聯合航空 (UAL) 2014 Q2 法說會逐字稿

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  • Operator

  • Good morning and welcome to United Continental Holdings earnings conference call for the second quarter 2014. My name is Brandon, and I'll be your conference facilitator today. Following the initial remarks from management, we will open the lines for questions. At that time, if you have a question, please press star followed by one on your touch tone phones.

  • This call is being recorded and is copyrighted. Please note that no portion of the call maybe 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 Jonathan Ireland. Please go ahead.

  • Nene Foxhall - EVP, Communications and Government

  • Thank you, Brandon. Good morning, everyone, and welcome to United second quarter 2014 earnings conference call. Joining us in Chicago to discuss our results are Chairman, President, and CEO Jeff Smisek, Vice Chairman and Chief Revenue Officer Jim Compton, Executive Vice President and Chief Financial Officer John Rainey, and 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, an capital structure, after which we will open the call for questions, first from analysts, then from the media. We appreciate it if you would please limit yourself to one question and one follow-up. With that, I'll turn it over to Jonathan Ireland.

  • Jonathan Ireland - Managing Director IR

  • Thanks, Nene. This morning we issued earnings release and separate investor update. Both are available on our website at ir.United.com. Information in this morning's earnings release and investor update and 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-Q, and other reports filed by 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. And now I would like to turn the call over to Jeff Smisek, Chairman, President, and CEO of United.

  • Jeff Smisek - Chairman of the Board, President, CEO

  • Thanks, Nene and Jonathan, and thank you all for joining us on our second quarter 2014 earnings call. Today we reported pre-tax earnings of $921 million, an increase of more than $300 million year-over-year. We earned $2.34 per diluted share, a 49% increase versus the second quarter of last year. We're pleased that our second quarter unit revenue performance exceeded our initial guidance, and that our quarterly non-fuel unit costs decreased year-over-year.

  • Our second quarter financial performance reflects the progress we are making on initiatives we have been implementing over the last few quarters. Our revenue management and network improvements are delivering as expected. We're exhibiting excellent cost control, we are making disciplined aircraft investments that are improving our fuel efficiency, and we are continuing to strengthen our balance sheet.

  • While we are pleased with the progress we made during the quarter, our entire management team is focused on continuing to improve our overall financial performance. We have a strong plan in place, and our team is committed to executing against it. We are working to accelerate our revenue growth. We have a tremendous set of assets and we will take the appropriate actions with our network and fleet to maximize the revenue we produce from those assets. In a few minutes, Jim will walk you through the steps we are taking to optimize our network, regional operation, and revenue management, all with the goal of improving our revenue and margin performance.

  • At the same time, we continue to execute on project quality, our $2 billion annual cost savings program, to make meaningful gains in quality and efficiency. Our employees have played a large part in this initiative, and I thank them for identifying and implementing durable, high quality improvements across our business. I have [ascribed] much of our excellent second quarter unit cost performance to the progress we are make in this area, and I'm confident that our team will continue to execute at a high level going forward.

  • In what is perhaps the clearest demonstration of our confidence and our ability to achieve the goals of the long-term plan we laid out at our Investor Day last fall, we announced this morning a [$1 billion] share repurchase program, which we expect to complete within the next three years.

  • We have made significant progress improving our overall capital structure, and initiating a shareholder return program is another step towards achieving a more balanced (Inaudible) of cash flow. We are firmly committed to increasing the value we create for our shareholders, and our share repurchase program is indicative of that commitment.

  • John will walk you through this program in greater detail in just a few minutes. During the second quarter, we faced difficult operating conditions, particularly due to multi-month runway closures at our gateway San Francisco and Newark hubs.

  • Our teams stepped up throughout, demonstrating their professionalism, running a solid operation, and providing good customer service. We're focused on running a more reliable and efficient operation, with a consistent product offering, and are confident in our ability to continue to improve in these areas.

  • We made significant strides in the second quarter towards our goals, but recognize that we have much work ahead to achieve United's full potential. We have very experienced, highly skilled employees who are committed to our success.

  • We'll continue to take the appropriation actions and make the necessary changes to get us to the level of earnings our shareholders and this management team expect. Now, I will turn the call over to Jim and John.

  • Jim Compton - Vice Chairman, Chief Revenue Officer

  • Thanks, Jeff. First I'd like to reiterate Jeff's recognition of our employees for running a reliable airline this quarter, while continuing to operate more efficiently. I'd also like to thank our customers for choosing United.

  • We are working hard everyday to improve the flyer-friendly experience we deliver, and we appreciate your business. In the second quarter, United's consolidated PRASM grew 3.7% on approximately flat capacity year-over-year above our original PRASM guidance range of 1% to 3%.

