV.

Corporate revenue grew 7% in the fourth quarter, continuing our 2013 trend of steady year-over-year improvement.

As I explained on our last earnings call, during the fourth quarter we implemented two significant recalibrations to our demand forecast.

These adjustments were made to shift the booking curve towards more close-in bookings and improve the yield mix.

We are starting to see the intended results from our actions and expect our yield mix improvements to accelerate through the first half of the year.

We currently expect first quarter consolidated PRASM to be between flat and up 2% year-over-year.

This includes a 0.4 point negative PRASM impact due to lost revenue from the severe storms in early January and approximately 1 point negative PRASM impact due to Easter shifting into April this year.

Ancillary revenue continued its strong growth in the fourth quarter, increasing 18% year-over-year, led by Economy Plus sales, which increased 31%.

On a per seat basis, Economy Plus revenue increased 36%, as we leveraged our pricing tools to better adjust our pricing based on the demand forecast.

At our investor day in November, we outlined a goal of exceeding $3.5 billion in annual ancillary revenue by 2017.

We're positioned well to achieve this goal, as we generated $2.8 billion of ancillary revenue in 2013 and expect to grow this by approximately 8% in 2014.

We also fine tuned our ability to provide our customers with ancillary product offers most relevant to them, based on factors such as customer and trip attributes.

We saw increased ticket penetration through our direct digital channels in the fourth quarter, in part due to the enhanced functionality introduced throughout 2013.

We've received excellent customer feedback on our new app and it is already having a positive impact on ancillary revenue.

Ancillary sales via the app nearly doubled in the fourth quarter versus 2012.

We're excited to roll out the first phase of our new website in the second quarter, which will provide improved ancillary opportunities, a better customer experience, and lower distribution costs.

We're also increasing our customers' access to ancillary products by distributing the content in the channels where some of our most valuable customers shop.

We expect to begin offering our Economy Plus product through all three major GDS providers in the first half of 2014.

This will allow our travel management company partners to fulfill Economy Plus transactions through their normal processes.

Importantly, we'll be able to utilize the same dynamic pricing and offer the same rich information through the GDS providers as we do on United.com.

We made good progress in 2013 and ended the year stronger.

We have now shifted our focus to being an even more flyer friendly airline for our customers in 2014 and beyond.

United has an unmatched portfolio of assets, great employees, an unrivaled global network, an excellent fleet of aircraft, and a customer pleasing product offering.

This year, we are excited by our opportunities to leverage these superb assets to satisfy our customers, drive efficiencies in our operation, and improve the quality of our revenue results.

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

Thanks, Jim.

I also want to thank our employees for their great work in 2013.

Due to their efforts, we made substantial improvements in our operational reliability and service that we deliver for our customers.

Today we reported $1.1 billion of net income for 2013, generating a pre-tax margin of 2.8% for the year and a return on invested capital of 10%.

We made significant progress in 2013 in building a foundation for sustainable profits in excess of our cost of capital.

We invested further in our people, product, technology and fleet.

We strengthened our balance sheet; and we laid the ground work to become much more efficient in 2014 and beyond.

For the fourth quarter and full year 2013, our consolidated operating expenses increased 2.3% and 2%, respectively.

Fourth quarter consolidated CASM, excluding fuel, third-party business expense and profit sharing, increased only 0.6% year-over-year.

For the full year 2013, our consolidated CASM, again excluding fuel, third-party business expense and profit sharing, increased 6.3% year-over-year on 1.4% lower capacity.

In each successive quarter in 2013, we slowed our year-over-year non-fuel CASM growth, an early sign of the cost discipline we're instilling throughout the business.

For the full year, our operating margin increased by 1 percentage point, to 4.6% in 2013.

Our fourth quarter operating margin improved by more than 4.5 points year-over-year, to 4.3%, marking our best fourth quarter operating margin since 2010.

While we made meaningful strides in performance as the year progressed, we are not yet even close to where we want to be.

Our team is committed to increasing returns and reducing costs for the long term.

