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Operator
Good morning and welcome to United Continental Holdings earnings conference call for the first-quarter 2014.
My name is Brandon and I will be a conference facilitator today.
(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 host for today's call, Nene Foxhall and Jonathan Ireland.
Please, go ahead.
- EVP, Communications & Government Affairs
Thank you, Brandon.
Good morning, everyone, and welcome to United's first-quarter 2014 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 Executive Vice President and Chief Operations Officer, Greg Hart.
Jeff will begin with some overview comments, after which Jim will review operational performance, revenue, and capacity.
John will follow with a discussion of our costs, fleet and capital structure.
After which, we will open the call for questions, first from the analysts and then from the media.
We would appreciate it if you would limit yourself to one question and one follow ip.
With that, I'll turn it over to our new Head of Investor Relations, Jonathan Ireland.
- Head of IR
Thanks, 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 release and investor update and remarks made during this conference call may contain forward-looking statements, which represents the Company's current expectations or beliefs concerning future events and financial performance.
All forward-looking statements are based upon information currently available to the Company.
A number of factors could cause actual results to differ materially from our current expectations.
Please refer to our press release, Form 10-Q 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 reconciliation of these non-GAAP measures to GAAP measures, please refer to the tables at the end of our earnings release and investor update, copies of which are 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.
Now, I'd like to turn the call over to Jeff Smisek, Chairman, President and CEO of United.
- Chairman, President & CEO
Thanks, Nene and Jonathan.
Thank you all for joining us on our first-quarter 2014 earnings call.
Our financial performance in the first quarter was disappointing.
I want to start by saying that this management team understands the importance of improving our financial results.
Although the historic winter weather adversely affected our results this quarter, we know we can do better and are taking actions to do just that.
I'm confident that our strong assets, combined with the strategies we have in place, will begin to yield improving revenue results as we progress through 2014 and beyond.
We're seeing encouraging progress, particularly in the domestic entity, from changes we're making to our revenue management and scheduling practices.
We continue to face significant pressure in the Pacific entity, giving increasing competitive capacity to China and depreciation of the yen.
But, we are taking appropriate actions to maintain and capitalize on our leadership position in the region.
We will make the appropriate adjustments to our network, schedule, and fleet to grow positions of strengths and eliminate our weaknesses.
This could require tough choices such as our recent decision to substantially reduce our flying in Cleveland, but we can't make progress without being willing to make changes that are necessary for our long-term success.
Jim will discussed in further detail the actions we are taking to improve our revenue throughout the network.
I am pleased with our cost performance in the first quarter, particularly given the challenging weather.
I attribute this good performance to the dedication of our employees and their active engagement in the launch of Project Quality.
The Project Quality program, designed to remove $2 billion of annual costs by 2017, is off to a strong start.
It is very early in the process, but I can assure you that we are intensely focused on and committed to its success.
We are engaging in a rigorous process as we work to achieve our goal of delivering durable efficiencies and high quality, all while offering excellent customer service and building a great place to work.
We will continue to invest in our employees, providing them better tools and training to do their jobs more effectively and improve facilities like renovated break rooms and in-house health clinics to make their work experience better.
Our operations are running well, now that the brutal winter is over.
Our customer satisfaction scores for the first quarter of 2014 exceeded those of the first quarter last year.
It's clear that our investment in customer service training last year is having a positive effect on our passengers' experience on United.
This year, we'll be training all of our customer-facing front-line employees to detailed customer service standards and will be objectively measuring our performance against those standards.
This will give us better visibility into how we're doing and where we need to target improvements.
We continue to invest in products and services our customers value, from new airplanes to onboard Wi-Fi, to power outlets, to enhanced digital tools, to functional, comfortable facilities on the ground.
In the first quarter, we introduced 11 new aircraft into our fleet, including to 787 Dreamliners.
By the end of this year, we will have installed next-generation, slimmer, economy seats on all of our Airbus and CRJ 700 aircraft, providing a good product with superior operating economics.
Next week, we'll be opening our brand-new Terminal B at Boston Logan Airport.
It will provide a state-of-the-art experience for our passengers with self-bag-and-tagging in the lobby, eight gates equipped with self-boarding technology, 100% in-seat power at the gates, and a brand new United Club.
I feel good about our direction.
We are committed to expanding our profits this year and to improving our profitability each year after that.
We have established the building blocks it will take to get us where we want to be and where you want us to be.
Now, I'll turn the call over to Jim and John.
- Vice Chairman & Chief Revenue Officer
Thanks, Jeff.
First, I'd like to thank our employees for their tremendous efforts in the quarter through extremely challenging winter weather.
In the midst of grueling storms and bitter cold, we worked together and improved our customer satisfaction's scores year over year.
I'd also like to thank our customers for choosing United.
We worked hard to deliver a flyer-friendly experience through these difficult months, and we appreciate your business.
The winter storms severely impacted the operation in the first quarter.
In total, we canceled 35,000 flights in the first quarter, including 30,000 flights from our regional operations.
This represents 2.5 times the cancellations we had in the first quarter of last year.