  • The improvement relative to guidance was primarily driven by better than expected performance in the Pacific and domestic regions. we have been on a path to optimize our Pacific footprint, and we are beginning to see benefits from the changes we have implemented.

  • We're restructuring our Asia flying to leverage our West Coast hubs, flying West from Tokyo to Asian destinations, and instead, flying directly from the West Coast to secondary Asian cities. we have recently added two new Pacific routes, San Francisco to Taipei, and San Francisco to Chengdu, and they are both performing better than expected.

  • We have also optimized our 747 deployment after investing in the fleet's reliability last year. As part of the 747 optimization, we have more appropriately matched capacity with demand in Australia, by down-gauging our flying to 777 aircraft, a we saw a double-digit PRASM increase in Australia in the second quarter.

  • In addition, we experienced better than anticipated yields this quarter in China, despite the added competitive capacity with yields in China slightly positive year-over-year. We expect this positive trend to continue through the peak summer months, although, we anticipate that accelerating industry capacity growth in China will put pressure on yields after the seasonal peak. That said, we are seeing the benefits of the actions we have taken to grow our leading Pacific franchise, and will continue to take the appropriate steps to build on this area of strength for United.

  • In the second quarter, our consolidated domestic unit revenue grew nearly 6%, the largest unit revenue gain of all entities. Driven by a solid demand environment, as well as strong execution on our revenue management initiatives. The improvements we have made to optimize our booking curb, taking fewer early bookings, and holding more seat inventory for later higher-yielding bookings, drove approximately [0.75%] of consolidated PRASM growth in the second quarter.

  • We expect to drive a [full point] of year-over-year PRASM growth in the third quarter. Additionally, we recently restructured the premium cabin fares on many of our domestic and short haul Latin flights. This initiative drove our consolidated paid premium cabin load factor up 5% to 47%, and it resulted in approximately [0.50%] of consolidated PRASM growth in the second quarter.

  • We continue to make gains with our corporate partners. In the second quarter, revenue for large corporate accounts, which is what we have typically reported, grew by 3% despite decreased year-over-year corporate revenue in April due to the Easter holiday shift. Additionally, we are seeing good growth from the rest of our corporate portfolio, primarily from our PerksPlus product, which is a points-based loyalty program for small- to medium-sized businesses. Our overall corporate portfolio, inclusive of PerksPlus, grew approximately 6% in the second quarter. Ancillary revenue grew at a solid clip in the second quarter, increasing 7.9% per passenger.

  • Our paid premium upgrade product performed extremely well in the second quarter with a 28% revenue increase year-over-year. In alignment with the domestic premium cabin pricing at the time of booking that I spoke about earlier, we have taken a similar approach with our premium cabin upgrade product. We're restructuring the prices and improving the targeting of our product and customer marketing, and are seeing a material increase in take rates an revenue as a result.

  • As Jeff said, while we were pleased that we exceeded our guidance for the second quarter, we have significant opportunities to improve on this result. My team is intent on doing just that. We have a comprehen - comprehensive effort underway to improve our revenue and margin performance.

  • The initiative falls into three broad categories. Network and Scheduling, our regional operation, and Revenue Management. We have identified meaningful areas of opportunity in each of these areas, and while many of the changes we will make in these areas will yield near-term benefits, several of the changes will take a period of time to implement and drive results.

  • I'll highlight a few of the examples of these initiatives, but be assured that we have identified, and will continue to identify additional opportunities. First, in the Network and Scheduling area, we plan to redesign the [flight bank] structure at our Chicago hub, as well as at our Denver and Houston hubs, which we announced last quarter. We will implement these changes between the fourth quarter this year and the spring of 2015. These changes will allow to us build more efficient, directional flows in shortened connection times.

  • Beginning this fall, we are adding more seasonal shaping to our schedule, increasing the amount of flying we do in the seasonal peaks, and decreasing our schedule during the [drop] periods. For example, in 2015 we expect to fly approximately 25% more capacity in July versus February, compared to just 13% in 2012. We will accomplish this by more optimally timing our maintenance visits, flight crew training and flight crew hiring.

  • We will continue to make disciplined and thoughtful decisions regarding the comprehensive structure and performance of our overall network. As we have consistently said, each hub has to earn its place in the network, and we will make return-driven decisions regarding the optimal hub network for United.

  • Further, we are working to maximize the utility of our gate and slot portfolio to increase the scale and operability of better performing hubs. We are excited about the long-term revenue opportunities these Network and Scheduling initiatives will drive. It is important to recognize - recognize that changes in this area by their very nature are more strategic, and will take more time to implement than some of the other areas of our business.