As Jeff mentioned, we are focused on improving the efficiency and quality of everything we do through Project Quality.

This effort is designed to make fundamental, permanent changes to the way we do business.

At our investor day in November, we outlined our plans to create sustainable long-term value for our investors while providing a great experience for our customers.

In addition to the improvements we expect in passenger and ancillary revenue, we are implementing a $2 billion annual cost saving initiative.

These savings are comprised of $1 billion in annual fuel savings and $1 billion in annual non-fuel cost savings that we expect to achieve over the next four years.

We will make meaningful progress on this initiative in 2014, particularly in the areas of productivity, maintenance and fuel consumption.

We expect productivity to improve approximately 3.5% in 2014 through improved tools for customers and employees, reduced overtime, and modifying layouts and processes at our airports, among other initiatives.

In addition to achieving greater operational efficiency, in 2014 we also expect to have a cost tail wind related to pension and post-retirement benefits.

As interest rates have risen, we expect the discount rate used to calculate our liability to increase.

We also modified these programs in the last year which, when combined with the increase in the discount rate and an updated experience study related to plan participation and retirement rates, will reduce the expense associated with these two liabilities by over $100 million in 2014.

The actions we are taking to become more efficient and reduce our costs, combined with the impact of lower discount rates, will help offset some of the other inflationary pressures we face in 2014, such as escalations in labor contracts, increases in airport rents and landing fees, and higher engine overhaul volumes.

We expect CASM, excluding fuel, third-party business expense and profit sharing, to increase between 3.5% and 4.5% for the first quarter and between 1% and 2% for the full year.

The investments we're making in our fleet, product and technology are critical to achieving the cost savings we've outlined and the returns our shareholders and management team expect.

In 2013, we took delivery of 26 new highly efficient and customer pleasing aircraft, consisting of 24 737-900 ERs and 2 787 Dreamliners.

We also retired 36 older, less efficient aircraft in 2013.

We ended 2013 with 693 mainline aircrafts, 9 fewer than we started the year with.

And over the long term, we intend to keep our mainline fleet size roughly flat, at about 700 aircrafts.

To that end, in 2014 we expect to take delivery of 36 mainline aircraft, consisting of 30 737-900 ERs and 6 787 Dreamliners, 2 of which will be the Dash 9s.

We also expect to introduce 27 Embraer 175 regional aircraft.

These 76-seat aircrafts are far more fuel efficient, and provide a superior customer experience and ancillary revenue opportunity versus the 50-seat aircraft they'll be replacing.

We will also begin installing split scimitar winglets on our 737-800 and 737-900 ER aircraft in 2014, which will reduce fuel consumption by approximately 2% more on those aircraft.

By replacing older, less efficient aircraft with more fuel efficient planes, installing winglets, and implementing operational initiatives to reduce fuel consumption, we expect our fuel efficiency to improve by approximately 1.5% in 2014.

At today's prices, that equates to approximately $200 million in annual cost savings.

For 2014, we expect between $2.9 billion and $3.1 billion of gross capital expenditures, including purchase deposits.

In addition to new aircraft which I mentioned earlier, much of the remaining 2014 capital spend is technology and customer facing product investments.

These investments will enable many of the efficiency improvements we've outlined, as well as provide a better experience for our customers.

In 2013, we made substantial progress improving our balance sheet, with $2.3 billion of debt and capital lease payments, of which approximately $400 million represented prepayments of debt maturing beyond 2013.

Additionally, we redeemed approximately $240 million of convertible debt and ended the year with $6.1 billion of unrestricted liquidity, including our $1 billion undrawn revolver.

We took a number of action in 2013 to strengthen our balance sheet.

We issued two tranches of unsecured debt, $300 million of senior unsecured notes maturing in 2018 with an interest rate of 6.375%, and $300 million of senior unsecured notes due in 2020 with an interest rate of 6%.

Importantly, these benchmark transactions will allow us to opportunistically pay off higher coupon instruments, such as the $400 million of 8% unsecured notes due in 2024 which we prepaid earlier this month.