Put another way, this is the equivalent of not flying for 7 of the 90 days this past quarter.
Running a reliable airline and providing good customer service are critical to our business, driving both higher revenue and lower costs.
We need to earn our customers business, and we will continue to make prudent investments in our operations and our customer service to provide a product our customers value and will pay for.
Turning to revenue, our first-quarter consolidated PRASM decreased by 2.0%.
The severe weather drove PRASM down by 1.5 percentage points in the quarter, given the disproportionate number of cancellations on our regional partners.
Flights, which typically have nearly double the PRASM of mainline flying, but also impact the fewest customers for cancellation.
Additionally, our first-quarter year-over-year PRASM was negatively impacted by approximately 1.25% points due to the shift of Easter and spring break demand out of March and into April.
Our revenue performance in the first quarter was by no means an acceptable result.
While some of the events affecting our revenue were outside of our control, we expect to perform better.
We are committed to expanding year-over-year revenue each and every quarter.
And this quarter, we fell short.
For the second quarter, we expect our consolidated PRASM to increase between 1% and 3% year over year.
We see substantial opportunity to improve our top-line performance in quarters and years to come.
We are beginning to see encouraging signs from actions we've already taken, most readily apparent in our domestic entity.
I want to highlight four actions in particular that we believe will improve our revenue performance going forward.
First, we've made changes to our revenue management processes, taking fewer early bookings and reserving seats for later, higher-yielding bookings.
In the second quarter, we believe these changes alone will drive 0.5 percentage point of PRASM improvement year over year.
Second, we have begun redesigning the flight frame structures at our Denver and Houston hubs.
This will allow us to build more efficient, directional flows and shorten connection times at these hubs.
We plan to implement the majority of these changes by the end of this year.
Third, we have recently launched a program to more actively sell premium cabin seats on some of our domestic and short-haul international flights at the time of booking.
By more dynamically pricing the seats we have increased our percentage of paid-premium traffic by more than 20% while improving the PRASM on these select flights by 0.5 percentage point.
Fourth, we're better at matching aircraft size to demand closer to departure.
On routes where we are seeing high demand, we are increasingly swapping out smaller aircraft and substituting larger aircraft to better meet overall demand.
These actions represent a sample of the initiatives we are instituting to improve our revenue performance going forward.
Given these improvement, we expect second-quarter consolidated domestic PRASM to increase between 4% and 6% year over year, outpacing are expected consolidated PRASM increase.
The Pacific entity continues to put pressure on our year-over-year consolidated PRASM performance due largely to competitive capacity increases and the weakening yen.
Despite this pressure, the Pacific continues to drive solid, absolute results.
United is firmly committed to the Pacific region.
We are the leading US airline to Asia and expect to strengthen that position as travel demand in Asia continues to grow.
We have, however, experienced substantial pressure in the region over the last several quarters.
Capacity between the US and China in the second quarter is increasing approximately 20% year over year and has increased more than 30% since 2012.
Additionally, the depreciation of the Japanese yen and weakening Japanese economy continue to be a drag on our Japan results.
In total, we expect the Pacific entity to reduce our consolidated, year-over-year PRASM by 1% to 2% percentage points in the second quarter.
To counter these challenges in the Pacific market, we are reinforcing our areas of strength and are expanding into new areas of opportunity.
For example, this quarter we will launch non-stop service between our San Francisco hub and Chengdu, China.
This route addition represents the start of the second phase of our Pacific strategy, which focuses on secondary Asian cities.
It's also a perfect example of the power of the 787 Dreamliner, its long range and appropriate gauge make it an ideal aircraft for routes such as this.
We are the only carrier to connect the United States to this rapidly growing Chinese market, and we are pleased with the early bookings.
Additionally, we are in the process of restructuring our Narita flying.
We have dropped non-core, trans-Pacific flights, like Seattle to Tokyo, and are continuing to reduce our flying between Tokyo and Asian destinations.
This permits us to free up aircraft that were sub optimally used to carry traffic beyond Tokyo and reallocate those aircraft to more profitable flying.
For example, our recent network changes, which included eliminating service between Tokyo and Bangkok, Taipei and Hong Kong, and down gauging service between Tokyo and Seoul, have allowed us to more efficiently use those aircraft on long-haul routes such as our new services between our San Francisco hub and Taipei and between our Houston hub and Munich, which we launched just today.
Our joint venture with A&A has made this possible.
As we eliminated Tokyo-to-Bangkok service, for example, A&A re-times and updates their Tokyo to Bangkok flight to maintain connectivity for our passengers.
Also, we time their Tokyo to Jakarta flight to connect to our late afternoon trans-Pacific bank in Tokyo.
As we continue to coordinate on schedules via our joint venture, we have been able to significantly increase the amount of traffic connecting on A&A.
For example, in the second quarter, we expect to 30% more passengers to connect on A&A year over year.
We are excited about the opportunities we have to further develop this relationship.
Corporate revenue continued to grow in the first quarter.
In spite of the difficult weather, our corporate revenue increased 2% during the quarter and grew 5% in March.
We are actively working to increase the value we offer to and generate from our corporate partners, with both existing and new accounts.