  • We also have a significant opportunity to optimize our regional operations. In particular, continuing to reduce the number of 50-seat aircraft in our fleet, and improving the reliability of our regional flying. Over the course of this year and next, we will remove the equivalent of more than 130 50-seat regional jets from our schedule. We will replace 70 of these with 76-seat Embraer 175s that we are now taking delivery of, and many we will not replace at all.

  • At the beginning of this year, we flew approximately 8% of our overall capacity with 50-seat and smaller aircraft, but by the end of 2015, we expect that to decline to only 5% of our total capacity. We are also taking a number of actions to improve the reliability of our regional operation beyond simply flying fewer 50-seat jets.

  • One particular area of focus is reducing the complexity of our regional flying by consolidating the number of regional flying partners we utilize in a given hub. We are also reducing the number of hubs from which regional partners operate. For example, today we have eight express operators flying out of our Washington Dulles hub, and we will reduce that to just four partners by this September.

  • By concentrating on our regional operations with fewer regional carriers in a hub, we will reduce complexity and variability, and thus drive improved reliability. We expect the changes we will make in our regional operation will have a revenue benefit as we improve predictability an our onboard product as well as a cost benefit, as we will be flying much more efficient E-175s instead of 50-seat aircraft. These examples illustrate only a few of the opportunities we have to grow United's revenue.

  • Through the enhancements we will make to our Network, our Schedule, our Regional operation, and our approach to Revenue Management, we will significantly improve revenue performance over the next 18 months. We'll provide more detail on our progress in the coming quarters. For the third quarter, we expect PRASM to grow between 2% and 4% on capacity growth of between 0.2% and 1.2% year-over-year.

  • For the full year, we now expect capacity to be between flat and up 1%, [1%] lower than the guidance we provided at the beginning of 2014. In conclusion, I am pleased with our improved performance.

  • However, we still have significant runway ahead. My team and I are committed to improving our revenue growth and we are very optimistic about our strategy to do so. With that, I'll turn the call over to John.

  • John Rainey - EVP, CFO

  • Thanks, Jim. And thanks to all of you for joining us this morning. I would also like to thank our employees for their efforts in the second quarter. Throughout the Company, we are making long-term, sustainable improvements, and I appreciate everyone's hard work in developing and implementing these important initiatives.

  • Today, we reported $921 million of pre-tax income for the second quarter, generating earnings per diluted share of $2.34. This represents a pre-tax margin of 8.9%, an improvement of nearly 3% year-over-year. Additionally, in the second quarter, we generated $1.5 billion of operating cash flow, and nearly $600 million of free cash flow.

  • While we are pleased with our improvement, we have significant opportunity to expand upon these results to generate the level of earnings we expect. Second quarter consolidated CASM, excluding fuel, third-party business expense, and profit sharing, was 0.2% lower year-over-year, much better than our initial expectations for the quarter. Results from our cost-saving initiatives during the quarter exceeded our expectations, and we also renegotiated certain maintenance contracts.

  • Additionally, some expenses we originally anticipated to incur in the second quarter shifted into the third. Year-to-date, our CASM performance has exceeded expectations despite the fact that we reduced our capacity by more than [1%] in the first half of the year from our initial plan for 2014. We expect this strong performance to continue in the second half of the year, with third quarter and full year non-fuel CASM each increasing between 1% and 2%.

  • I attribute much of our good cost performance to outstanding execution of our project quality initiative. This initiative is designed to generate $2 billion of annual cost savings by 2017. Through project quality, our team is making fundamental, permanent changes to how we do business.

  • For 2014, we expect to achieve nearly $200 million in fuel efficiency savings and approximately $300 million in non-fuel savings from this initiative, which is at the high end of the range we previously provided. The progress we are make in this area is clearly evident in our second quarter CASM performance.

  • One area in which we are seeing meaningful gains already is productivity. In the second quarter, we improved our productivity by 3.9% year-over-year, the fourth consecutive quarter of improvement. For the full-year, we are on track to improve productivity by 3% versus 2013. Since our merger, we have evolved how we allocate capital at United and today we announced the next phase of our capital allocation plan with a $1 billion share repurchase program, which we expect to complete within the next three years.

  • This amount represents approximately 6% of our market cap. In conjunction with this announcement, we have initiated a $200 million accelerated share repurchase program which will be completed within the next three months. In addition, during the second quarter, we spent $62 million to retire convertible debt, which would have converted into 1.5 million shares of United stock. Over the last year, I have consistently talked about two [gaining] items prior to initiating the shareholder return program.