We continue to make good progress on our goal of reducing non-aircraft related debt and using our balance sheet to efficiently fund investment in our business.

In addition to paying off the 8% notes, earlier this month we called for redemption of the remaining $156 million of the UAL 4.5% convertible notes due in 2021.

Our balance sheet improvements resulted in our 2013 interest expense declining by $52 million year-over-year.

Excluding non-cash mark-to-market fuel gains and losses, we expect full year 2014 non-operating expense of approximately $700 million.

Lastly, we continue to face headwinds from Washington increasing taxes and fees on air travel.

Recently, Congress more than doubled the TSA security fee.

For United alone, the net annual run rate impact from this increase is over $100 million.

To make matters worse, a significant portion of the security fee increase will be used to pay for deficit reduction rather than aviation security.

There are now 16 different taxes and fees on air travel, representing a tax of approximately 21% on a typical domestic round trip ticket, a rate that is higher than tobacco and alcohol, items which are taxed to discourage consumption.

Our government should not be discouraging air travel, as it's a powerful economic engine that accounts for 5% of this country's GDP.

Instead of increasing our federal tax burden, Washington should recognize the need for a national airline policy that promotes a successful US airline industry and helps grow jobs and our nation's economy.

While our industry is taking a number of substantive, self-help measures to fix itself, increased taxes and fees from our government and a lack of a coherent national airline policy represent one of the most significant threats to the long-term success of this industry.

Despite the actions of Washington, we at United are eager to demonstrate our continued progress in 2014.

Our financial priorities for 2014 are clear, significantly improve our efficiency, expand earnings and return on invested capital, make high-return yet disciplined capital investments, and further improve our balance sheet to reduce the risk in our business.

We have a lot of work do to achieve these results, but I'm confident that we have the right plan, the right people, and the unwavering dedication to deliver for our employees, our customers, and our investors.

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

While I'm pleased with our accomplishments in 2013, I and my management team are far from satisfied.

We know that we can produce better operational and customer service results and far better financial results from the terrific people and assets at United, and we're very excited about 2014 and beyond.

Our goal is to make United employee friendly by being a great place to work, customer friendly by offering top tier reliability, a competitive product, and consistently strong customer service, and investor friendly by delivering improved financial results.

We are dedicated to doing just that.

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

Thank you, Jeff.

First we will take questions from the analyst community.

Then we will take questions from the media.

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

Brandon, please describe the procedure to ask a question.

Thank you.

(Operator Instructions)

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

Please go ahead.

Thanks.

Good morning, everybody.

John, question for you.

So you've got about $3 billion of CapEx scheduled.

You've got about $1.5 billion in debt maturity.

So that's $4.5 billion, right there between the two, of cash obligation.

How much of that $4.5 billion -- and you can talk directionally, if you want -- how much of that $4.5 billion is going to come from cash from operations, or cash on hand, versus new debt you're going to raise?

Hunter, we're optimistic about 2014 and what we can do in terms of operating cash flow.

As I mentioned in my prepared remarks, we issued two unsecured notes last year, each of $300 million, which in part are intended to provide a little bit more liquidity, as we look at some of the refinancing opportunities that we have in the back half of the year.

And specifically, I am referring to the $800 million of notes that we can prepay beginning this September.

And with respect to CapEx, the guidance that we've given of $2.9 billion to $3.1 billion certainly puts pressure on free cash flow.

But I want to emphasize that those are the right investments for our business.

Those investments are going to enable us to achieve the returns that we expect over time.

So I guess I'm trying to get at, is there a scenario that you might possibly not raise debt this year?

Yes, there is a scenario.

Absolutely.

Great.

Thank you.

And question on the --

Hunter, other than aircraft debt.

Oh, okay.

Well, that counts, too.

Question on the JV.

You guys have a revenue share.

Delta has a P&L share.

I'm talking specifically in the Trans-Atlantic here, A-plus-plus.

Lufthansa runs A-380s on that route.

And I think that's a big CASM tail wind that they get; but it's probably dilutive to yield, because it's such a big plane.