Given changing industry dynamics, we are well positioned to compete and are very focused on account retention and expanding our preferred position with key corporate accounts.
Additionally, we have considerably improved our corporate customers compliance with their contracts and are at our highest level of compliance since 2012.
Our corporate partners recognize the value United provides through robust, schedule utility, our competitive product offering, a reliable operation, and improving customer service.
We expect to continue our progress in the corporate space in quarters to come.
Our consolidated capacity for the first quarter was down 0.3%, mostly driven by regional flying, which was down 1.8%.
For the second quarter, we expect capacity to be between flat and up 1%.
For the full year, we now expect capacity to grow between 0.5% and 1.5%.
Our lower capacity guidance is largely due to weather related cancellations in the first quarter and reduced regional flying throughout the year.
The confluence of the 865 retirements, the new flight and duty times, and the new 1,500 hour rule for new pilots has particularly affected regional carriers making it difficult for many regional carriers to fulfill their schedules.
As a result, we have modestly reduced our schedules, and that is reflected in the capacity guidance I just provided.
If this issue should worsen, we will be prepared to make the appropriate adjustments to our schedule and fleet.
Ancillary revenue continued to grow in the first quarter, growing 6% year over year, and 8% per passenger.
We continue to see solid Economy Plus growth from enhanced pricing capabilities and favorable booking performance on United.com.
Additionally, in the first quarter we reached an agreement to begin offering Economy Plus through Travelport and just recently reached a similar agreement with Amadeus.
This will improve access to ancillary products for some of our most valuable customers by distributing these products through the channels most corporate customers use.
We expect to generate $3 million of ancillary revenues in 2014, which represent 8% growth year over year.
We are beginning to use our real-time decisioning tool, which allows us to tailor ancillary offers to specific customers based on their travel pattern, prior purchases, and destination among other criteria.
Initial results show a more than 15% increase in year-over-year ancillary revenue where we used the real-time decisioning tool.
We will be expanding the use of this powerful tool to more customers through more channels in the near future.
This summer, we will roll out the first phase of our new website, which will provide improved ancillary revenue opportunities and a better customer experience and result in lower distribution costs as more of our customers use United.com.
Earlier this month we launched an all new United Act for the Android platform, which offers customers innovative, new features, smoother functionality and improved touch-friendly design.
In total, we have had more than 10 million app downloads to date.
We are now generating, on average, over $1 million in revenue per day through our mobile applications.
In the first quarter, we nearly doubled our revenue through our mobile app year over year.
We're also continuing to install satellite-base Wi-Fi on our aircraft.
We have more than 230 Wi-Fi-equipped aircraft today, and expect to have more than 450 aircraft enabled with this technology by the end of 2014.
In addition, this quarter we will start to roll out our personal device entertainment product, which wirelessly delivers streaming video from the aircraft's onboard server to our customer's own electronic devices.
In conclusion, United had a challenging first quarter and I am not pleased with our results, but we are already making progress in the second quarter.
We are taking prompt action to improve results going forward.
We are on track to achieve our ancillary revenue goals and continue to improve our operations, customer service, digital tools, and product.
We know we're capable of much more at United.
We have the right plans in place to achieve our full potential and profitability grow our top and bottom lines in the quarters and years to come.
With that, I'll turn the call over to John.
- EVP & CFO
Thanks, Jim.
Thanks to all of you for joining us this morning.
I also want to thank our employees for their efforts in the first quarter in what were very difficult operating conditions.
To date, we reported a $489 million loss for the first quarter, which includes an approximately $20 million negative impact from the severe winter weather.
Despite our unsatisfactory earnings performance, I am pleased with the progress we are making on some of our key Company goals of reducing costs and strengthening our balance sheet.
Our first-quarter consolidated chasm, excluding fuel, third-party business expense and profit sharing, increased 3.1% year over year, nearly a full point lower than the midpoint of our original cost guidance despite weather driving decreased capacity and incremental costs throughout the system.
These headwinds were offset by solid progress we are making with Project Quality initiatives.
Project Quality is designed to make fundamental, permanent changes to the way we do business.
We've seen promising early progress toward our $2 billion annual cost savings goal.
One area in which we've made good progress to date is in procurement, where we achieved approximately $20 million in savings in the first quarter.
Another area in which we've laid the groundwork to drive significant savings is at our airports.
I've spent time at multiple hubs recently observing the progress we're making in this area, and I'm encouraged by the engagement of our employees in finding better and more efficient ways to serve our customers.
We're beginning to transform the way we operate in our airport lobby, on the ramp, in the back room and at the gate, much of it through better use of technology.
It is precisely these types of changes that Project Quality is designed to deliver, changes that redesign processes and improve efficiency without sacrificing the quality of service that we provide.
We are pleased with our Project Quality progress to date and expect to generate between $250 million and $300 million of non-fuel savings from this effort in 2014.
Our overall productivity improved 1.6% in the first quarter, lower than we expected due primarily to the extreme winter weather.
We currently expect to improve productivity by approximately 3% in 2014.