  • First, we wanted to address the $800 million, 6.75% secured notes, for which we have a plan in place and I'll speak to the details shortly. Second, we wanted a level of earnings and cash generation that supported the capital distribution to shareholders, and our earnings outlook does just that. At this time, we believe the best method to distribute capital to shareholders is through a share repurchase program.

  • We have confidence in our earnings potential, and believe we are trading at a discount to our intrinsic value. As we continue to demonstrate progress against our plan, increase our earnings, and further pay down debt, we will evaluate if and when we should complement our share repurchase program with a dividend.

  • In addition to returning cash to our shareholders, our long-term capital structure goals include reducing or non-aircraft related debt and managing total debt at approximately $15 billion, while maintaining an unrestricted liquidity balance of $5 billion to $6 billion. In the second quarter, we made $333 million of debt payments, and for the second half of 2014, we expect approximately $575 million of scheduled debt payments.

  • We are seeing a clear benefit from the balance sheet improvements we are making. We expect our 2014 interest expense to be approximately 30% lower versus just four years ago.

  • In keeping with our goal of reducing non-aircraft debt on our balance sheet, we intend to redeem the entire $800 million of 6.75% secured notes. We expect that this redemption will occur this September when the notes become prepayable at par.

  • As we look forward, our debt and capital lease payments over the next four years are approximately $1.1 billion annually, about half of what our annual maturities have been over the last four years. In addition to reducing our debt, we are making high return investments in our business. In the third quarter, we expect approximately $650 million of gross capitol expenditures. We plan to take delivery of four 737-900 ERs, and two 787s, including our first 787-9 during the quarter.

  • Also in September, we expect to close on a transaction under our existing $1.9 billion credit facility, in which we will increase the size of our undrawn revolving credit facility by $350 million, to a total of $1.35 billion, and issue an additional $500 million tranches of term loan debt. These transactions will allow us to reduce our balance sheet debt and interest expense, while continuing to maintain an appropriate level of liquidity.

  • We introduced our seven, highly efficient Embraer 175s in the second quarter, and we expect to take an additional twelve in the third. We expect to have 70 of these operating by the end of 2015. Additionally, we are working to meaningfully reduce our capital expenditures over the next four years by working with the aircraft manufacturers and continuing to explore opportunities in the used aircraft market.

  • I'm encourage by our second quarter financial performance and by the progress in our project quality initiative. We expect to expand earnings year-over-year in the third quarter, and to continue this momentum as we move forward. We are pleased to take an initial step toward returning cash to our shareholders, and we will continue to make prudent return-driven investments in our people, fleet, product, and technology.

  • Through the actions we have taken and will continue to take to improve revenue and operations, our efforts to improve the efficiency and quality of everything we do, and the more balanced allocation of cash flow going forward, we are creating a great foundation for increasing shareholder value. I'll now turn it over to Jonathan to open up the call for questions.

  • Jonathan Ireland - Managing Director IR

  • Thank you, John. 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. Operator, please describe the procedure to ask the question.

  • Operator

  • Thank you, sir. (Operator Instructions). From Wolfe Research, we have Hunter Keay on the line. Please go ahead.

  • Hunter Keay - Analyst

  • Hey, everybody, thanks. Great color on the commentary, thank you for that.

  • Jeff Smisek - Chairman of the Board, President, CEO

  • Thanks, Hunter.

  • Hunter Keay - Analyst

  • John, a little bit more on the cash discussion. If we think about your CapEx being about $3 billion a year as of today, next year and the year - a couple of years thereafter that, and then you have got $1.1 billion in debt payments and then some degree of - of repo, obviously, going on. How should we think about how much debt you're going to raise? Right, so are you just going to be paying down these - the - the $1.1 billion of debt maturity as they come due? How much of the CapEx do you see yourself financing? how much cash comes in that you are going to raise in the capital markets?

  • John Rainey - EVP, CFO

  • Yes, as a general rule, we would expect to finance aircraft with debt. The efficiency in that market right now is - is outstanding. When we can raise debt at 4% to purchase assets, that's a - that's a very good use of cash that also lowers our overall cost of capital. Where we will be opportunistic with paying down debt is in some of the non-aircraft categories. We have the term loan, as well as several tranches of unsecured debt, which happens to also be at all-time low rates for the airline industry, but the key thing here, Hunter, is balance. We have evolved how we allocate cash flow since our merger.