So I guess it's a two-part question.

One, has there been some talk of maybe down gauging some of the A-380s on the Lufthansa side?

And two, is there a possibility that you guys may shift to a full scale P&L share, as opposed to just revenue share, to maybe capture some of those unit cost savings from the 380s that they're running?

Hunter, this is Jim.

A couple points.

One is, without specifically -- I will tell you that the network teams from both sides clearly talk in great detail about capacity and what's best for the JV, as well as delivering a great product for our customers.

I used an example of the holiday period, which is a great example where, in the past, you might find both carriers canceling on the same day, and then you look up and the next day, both carriers are flying.

Well, this year, with that coordination, what you do is you work with each other to make sure that one cancels on one day, one flies, and verse versa, all in delivering a great product and things like that.

So that's just an example that says how detailed a level of conversations on how we manage that capacity and understanding what our partners' needs are and the challenges that they face as they try to place capacity around their network.

Again, the second phase is that we're always working with our JV partners about how to improve the JV.

We, right now, think the revenue share model is the one that works for us.

We actually think that within that, we have a lot of work to do to again make the product much more transparent to our customers and drive results on that.

So we're comfortable where we're at.

That being said, we're always discussing what's the JV look like in the future.

Thank you, Jim.

From Evercore, we have Duane Pfennigwerth online.

Please go ahead.

Good morning, guys.

Good morning, Duane.

Just in terms of your stronger margin improvement in the fourth quarter.

Of that 4 points, how much would you say is a result of non-recurring accounting true-ups?

And can you talk about was there any region in particular that drove that acceleration in margin improvement?

Duane, this is John.

Very little would I attribute to non-recurring items within the quarter.

There's obviously some lumpiness from one month to the next.

But we were really pleased with how we closed out the year.

We're pushing hard internally to achieve some of the goals, and we had broad support from all the divisions.

And I think it's an early indication of what we expect for 2014 and why we're pretty optimistic looking into the year.

And as far as regional strength, Jim might want to chime in.

Domestic continues to be a pretty good balance between supply and demand, as that was stronger, particularly in December.

But other than that, nothing really stands out.

Duane, I would add just a little detail.

The team did an amazing job of managing the holiday period, both from a capacity side, as well as managing the yield and the mix.

So just a terrific job that exceeded our expectations on the top line.

Thank you.

And then just a little detail.

I may have miss it in the release.

What was operating cash flow in the quarter?

Thanks for taking the questions.

Operating cash flow, I don't have that.

Let's see, for the fourth quarter, it was negative $334 million.

Thank you.

Thank you.

From Deutsche Bank, we have Michael Linenberg online.

Please go ahead.

Hello.

Good morning, everyone.

Just two here.

On the pension piece, John, you talked about how the expense, you have a bit of a tail wind.

At your investor day, I think at the end of the third quarter, the liability was $1.8 billion.

Where was that liability at year-end?

How did that settle out?

Just our pension?

Yes.

It was around $4 billion, of just the liability.

Obviously, that's offset by the plan assets.

So the net liability was a little more than $1.5 billion.

Oh, good, so nice -- a few more hundred million of improvement from the third quarter.

Right.

I'd just add that we also saw a fairly significant decline in our other post-retirement benefit obligation, as well.

Okay.

Good.

And then my second question, when we look at the CASM guidance, we have a little bit of a bump up in the March quarter and then it looks like it moderates through the year, and it looks like it's a bit of a repeat from a year ago.

And I'm curious, is that weather, is that costs maybe associated with some of these employee buyouts or potential furloughs?

What's driving that bump in the early part of the year?

Mike, I'd probably point to three things.

One is we have a fairly significant escalation in one of our labor agreements at the beginning of this year that is hitting us in the first quarter.

We also have more lumpiness than usual.

And I'll give you an example of that, with respect to some of our other cost items.

Our maintenance expense, a significant portion of that is air frames.

In the first half of the year, we're going to spend twice as much on air frames as we will in the back half of the year.

And a lot of that is just driven by the timing of checks.