Our long-term goal is to improve productivity 15% to 20% by 2017, generating approximately $500 million in annual savings.
We expect CASM, excluding fuel, third-party business extensive profit sharing, to increase between 1.25% and 2.25% for the second quarter.
We plan to improve our year-over-year non-fuel cost performance in each successive quarter in 2014 and expect non-fuel CASM to be up approximately 1% in the second half of 2014.
Much of this sequential improvement is related to our Project Quality savings accelerating as we move throughout the year.
In the second quarter, we expect to incur approximately $800 million of gross capital expenditures.
We plan to take delivery of nine of 737-900 ERs, each of which provides a greater than $2 million annual benefit versus the 757-200 aircraft they're replacing.
We're also excited to introduce our first six, highly efficient, Embraer 175 aircraft this quarter.
We plan to introduce 70 of these E175s, in total, by the end of 2015, which will replace less efficient, 50-seat regional aircraft.
The E175, featuring first class, economy plus and economy seating, also provides a better product than the 50 seaters.
During the first quarter, we retrofitted our first 737-800 aircraft with new Split Scimitar Winglets, which reduced fuel consumption by up to an additional 2%.
We expect to have these winglets installed on over 80 aircraft by the end of 2014.
We improved our fuel efficiency in the first quarter by 0.6%.
This metric came in slightly lower than our initial expectations because of the severe weather during the quarter led to higher taxi times, aircraft re-routing, and longer APU usage, but we still expect to improve our full-year fuel efficiency by approximately 1.5%, in line with the guidance I provided on the call list quarter.
At today's prices, that represents nearly $200 million in annual cost savings.
We continued to improve the quality of our balance sheet in the first quarter and made $637 million of debt and capital lease payments.
We made further progress toward our goal of reducing non-aircraft related debt by redeeming at par $400 million of 8% unsecured notes due in 2024 and by reducing convertible debt by $202 million.
We have reduced our total convertible debt by nearly 50% since the end of 2012.
In addition to paying down debt, we are also making good progress reducing our pension liability.
Our unfunded pension liability was approximately $1.6 billion at the end of the first quarter.
We've made $118 million of cash contributions toward our pension year to date, and expect to contribute approximately $290 million for the full year.
This is approximately double our minimum funding requirements.
Continuing to fund our pension in excess of our minimum requirement will meaningfully reduce our risk over the long term.
We also completed two significant financings during the quarter, including pricing first EETC of the year.
We raised $949 million through this transaction to finance 25 new aircraft, including 787, 737-900 ER, and Embraer 175 aircraft scheduled to deliver this year.
The blended rate of 4.13% is the lowest among any recent EETC deals.
During the quarter, we also repriced are $900 million term loan due in 2019, reducing the LIBOR margin and LIBOR floor each by 25 basis points.
The success of these transactions is indicative of the progress we've made in the de risking in the business over the past few years.
In conclusion, we are far from satisfied with our first-quarter results and we need to and will substantially improve our financial performance in the coming quarters with the plans we have in place and the actions we are taking.
Through our initiatives to grow our revenue, embed efficiency throughout the business, and further improve balance sheet, we will expand earnings in each of the remaining quarters this year.
We have a clear goal and a solid commitment to generate the level of returns our investors and management team expect.
I'll now turn it over to Jonathan to open up the call for questions.
- Head of IR
Thank you, John.
First we'll take questions from analyst community and then we'll take questions from the media.
Please, limit yourself to one question and, if needed, one follow up question.
Operator, please describe the procedure to ask a question.
Operator
(Operator Instructions)
Michael Linenberg, Deutsche Bank
- Analyst
Two questions here.
Jim, you went through some of the revenue initiatives like re-banking Denver, Houston.
You talked about revenue management.
Do have a rough number on what the revenue enhancement would be on an annual basis in aggregate for all of four of those initiatives?
How do we think about that?
- Vice Chairman & Chief Revenue Officer
Hey, Mike.
It's Jim.
The number that -- one of the areas of revenue management we gave some insights and adding about 0.5% for the second quarter, and that's the only one that were talking about in terms of the incremental impact to our RASM.
I put that in the context of what we've talked about in the third-quarter call when we acknowledged the inputs to the revenue management system and made the quick changes to recalibration that we thought it affected our September number by about a percentage of RASM.
So, you can think of the run rate of being about 1% in terms of RASM performance due to the changes that we're making on the revenue management side.
- Analyst
Okay.
Good.
Then, just one other question here.
Maybe this would be for you, Jim, as well.
You look at how Delta is rethinking their frequent flyer plan and basically now changing -- tying the miles earned basically tied to revenue paid.
It's not unique, I think JetBlue, Virgin America, Southwest are also along those lines.
Is that something that you may be looking at or studying?
Is that something that makes sense given your network, your customer base?
Any thoughts on that would be great?
Thanks.
- Chairman, President & CEO
Michael, this is Jeff.
Clearly, our frequent flyer program is evolving and as are others.
What we're trying to do is better align the benefits that we deliver to our customers through the frequent flyer program with the benefits that the customers deliver to us from their flying, including the profitability of their flying.
I believe that you will see evolution of our program over time.