  • Initially after our merger, the best way to create shareholder value was to continue to de-lever and de-risk this business. We have also made a lot of core investments in the Company and in our infrastructure, and we are at a point now where we have complimented that with the first phase of capital distribution to shareholders, and going forward, we will be opportunistic in terms of paying down debt, overfunding our pension, investing in our business, and continuing to deploy cash to shareholders.

  • Hunter Keay - Analyst

  • Okay, thanks, John. Is Greg Hart there?

  • John Rainey - EVP, CFO

  • He is.

  • Greg Hart - EVP, COO

  • Hey, Hunter.

  • Hunter Keay - Analyst

  • I have a question for you on the - on the regional side, and - and Jim, you may have some color on this, too. I was going to ask you and Jim, you answered a lot of it, is - is obviously you're - you're kind of consolidating the regional footprint a little bit, and I think a lot of United's problems over the last couple of years can be really tied back to the regional operation, whether it is just basic reliability, on time performance or - or - or fleet type, whatever you want to call it, but my question is - is - is really, how much of that can you actually control? If your regional providers are showing up late or behaving badly, how much control do you really have over that? Obviously, can you fire them. But in terms of what you can do to fix it in the immediate term, what can you control and what can you not control on the regional side?

  • Greg Hart - EVP, COO

  • That's a good question, Hunter, and I - and I think it - there's - there's certainly lots of things we can control and there's investments, for example, we can make on our end that will - that will provide an e - a better environment for our regional partners to operate in. For example, as a result of our experience in the first quarter with all of the weather, we have invested in quite a bit of technology that is going to provide the opportunity for us to better cancel flights and provide the regional operators a better chance to recover much quicker than what they have historically been able to do. That's an example of some of the things we are doing to better facilitate their operations, but both in - in wintertime as well as summer storm time. There's lots of things we are doing along those lines to help the regional carriers perform better.

  • Hunter Keay - Analyst

  • Thank you.

  • John Rainey - EVP, CFO

  • Thanks, Hunter.

  • Operator

  • From Cowen and Company, we have Helane Becker on the line. Please go ahead.

  • Helane Becker - Analyst

  • Thank you very much, operator. Hello, everybody, thank you so much for the time. Can I just ask Greg a question, actually? How - I - or somebody said 8% of your operation is regional and that's going to be declining. Is there a way to determine what percent of your cancellations, and therefore some of the reliability issues are actually weather-related versus operational difficulties?

  • Greg Hart - EVP, COO

  • Helane, I think what Jim mentioned as it relates to the 8%, was 8% of our flying is on 50-seaters, and that's declining --

  • Helane Becker - Analyst

  • Oh, got you.

  • Greg Hart - EVP, COO

  • --to 5% over the course of the next 18 months or so. Obviously, we - we track our regional carriers performance each and every day and understand each and every flight that is either delayed or canceled and the - and the reasons why. It's something we have got laser light focused on and are focused on, not only taking advantage of the opportunities that - that they provide, but building better flexibility within the schedule to provide better opportunities to recover. Jim talked about the consolidated number of operators in Dulles for example. As you can imagine, as we built scheduled depth for the operators in Dulles, they have better capabilities to recover themselves.

  • Helane Becker - Analyst

  • Okay, but there's no way to know how much is weather-related, how much is pilots, because of weather, not being available, there's no way to actually determine that?

  • Greg Hart - EVP, COO

  • For us, we have that data and we measure it everyday. It's not anything we talk about publicly, but we have contractual relationships actually with our providers that account for weather-related delays differently than mechanical or pilot-driven delay or cancellation.

  • Helane Becker - Analyst

  • Okay. Could - could I just ask John a question? I think you mentioned that you thought your shares were, I think you used the word intrinsically under-valued relative to your peer group. Do you have an amount that you think you're under-valued by?

  • John Rainey - EVP, CFO

  • Nothing that I would want to disclose, Helane. The thing being, though, is that we have a lot of confidence in our plan and our ability to execute on that plan, and if you believe that the - the preferred method of deploying capital to shareholders is through a share repurchase program, you want to do that at a point where you're trading at a discount to that future earnings potential. We believe that's the - the inflection point that we are at. We have got a lot of confidence in our plan going forward, and we believe that now is the right time to do this for United shareholders.

  • Helane Becker - Analyst

  • Okay. Thanks very much, guys, thanks for your help.

  • John Rainey - EVP, CFO

  • Thank you.

  • Operator

  • From Morgan Stanley, we have John Godyn on the line. Please go ahead.

  • John Godyn - Analyst

  • Thank you for taking my question. John, I wanted to follow up on the repurchase a bit. You described it as - as sort of the initial step, and I think it's great to see an industrial company do a buyback before they hit their inflection. How - how do you think about a more steady state return of capital, assuming that all the initiatives play out over the next 18 months or so?