But the third thing, and perhaps most importantly, is there is a ramp up to a lot of the efficiency initiatives that we have in 2014.

As you can appreciate, not all of those begin on January 1. But we're excited about the early returns there.

I think our fourth-quarter results give you some indication about the progress, and we're optimistic for how that rolls out in 2014.

Okay.

Very good.

Thank you.

From Morgan Stanley, we have John Godyn online.

Please go ahead.

Great.

Thank you for taking my questions.

Jim, I just wanted to follow up on the PRASM guidance.

Just given the strong fourth-quarter result versus your guidance, the optimism that we're hearing on the turn around, your comments about accelerating improvement in yield mix, I can't help but wonder if some of the choppiness we experienced last year has caused the team to maybe add a bit more of a layer of conservatism to the PRASM guidance.

Your thoughts?

John, I think that's a fair assessment.

As we look at our first quarter in guidance, put a little bit of color around it, as we guide to that flat to 2% up.

Last year, we ran 5.9% RASM growth in the first quarter, and far exceeded our peers and the industry, on average.

And so we are up against a little bit more difficult comps versus how we performed last year.

The second piece is, as I mentioned, the weather impact of about 0.4 points of RASM to the down side to us.

What we found is in this weather event that was severe, and of the 6,300 cancellation, a majority of those happened to be in Chicago.

Normally, with a short weather event in a leisure period, you pretty much capture the traffic.

But this is a time of year that we did recapture the leisure traffic coming home from the holidays, but a lot of business traffic that historically starts that first week of January heading out, particularly in Chicago, we didn't see the mix that we would have expected on a normal year, given the severity of the weather.

The third piece to our first quarter, and may be different from what other carriers are talking about, we actually see a point shift of RASM from March into April, given the Easter effect and how our network operates within that Easter, so moving into the second quarter.

And then the fourth piece, maybe kind of tied to your comment, John.

The team is really focused on the booking curve right now.

I will tell you that, on the revenue side, whether it's in any division, it's always about how do you do better and how do you beat and so forth.

But we are seeing the benefits of the mix change, and we do expect that to accelerate as we move through the first half of the year.

So when you put it all that together, what we really see is terrific momentum coming off of the fourth quarter and a lot of excitement about 2014, with capturing some of those realities around the first quarter that leads to our guidance.

That's really helpful.

And John, if I could actually ask a question about costs.

Some of the commentary that you gave on productivity improvements that are being driven through the organization sounded pretty impressive.

And when we think about the walk in CASM, ex-fuel, throughout the year and where we're starting at in the first quarter and what the full-year guidance looks like, I wonder, as we look towards the end of the year, could we actually be seeing flat to down CASM, ex-fuel, given the productivity improvements?

Anything you can offer there?

Yes.

I think that's a very reasonable assumption.

As was mentioned in an earlier question, there's a lot more pressure in the first quarter.

But we're pretty excited about the productivity improvements we're seeing.

In the fourth alone, we saw a 5.5% improvement in productivity with our labor forces.

And as we continue to improve our operations, reduce our reliance on overtime, reduce call volume, things of that nature, we'll see those improvements bleed through into 2014.

And you might remember at our investor day, we talked about a multi-year goal of a 15% to 20% improvement, and we're targeting a 3.5% improvement in 2014.

Great.

Thanks a lot.

From JPMorgan, we have Jamie Baker online.

Please go ahead.

Hello.

Good morning, everybody.

Jim, a follow-up to what you were saying just now about RASM.

I certainly understand the point you were making about business travel getting off to a slow start in January because of the weather.

But my view, which isn't necessarily correct, but my view, nonetheless, has always been that most business travel does get recaptured within a month or two, perhaps not if you just missed the annual auto show, but if the role was to visit clients or do what everyone does for a living, you've still got to do that meeting in Chicago.

Did you not incorporate any recapture in the guidance, or did you incorporate that in the guidance?

In other words, is it gone for good?

That's a great question, Jamie.

I think what we do with our guidance is we take the information that we have at hand and try to make some assumptions.