We can't talk about specifics at this point in time, but clearly this is an evolving process.
Our frequent flyer program is becoming much more sophisticated and is better aligning benefits bidirectionally.
- Analyst
Great.
Thanks, Jeff.
Operator
Hunter Keay, Wolfe Research
- Analyst
John, you talked about at Analyst Day a commitment to cash deployment next year, but given the loss this quarter and what would I believe to be really a lack of really any free cash flow this year above substance.
Is there a chance that you find that you're really not in a position to do that?
I mean if you have, say, like a 1% dividend yield next year, but you margins are 500 basis point below Delta and American, I'm not really sure if that's going to really change the minds of people that are on the fence about buying your stock.
Is there a point where if you operational performance is not good enough relative to others, that you say, hey, maybe we should focus inwards to take some dramatic steps to fix what's wrong before we start deploying cash next year?
- EVP & CFO
Good question, Hunter.
I'll tell you that we have been consistent and we have had two things that we need to accomplish prior to returning cash to shareholders.
One being having a level of earnings performance, which supports that, and we also have some goals to take care of some debt the we can pay off in the back half of this year.
To your point about earnings improvement, I'll tell you that we are extremely disappointed with first-quarter results.
There's no doubt about it.
We have the same feeling about this as the analyst community and investors.
But, we have absolutely not lost any conviction at all in the plan that we laid out last fall.
We're encouraged by a lot of the progress that were making right now.
It's more difficult to see that in some of our financial results, but we've got an extreme focus on improving revenue with Jim's team.
The entire Company has bought in to be more efficient and in improving our costs along the lines of Project Quality.
I'll give you an example of that.
Honestly, for the first quarter this was one of the most difficult operational quarters we've had since 9/11.
Despite that are overtime improved year over year for both our airport groups, which is by over 1 point, and as well as our technical operations group.
So, despite having a more difficult operating environment, the progress that we're making in becoming more efficient is being seen throughout the business.
Now, admittedly, that's not reflected in our first-quarter results, but, again, we have not lost any of the conviction about the back half of this year.
We are fully committed to accomplishing the goal of being able to return cash to shareholders next year.
- Analyst
Would you care to share maybe what that earnings threshold would be?
- EVP & CFO
The way that we look at returning cash to shareholders, I think it's important to be able to do that in good years and bad years.
We look at a lot at the volatility of earnings.
We haven't come out and said we have got to earn X billion dollars to achieve that, but it's really a level of earnings that we're comfortable with in the business, and we're making progress.
We feel good about the back half of the year.
As I said in my prepared remarks, we expect to have earnings improvement in each of the remaining quarters this year.
- Analyst
Okay.
Thanks.
Maybe one for Jim, and, Jeff, if you have opinion on this it would be great.
When I look at Los Angeles as a hub and I see what the Asian airlines are doing there, it makes me ask some hard questions.
Asian airlines, you talked about the competitive capacity, or 20%.
Asian airlines right now have over 500 wide bodies on order, already, right now, the top 11 Asian airlines.
A lot of these guys are Chinese guys, with whom you're not going to have a JV for the foreseeable future.
They don't run their business for returns.
Los Angeles, not a great corporate market.
Domestic stuff, very fragmented at the multiple airports.
When do you ask yourself, is Los Angeles a great place to actually run a hub, not serve but run a hub, when you've got such a great hub just a few hundred miles north in San Francisco?
- Vice Chairman & Chief Revenue Officer
Hey, Hunter, this is Jim.
A couple thoughts.
One is our Pacific, as I mentioned, it is running at extremely high levels of performance in terms of the economics of it.
There are some near-term challenges that you're alluding to in terms of the capacity, particularly to China where we're seeing 20% growth.
For us, that growth is primarily into the US to our hubs.
So, yes, it does affect the San Francisco, Los Angeles and so forth.
I'll tell you, we perform very well out of Los Angeles to China.
We have adapted.
We actually, the 787, is a terrific aircraft for us to manage some of the competitiveness, given its fuel efficiency and its gauge and so forth.
I think for us, what we'll always do is continue to watch demand and make sure the capacity is aligned with demand, and at the same time we're going to continue to build on our strengths and where our assets are at their strongest point.
But, you're right.
It's a competitive environment and it's an area that we'll continually watch and make the right moves depending on where -- the necessary moves that we need to make.
- Analyst
Okay.
Thanks.
Operator
Jamie Baker, JPMorgan.
- Analyst
Quick question for Jim, a follow up to Mike's question on the revenue initiatives spooling up by year end.
Does that mean you believe United can close your RASM gap to the industry by year end?
Or, should we not be that ambitious?
- Vice Chairman & Chief Revenue Officer
Hey, Jamie, this is Jim.
First let me say this, we run the highest length-of-haul RASM in the industry.
We're going to continue to do that.
We're disappointed in the rate of growth off of that, and those initiatives that I talk about are specifically worked to put us on the path that will get us to the point that we're growing at the rate that we feel that we need to do.
What I will say is that, yes, we expect to close the gap, our RASM performance.
I'd like to leave it at that, is that we will close it.