  • John Rainey - EVP, CFO

  • Well, you're right, John, this is a first step, and I will add that I think it's a watershed moment in the airline industry where you have the largest four carriers returning cash to shareholders. I think that that speaks volumes about how this industry has changed, how it's de-risked the business, and the sustainability of those earnings going forward.

  • One way that we look at this is the amount of cash that we are deploying relative to our market cap. Today's announcement is about 6% of our - of our market cap. We are going to - as we begin to act more like an industrial, I think we should begin to measure ourselves against the industrials, and have returns of capital that aspire to be similar to those.

  • John Godyn - Analyst

  • That is very helpful. On a - on a separate topic, I'm very interested in the fact that you guys are on the cusp of some major upgauging here, and you have been do some replacement of aircraft as well. Are there any anecdotes, numbers, sound bytes that you could give us in terms of the differential and the economics of - of different aircraft, just to help us model the impact over the next 18 months or so of some of these initiatives, because they sound like they could be meaningful?

  • John Rainey - EVP, CFO

  • Are you referring specifically to the used versus new market, or just in terms of the CapEx materiality of the reduction?

  • John Godyn - Analyst

  • Two - two - two things I would be interested in. Number one, when you think about perhaps per seat CASMex fuel differential, approximately, some of the larger gauge aircraft you're bringing in, versus the 50-seaters you're switching out. Secondarily, in the past you've offered some thoughts on replacement economics and talked about how 737s save you money quite a lot of money versus 757s. I'm just trying to put the whole picture together, and looking for some more of those data points.

  • John Rainey - EVP, CFO

  • Sure. Well, the 70-seater obviously is appreciably better from a CASM perspective than the 50-seat product. Equally, it puts some pressure on the revenue side. Now, I think balancing that on the revenue side, just to go there for a second, is that it's a much better product for our customers, and (Inaudible) flying a 50-seat today, wing tip-to-wing tip with a competitor that is flying a mainline jet, it's an inferior product and customers book away from that, so I view that more as a scratch on the revenue side, and it provides a fairly [immaterial] improvement on the cost side.

  • With respect to replacement economics. we have often talked about the fact that for each 757 that we replace with a 900ER, it's [$2 million] dollars to the bottom line each year. One of the things that we are looking at right now is the used aircraft market, and that market varies widely based upon which aircraft type you're talking about. I'll give you an example; The 737-800, a 10-year-old 800 is not priced as low relative to a - a new 800, as like an Airbus or some of the other older vener - generation planes, so we need to be opportunistic with respect to which particular aircraft types we look at if we are looking at the used market.

  • But while we do trade, maybe some of the operating economics for a plane that's not newer generation, as we have consistently said, one of the ways that we look at returns in this business, in a very important way, is return on invested capital, and where we may be trading the top line, the numerator, the notepad, we are - we are actually benefiting it by the lower invested capital, and - and so that's one of - one of the factors that we will take into this decision.

  • John Godyn - Analyst

  • Thanks a lot.

  • Jim Compton - Vice Chairman, Chief Revenue Officer

  • John, this is Jim. I would just add to John's comment on the revenue side. The (Inaudible) of the 50-seaters with the 70-seaters, it also presents a first class cabin and economy plus cabin that - we're excited about the ancillary opportunities.

  • I mentioned a little bit about what we are seeing on upsell, as well as first class pricing in the premium cabin domestically, so we are excited about the opportunity that (Inaudible) 70 airplanes come into the system over the next 18 months, what that will drive on the ancillary side.

  • John Godyn - Analyst

  • Got it. Very helpful, guys. Thanks.

  • Operator

  • From JPMorgan, we have Jamie Baker online. Please go ahead.

  • Jamie Baker - Analyst

  • Good morning, everybody. Jim, Delta made the point yesterday about their long-standing relationships with (Inaudible) JV partners within the context of Trans-Atlantic pricing and scheduling. Lufthansa has announced capacity cuts, but apparently not yet in the Atlantic. I know you don't have veto power over your partners' schedules, but how closely do you coordinate, can you influence, can you compel more capacity discipline at the (Inaudible) level, or you just - only at the United mainline level?

  • Jim Compton - Vice Chairman, Chief Revenue Officer

  • Hey, Jamie. We have a great working relationship with our JV partners, and whether it's Lufthansa, Air Canada, all of our JV partners. We coordinate very closely on capacity, as well as the pricing and sales - and the sales agreements that we have in the marketplace. You are right though, at the end, each carrier is free to make decisions that they feel best for them, but I will tell you the relationship that we have with our JV partners and our coordination is very tight.