Does business traffic that would have gone that first week of January, does some portion of that start up later in the quarter?

I would agree with you.

I think it does, and so forth.

So it's a matter of, again, to your point of what percent of that happens.

We've tried to incorporate that in there.

If that traffic is coming, it may or may not be seen in the yields that we see right now, because it's still to be booked.

But we clearly try to anticipate for that.

And our guidance kind of reflects our best look at what the data is saying right now.

Sure.

And a follow-up to a question that I actually touched on, I believe, last quarter.

Maybe it was the third quarter.

But the New York market, Delta has indicated they hope to bring JFK up to a profit for this year.

And it sounds like aircraft gauge and transcon flying are the driving factors for them, as opposed to just a rising industry tide.

I'm wondering how your Newark plan compares to this.

I realize that hub's already profitable.

But is the rate of improvement in Newark for 2014 consistent with your consolidated outlook, or possibly the hub becomes a little bit less profitable, as others improve their corporate share here in New York?

Any updated thoughts on this topic?

Yes, Jamie.

So for us, New York is obviously a terrific profit center for us.

It has been a while.

We think that, as we've talked about in the past, the advantage for us is that true connecting hub.

So if something is changing in the local market, we have the ability to connect high yield flow across that.

But that being said, I'll point to our 7% corporate revenue growth in the fourth quarter.

That was our strongest growth of any quarter during 2013.

It gets back to why we're excited about the momentum as we head into 2014.

So whether it's New York or across the system, we think that what we're seeing is great momentum across the system.

I will add that in the transcon, we see some of our pressures, particularly in Newark, began last April, with Virgin America's entry into the market.

Right.

And so as we've managed and tried to optimize revenue around that, we actually see upside as we go through the year, as we lapse some of that experience that happened in 2013.

So we're very excited.

Got it.

Thanks, Jim, for taking my questions.

If I could just quickly squeeze in something for John, just on the fuel efficiency.

Based on the consumption guidance that you gave, it looks like ASMs per gallon will improve this year by about 1.7%.

You indicated 1.5%.

So it sounds like we're on the same page.

But as we look at the 2015 fleet plan that you provided, should the rate of improvement slow or stay roughly the same?

Jamie, when we talk about the $1 billion in non-fuel cost savings -- I've been asked this question quite a bit -- most of that -- I'm sorry, in fuel cost savings -- most of that is through the efficiency of new planes.

There are some operational initiatives that we have.

But I think it's a fair assumption, for your modeling perspective, to assume that the savings are fairly ratable with our delivery of airplanes over that period of time.

Excellent.

Thank you so much.

Thanks for letting me squeeze a third one in.

Take care.

From Cowen and Company, we have Helane Becker online.

Please go ahead.

Thanks very much, Operator.

Hello, guys.

Just a couple of questions.

One, what is the amount of cash you have trapped in Venezuela, and have you been able to shift point of sale away from that market?

What's your thought about that, given today's devaluation?

Yes, it's a very topical question, Helane.

We've got about $80 million of cash that's trapped there in Venezuela right now.

Obviously we, along with other carriers, have had trouble repatriating that in a timely fashion.

In terms of point of sale shift, I'm going to turn that over to Jim.

Hello, Helane, Jim.

This is one where John and I are connected at the hip, because what we do is obviously manage the economics.

So as the devaluation affects the overall results of the economics, the team understands that and tries to make the correct point of sale from a revenue management and a network perspective.

It's a very strong point of sale out of Venezuela, but we do try to adjust for the impact of things, such as devaluation.

We work very closely with John's team on that.

And I would add that we're still waiting to hear, based upon yesterday's announcement from the government, if the cash that we have there can be repatriated at the older rate or it's got to be repatriated at the new rate.

Right.

Okay.

And then, can I just ask about the San Francisco hub?

I think I read that they're closing the runways this summer, like on an alternating basis to do maintenance.

So can you just talk about that and how that's going to affect your operation from an on-time perspective and so on?

Sure, Helane.

This is Greg.