We have a great plan.
We have our strong commitment of the team here, and we will close that gap over the quarters and years to come.
- EVP & CFO
Jamie, I would just add to that, that we recognize that we're underperforming the industry.
We have an expectation among ourselves that we should be an industry leader.
The first step is to have industry competitive margins, and so when we talk about closing the RASM gap, we're actually much more focused on closing the margin gap.
Some of the decisions that we make, may be RASM dilutive, but profit maximizing.
You could see some of that in our numbers, but I think, at the end of the day, we need to be held accountable for our margin performance versus our competitors.
- Analyst
Okay, and that actually leads me to the second part and perhaps a tougher part of the question for Jeff.
Have you considered at any point, that perhaps, and an emphasis on perhaps, there is a more structural explanation as to why results are being held back.
For example, we've cited, and others have as well, that you face more competition in your hubs than American and Delta do.
If I jump in a taxi in San Fran or Denver and say take me to the airport, the guy asks, who are you flying?
That just doesn't happen in Charlotte.
You pursued a forward-cabin strategy that should be generating a RASM premium, but currently isn't.
I appreciate all the talk about winglets and Wi-Fi and the like, but I'm just not convinced that, even if properly executed, even if properly mined, United has the same profit potential as your primary competitors.
Any thought on that?
- Chairman, President & CEO
Well I don't think, Jamie, that there is a fundamental structural problem.
I mean, all things being equal, high concentration in a hub is a good thing.
There's no question about it.
But, it's also important to have hubs in the key business markets.
It's important to have a good mix of local and flow traffic.
We do that.
So, no, I don't think is a fundamental structural problem.
Now, there are issues with geographic locations for winter storms.
I will grant you that.
We got whacked West, East, Denver, Chicago, Cleveland, New York and Dulles all in a row.
Some of our friends in the South did not have that difficulty.
I don't think there is a fundamental structural there.
I think for us, it's a lot of basic blocking and tackling, getting our operational integrity humming.
We're clearly making progress there and certainly -- Greg Hart is here if he wants to comment on that, but we clearly are.
Focusing on tuning all of our revenue initiatives, and Jim and his team are working very hard on that.
We operate really inefficiently today, Jamie.
That's what Project Quality is all about, bringing quality and efficiency, elimination of defects, all across the system.
We also, candidly, are still operating with a number of parallel systems, processes, leftovers from the merger that we need to conclude.
Those drive inefficiencies and they drive costs.
Our customer service, historically, since the merger, has not been as good as it should be.
We're spending a lot of time and money and effort training our folks.
This year, importantly, we're bringing in a third-party, which will objectively measure us against those customer service standards so we can establish a baseline, which will help us improve customer service.
If you have the lack of operational reliability, which historically, which we're improving a great deal, that drives a lot of costs and a lot of dissatisfaction, which drives away revenue and improves cost.
So, in answer, no, I don't think we had structural problems.
I think we've identified all of the areas where we need to improve.
We have very good, very disciplined, very rigorous plans to attack each of those areas and I'm very confident that we will.
- Analyst
Okay, Jeff.
I appreciate being so forthright.
Thank you.
Operator
John Godyn, Morgan Stanley
- Analyst
Obviously, investors are losing faith a little bit, based on the second-quarter performance, that the revenue side of the turnaround is going according to plan.
On the other hand, Jeff, Jim, John, what we hear from you guys is that you are taking the appropriate actions.
You're seeing encouraging signs.
You have a lot of confidence that things are going to work.
I was just hoping that you could elaborate on that disconnect?
What exactly are you seeing that gives you more confidence than what investors are seeing?
When might investors start to see the same things?
- EVP & CFO
Well, John, I'll start from a cost perspective.
Obviously, our costs have been too high.
If you look at our cost guidance for the year being up 1% to 2%, excluding fuel, that's a much more appropriate level to have the need to run the business, and that candidly an expectation of what we have going forward for the next few years, something less than inflation.
We're seeing a tremendous amount of focus and improvement in a lot of the initiatives that we've undertaken.
I gave the example to an earlier question of the improvement in overtime.
We're seeing deployment of technology that is enabling us to better staff airports, to do it in a more customer friendly way as well.
There's every aspect of our business, that we're able to touch, where we're seeing good improvements and an overall engagement by the employees.
That's reflected in our cost results.
I think, speaking for both cost and revenue, the issue is often the pace of change.
It's never as fast as what we would like.
No one wanted that to occur faster than we do is a management team.
The things that we're seeing, whether it's the booking information that we see or the cost expectations, the early indications we're pretty excited about.
- Vice Chairman & Chief Revenue Officer
John, this is Jim.
Again, on the revenue side, obviously, we have the advantage of seeing things in a much more granular level on the revenue side, which is quite frankly why in the second quarter, we wanted to break out the PRASM guidance from -- to highlight some of the pressure areas that we are in in the Pacific, but also highlight the consolidated domestic rolling forward to 6%.
Even if I adjust for weather in the first quarter, what the team is seeing is the beginnings of the actions they've taken grabbing hold at the granular level.