  • As we look at the Trans-Atlantic capacity, we are - we are relatively flattish in the second quarter. Some of the seasonal shaping that I mentioned in my comments have a direct impact on the Trans-Atlantic, in that you will see our capacity relatively flat in the winter 2015 (Inaudible) season. But to your point, we work really close with our JV partners.

  • Jamie Baker - Analyst

  • I assume that means you share schedules, planned schedules well before they're loaded. You're not like us, where you have to rely on monitoring schedule tapes an stuff?

  • Jim Compton - Vice Chairman, Chief Revenue Officer

  • Absolutely. The network teams have far-outlooking discussions in terms of what capacity and what works for each carrier.

  • Jamie Baker - Analyst

  • Okay, that's what I figured. A question for Greg; when we think about the first quarter's unprecedented meteorological mayhem, if we were to repeat that in the winter 2015, are there any particular initiatives you can point to that would make the outcome less severe for you guys? I don't know, put differently, were there operational takeaways or do you just treat last winter's weather as a one-off, sort of Chicago's own, well, super typhoon (Inaudible), if - if you will?

  • Greg Hart - EVP, COO

  • Hey, Jamie, great question, and we are certainly not treating first quarter's weather as a one-off. We are expecting more of the same moving forward, and preparing for that. We have got a lot of things ongoing to help us better manage weather events at the airport, and a couple of examples I can point to; one is we are work on a tool that's going to provide the opportunity to better rebook our passengers over our network. Today's tool isn't that sophisticated when it comes to being able to rebook our passengers over every itinerary we can provide in our network, and obviously, with seven hubs here in the - in the Continental US, we have got a lot of different itineraries that we can put people over, so we are working on a tool that is going to better do that.

  • We also are working on a tool that I mentioned earlier that is going to help us better get the airline back on its feet after a - a winter storm. We are going to cancel flights, such that we are going to better understand where our crews are, where they have time, where the airplanes are to help the airplane recover much quicker than what we have been able to do historically. There's several other examples I can point to across all of the visions we are working on to better provide the opportunity to get our passengers to where they want to be much quicker than we have historically.

  • Jamie Baker - Analyst

  • Good, good. Well, hopefully we won't be tested in the same way, but I appreciate the clarity and the response. Take care, everybody.

  • Operator

  • From Deutsche Bank, we have Michael Linenberg on line. Please go ahead.

  • Michael Linenberg - Analyst

  • Yes, hey everyone. John, the question about exploring opportunities in the used aircraft market. Where do you see a need? Is it - are you looking at wide bodies, narrow bodies? What's - what's behind that?

  • John Rainey - EVP, CFO

  • It's on the narrow body side. We are making some investments in our fleet on the wide bodied side to prolong the life of those planes, but this is more about being disciplined and balanced with respect to CapEx, and as we shift from relying less on the 50-seat RJs, and more on the regional fleet, we need do that in a financially-disciplined way. I'm a big believer in the - the aircraft that the manufacturers are putting out, but there's a limit to what we should go out and spend, and we need to be balanced with our capital, balanced with the amount of debt we are putting on, and actually do this in a way that enables us to retur - return cash to shareholder.

  • Michael Linenberg - Analyst

  • Great, and my second question, and this is - it's probably a question for Jim - I think there was - it was an article in some of the - it seemed like some of the papers picked it up not that long good ago, about maybe United should shut down its Dulles hub, and I guess the question is - as I recall, I don't know, this wasn't even that long ago - I recall hearing where I believe the DC and Northern Virginia area had one of United's highest concentrations of 1K and global service members, and some of the average one-way fares out of Dulles, at least on mainline, were amongst some of the highest in its system.

  • I don't know if that's - if that's changed, maybe it has changed with the merger and the integration, but historically I actually thought that that was a very profitable operation for United. I realize you don't get into profitability by hub by hub economics, but is there anything that you can say to, I don't know, refute that or just give us some color?

  • Jim Compton - Vice Chairman, Chief Revenue Officer

  • Hey, Mike, this is Jim. I think - I think my comments would be that we have, as I talked about our revenue initiatives in the three areas that we are focused on, Network and Schedule, the regional operations, and Revenue Management. Within Network and Schedule, we are very focused on how our traffic flows across all our hubs, and how each hub participates into the overall network performance. Within that, the team - very granular analysis, and the granular analysis includes many of the things that you mentioned, in terms of where the most loyal customers are, the lifetime spend, and our expectations with that going forward. So - so I think I would just summarize by saying that we are very much focused on the revenue initiatives that we have implemented, that we are going implement, and those that we are researching, and that includes the overall look at the network.