Obviously, we're aware of the impact that's going to have in San Francisco, and we have proactively gone out and reduced our schedule a little bit to help facilitate better performance of the hub, in anticipation of some issues related to the runway closures.

Okay.

Great.

So that's all included in the full-year guidance?

Yes.

Helane, this is Jim.

Our guidance incorporates the runway closures.

Okay.

Perfect.

Thank you.

From Goldman Sachs, we have Thomas Kim online.

Please go ahead.

Thanks.

What are your thoughts about industry capacity continuously ramping up in Asia, specifically in view of the soft yield environment?

For example, are there any signs of demand accelerating?

Or should we be concerned here at all about further headwinds with regard to the overall impact on PRASM?

Hello, Tom.

This is Jim.

A couple comments.

One, it's a very strong performing part of our network and continues to be so, given the economic growth in China, in particular.

What we're excited about here is that we know the competitive challenge is out there.

For instance, a 20% growth of capacity we've seen in China, really that capacity growth is into Beijing and Shanghai, which is why we talk about a second phase of our Pacific strategy of secondary cities.

So the San Francisco to Xiangdu point.

The other piece is, as we move through the year, we have a lot of initiatives in terms of getting the right aircraft on the right market.

If you remember, we've talked about our 747 and the Tech Ops team has built back in tremendous reliability into that fleet.

Whereas last year we concentrated in San Francisco, this year we'll be able to place it in markets that better fit the demand.

So for instance, Chicago to Shanghai and Chicago Tokyo will be on the 74.

And one of the 74s will actually go Chicago Frankfurt.

So the point being, from us, we have many initiatives to optimize the network out there.

And that's in understanding the competitive pressures that are out there and working with what we think is the best footprint, the conversation about San Francisco earlier.

There is no better gateway, in terms of serving the Pacific.

And we think with the moves we're making with the fleet with our second phase of our Pacific strategy of secondary cities, we're well positioned in an entity that operates at a really high level.

Great.

Thanks, Jim.

What is your capacity growth plan for Trans Pac this year?

We don't break out the entities.

So all we've guided to is that system of 1% to 2% for 2014.

Okay.

And John, can I ask you just a question with regard to GAAP-based taxes?

How should we be thinking about how that's going to be evolving as earnings continue to improve?

Thanks.

Sure, Tom.

There is not a bright line test on when we begin booking taxes.

At the end of 2014, we'll get with our accountants and we'll look at the various metrics that they evaluate.

And for example, one of the things that is evaluated is a cumulative three-year earnings on a GAAP basis.

And as we had a significant number of special charges in 2012, that actually put us into a GAAP loss position.

But it's something that we'll evaluate at the end of 2014.

And it would be a few years, likely, before we would pay cash taxes, because we do have significant NOLs.

Thanks a lot.

Thank you.

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

We will now take calls from the media.

(Operator Instructions)

From Bloomberg News, we have Mary Schlangenstein online.

Please go ahead.

Hello.

I just wanted to see if you had any impact during the quarter or the full year from the evaluation changes in the yen?

We did.

We've had -- the depreciation of the yen hurt our results.

In fact, in the fourth quarter, it resulted in about a half a point decline in our consolidated RASM, because of what happened there with the yen.

We are hedged a little bit more into 2014.

We've got about 30% of our exposure hedged, at a little bit less than where the market is today.

So it's a slight gain position.

Great.

Thank you.

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

Please go ahead.

Hello there.

You mentioned a little bit earlier about the storm impact in January.

Did you give that in dollar terms?

And if you didn't, could you?

Sure, Josh, this is John Rainey.

The storm impact on a revenue basis, gross revenue, was about $80 million.

Obviously, as we canceled over 6, 000 flights, we didn't consume as much fuel and we had some cost savings which muted that impact.

So the net impact to us in January was about $60 million.

All right.

Great.

Thank you very much.

You're welcome.

And that is our final question.

I will now turn it back over to our speakers for any final remarks.

With that, actually we're going to conclude.

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

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

Thanks.

And this concludes today's conference.

Thank you joining.

You may now disconnect.