Those are the things, that here, drive so much optimism on our side is because we can separate the pressure areas, such as China and so forth, and understand that market and how well we perform in that market.
At the other hand, the initiatives that we're doing, we can see some of the early results for instance, from the revenue management recalibration.
We have all the confidence, whether it's the up-selling initiatives, whether it's the re-banking, based on the initiatives that we've driven so far today, that we're going to have success in that.
That's where the enthusiasm on the revenue side comes from as we look forward over the next several quarters and next several years.
- Analyst
When we think back to the fall, the first half of the year was when we were supposed to see a lot of this inflection.
You get a pass on the first quarter because of weather.
We're not seeing in the second quarter.
Looking out today, at what quarter, can we all agree that it's not working?
- Vice Chairman & Chief Revenue Officer
John, in terms of revenue management, I highlighted that we're seeing those benefits in the second quarter, 0.5% PRASM, in terms of contributing to the 4% to 6% consolidated domestic guidance.
We are seeing the benefits as we move through the year and where we'll have the full effect, as we get over the month of September, in the third quarter.
The other initiatives are building.
Some of the ones that I've talked about of the swapping of aircraft, we can actually measure those, real time, how we're doing and we're going to start to expand those.
Again, at a granular level, we're early in initiatives and we're actually seeing the benefits.
Those are the things that we were highlighting today on the call.
- Analyst
Got it.
Thanks.
Operator
Helane Becker, Cowen and Company.
- Analyst
I think one of last year's many excuses was regarding maintenance and having aircraft parts our of place when things went wrong.
As part of the improvement process, have you -- can you speak to that and whether that's actually showing signs of improvement?
- EVP & COO
Sure, Helane, this is Greg.
As it relates to maintenance and our investment in the infrastructure, we've actually spent quite a bit of time, actually last year, putting infrastructure in place that provided us the opportunity to perform at a much higher level.
The data we can point to that says that that's been a success is that in the calendar year 2013 we canceled fewer flights at United Airlines, and the airline as it relates to maintenance cancels, as the airline had done in the last decade.
We've seen a lot of progress as it relates to that.
We continue to build on that progress and have a lot of momentum moving forward in terms of improved performance as it relates to, not only maintenance, but all of our operations.
- Analyst
Okay.
One of the questions that I get, and maybe this is for Jeff, is that for a while your revenues were about equal to your peer group and you earned half as much.
Actually, now your revenues are less than your peer group.
Delta and American both had reported, had out earned you this quarter.
I'm just wondering how much of the revenue gap gets narrowed by some of these initiatives that you're putting in place in an environment where your two biggest airports are undergoing runway construction this summer and are undergoing -- and especially at Newark where the air train isn't going to work from May 1 through, I think it's, July 15, like peak season?
How does that happen?
- Chairman, President & CEO
Helane, first of all, let's focus bigger picture here and I'll ask Jim to talk about San Fran and Newark -- the emass in San Fran and run way work in Newark.
Our goal here isn't really focused on pure revenue comparisons, but rather as John talked about, making sure we're earning industry competitive margins.
We have a lot of assets that generate a lot of revenue for us, and we can do a better job and will do a better job, generate even more revenue from that set of assets.
Our goal, really, is focused on margin.
We're focused at pulling, obviously, the two levers of revenue and cost, but also making sure, as Greg talked about, making sure that we're operating reliably.
Because you've got to have a reliable core to generate the revenue and to run your operations efficiently since you're doing it so at lower cost.
The issues that which are quite temporary at Newark, which is slot constraint, so that's actually much easier than San Francisco.
Those are temporary, but I'll ask Jim or Greg to talk to you about those.
- EVP & COO
Hey, Helane, this is Greg.
In Newark, just a point of clarification, we actually have runway construction in April and May, so we're halfway through that and are hopeful that it actually might end a little earlier than planned.
As it relates to the connecting train that runs from the train station to the terminal area, we've worked with the Port Authority to put in a very vigorous plan to recover with buses.
I think that while a little inconvenience for the passengers, we'll be at a very good product.
Of course at the terminals, on air side, we have a busing service that runs between our two terminals in Newark.
In San Francisco, we've also spent a lot of time working to make sure that we mitigate as much as possible the runway construction that is taking place there.
It starts in May and ends in September.
We're, obviously, hopeful, again, that that ends a little bit sooner, given some of the incentives in the construction contact that the airport has put out there.
We have worked to isolate the impact to San Francisco.
The construction is happening in the summer because there is less weather disruptions in the summer in San Francisco, so it's the right time to do it, from a weather perspective.
We've also isolated the schedule as such as we can adding ground time in San Francisco, lock time as well as isolated the flow so the aircraft in San Francisco as much as we could.
- Analyst
Okay.
With respect to the 50-seat issue, the performance of the regional airline, where you seem to cancel, or you regional partners seem to cancel a huge number of flights.
As you move up the food chain to the 76 seaters and the larger, is that going to be done more mainline flying?
Is that how we should think about that?
- Vice Chairman & Chief Revenue Officer
Helane, this is Jim.
I also want to remind that the completion factor that we saw on the regional in the first quarter was driven, by far primarily, by the weather event, the severe weather event.
As I mentioned in my comments, of the 35,000 cancellations, you're right, 30,000 were regional.
The severe weather, and our trying to affect the least number of customers as possible, drove it disproportionate to regional.
As that weather moves out, we've already seen the regional completion factor improve, relative to the first quarter, significantly.
The 70 seaters, that operates under our regional partners and not on the mainline.
- Chairman, President & CEO
Helane, to your point, it is important that, take weather events aside, it is important that we deliver the same degree of focus to the operational reliability and on-time performance of our regional partners as we due to the mainline.
We have a lot of time and attention to that.
We have a number of regional partners, obviously, as well, but from a customer's perspective, it's important that we have those aircraft as reliable as they can be in as much on-time performance that can be.
It is true, however, that during severe weather, those get canceled more.
They affect the fewest passengers, comparing canceling of a 50 seater versus canceling a 777.
Operator
Duane Pfennigwerth, Evercore
- Analyst
I think I heard you talk about close-in re-fleeting.
I wondered if you would expand on that little bit?
How many aircraft swaps per day would you expect?
How do you manage the complexity?
- Vice Chairman & Chief Revenue Officer
Hey, Duane, this is Jim.
On a daily basis we're probably doing approximately 50 swaps, where we're swapping, where we have a good sense of the demand and the demand is stronger for instance and we'll swap in a larger gauge and move that flight to, obviously, a market where the demand is less and so we're matching capacity and gauge very much in line.
We actually look at that 30 to 45 days out and start watching it.
Some of those swaps will start out -- as far out as 45 days.
As we get closer in to 30 days, the team works very closely with Greg's team and ops to make sure that we're providing a consistent, reliable product.
We're seeing great and early results from that, great results from it.
- Analyst
Okay.
Appreciate that.
Just on the regionals, on your 50-seat regionals.
I wonder if you'd be willing to talk about the number of 50 seaters where you have leases expiring in 2014 and 2015?
How that number compares with those same aircraft that come off contract with your regional service provider?
In other words, is there a chance that you have to find a new service provider for some of those for a period of time?
- EVP & CFO
Duane, this is John.
Over the next 18 months, we've got 175 aircraft that come out from underneath a capacity purchase agreement.
Of those, 125 actually, the head lease have expires.
A certain number of those we could place with another provider or extend the capacity purchase arrangement with that current provider.
But even of those remaining aircraft that will come off lease, the lease expiration is in the very near future as well.
One of the things that we had talked to you about in the past is, it's important for us to have a lot of flexibility in our fleet plan.
You see that both in our mainline fleet as well as our regional fleet.
We've laddered a lot of these capacity purchase agreements, so that is allows us to have that flexibility to remove aircraft from our schedule when we need to.
- Analyst
Okay.
Thanks very much.
Operator
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)
Ted Reed, The Street
- Analyst
I was thinking about Jamie's question, and is it possible to say that what's really hurting United is that your best asset is the San Francisco hub to Asia and that the capacity issues in Asia and the yen devaluation are what is really contributing to the under performance, just as much or more than anything else?
- Chairman, President & CEO
Ted, let me just talk about the hubs for a moment and then I'll turn over to Jim.
Look, we have a number of -- San Francisco is a terrific gateway to Asia.
It is clearly the best hub on the West Coast for Asia.
We also have terrific hubs throughout the United States.
I wouldn't say San Francisco is the best hub, it is a great hub.
There's no doubt that competitive capacity pressures from the US to Asia, particularly to China, where we are the largest US airline by far, have contributed to our -- have pressured our unit revenue.
That said, we make good money in Asia today, even with that pressure.
We expect to continue to make good money in Asia.
We expect to not only maintain our lead there, but we would have opportunity to grow into new markets.
A lot of capacity has gone in for China, for example, Beijing or Shanghai, and our new route to Chengdu, a non-stop basis, is an exciting opportunity.
We think we have future opportunities for that.
I'll ask Jim if he'd like to comment anymore.
- Vice Chairman & Chief Revenue Officer
Hey, Ted, this is Jim.
I'll take you over to the other side of the coast, because Newark is a terrific asset also.
We have a terrific presence in New York and we have the unique presence.
That presence is because we have the true-connecting hub.
From a network perspective, not only all the things that go with that hub, great facility, great product and so forth.
We have that opportunity to offset weak demand in the local market, whether it be absolute demand or demand that's driven by lower pricing with higher yielding demand that wants to connect to Europe over Newark.
Nobody else can do that in the New York area.
I would add to Jeff's points is that we have a number of great assets in the hub, where each of them are unique, whether it's Houston into Latin America, Jeff's comments on San Francisco, New York, all of our hubs have unique strength to them.
As we go forward, we're going to build on those strengths.
- EVP, Communications & Government Affairs
Okay.
With that, we're out of time so we're going to conclude.
Thanks, everybody, for joining the call today.
Please call Media Relations if you have any further questions.
Goodbye.
Operator
Ladies and gentlemen, this concludes today's conference.
Thank you for joining.
You may now disconnect.