  • Michael Linenberg - Analyst

  • Okay, great. Thanks, Jim.

  • Operator

  • From Buckingham Research, we have Dan McKenzie online. Please go ahead.

  • Dan McKenzie - Analyst

  • Hey, good morning, guys. Jim, I guess if I could just follow-up on Mike's question, I think one of the comments I heard is that each cub - hub, pardon me - has to earns its way into the network, and alluded to the fact that maybe more decisions could be on the way. I know you're not willing to make announcements today, as, of course, these are long-term, strategic decisions you have to live with, but I wonder if you can provide some perspective about when you might expect to reach a decision, first? Then secondly, from where you sit today, does any potentially required surgery seem extensive or, perhaps, more modest?

  • Jeff Smisek - Chairman of the Board, President, CEO

  • Hey, Dan, this is Jeff, let me take that question if I could. I would say nothing is off the table, and we will take the actions that we need to take to maximize the value of our enterprise for our shareholders. We have demonstrated an ability and willingness to take tough actions. Cleveland is a good example of that. We have a lot of initiatives underway and we are - we are taking a lot - a look at a lot of others.

  • I'm not going to put a timeframe on that, nor will I talk about, nor will we as a Company talk about directionally where we are going until we are ready to talk about something. I want to assure you that this team is committed improving our margin performance, to improving value for shareholders, to improving our product, to improving our operational reliability and we will take whatever actions necessary to do just that.

  • Dan McKenzie - Analyst

  • Understood. I appreciate that. I guess just if I could follow-up with one more question on the capital return. I appreciate the perspective that you guys have already shared. I guess it's going back to the original goal, it was initially to return it in 2015, and so I'm wondering, maybe you've all ready shared this, but provide more prospective on what con - on what led you to conclude that it made sense to bump it up by a year? I guess in particular, is it really just the - the intrinsic value of the stock, or is - or is there a view perhaps that the core business is on track to recover more quickly than you previously an - anticipated?

  • Jeff Smisek - Chairman of the Board, President, CEO

  • It's absolutely both of those, Dan. I would - I would emphasize that when we first articulated our plan to return cash to shareholders last fall, we were deliberately vague with the timeframe and we said by sometime in 2015, and at that point, we were very early on in several of the key initiatives that - that we are working on right now.

  • We now have a few quarters underneath our belt, and can you see the results of those performances in our financial and cost performance this morning. We have clear line of sight into the cash flows that exist out into the timeframe that we talked about, and we have got a lot of confidence in our plan, and that's what this action today reflects.

  • Dan McKenzie - Analyst

  • Very good. Thanks, guys.

  • Operator

  • From Evercore Partners, we have Duane Pfenningwerth on line. Please go ahead.

  • Duane Pfennigwerth - Analyst

  • Good morning. Jim - Jim, wonder if you could talk a little bit more about re-banking specifically, I don't know if it was just Chicago, or a number of hubs?When we look at your connecting RASM, it actually appears pretty good, it is running ahead of your existing primary competitor, so it looks like philosophically you already appreciate the value of connecting revenue. Can you talk about what's actually changing, and what revenue you feel like you're leaving on the table, and maybe how large this opportunity is?

  • Jim Compton - Vice Chairman, Chief Revenue Officer

  • Yes, this - the opportunity is to obviously to improve that. The - and what we are focusing on is beginning in the fourth quarter in Denver and beginning in Houston towards the end of the year and into the first part of the year, and then Chicago by spring of 2015, looking at re-banking those three hubs. What it will do is it makes - what it does is it reduces the connection time, and the opportunity to drive more connections at a higher yield than what you're already seeing today. So, yes, we do - we do really well in the connecting business today, but we think it's an opportunity to drive it even higher as we tighten those things up and driving even more connecting opportunities for our customers.

  • Greg Hart - EVP, COO

  • And also, the one thing I would add, Duane, as - as - as we have had a lot of focus on improving our operations, we have more confidence in our operational reliability going forward to permit those connections to occur without undue misconducts.

  • Duane Pfennigwerth - Analyst

  • That's helpful. That's it from me.

  • Operator

  • From Stifel, we have Joe Denardi on line. Please go ahead.

  • Joe Denardi - Analyst

  • Thanks. Jim, I wonder if you could talk a little bit about the commentary you provided on the Pacific? Maybe quantify or put into context how the initiatives you've put into place on that market should help alleviate some of the - the capacity growth that you're seeing going into fourth quarter, maybe on a year-over-year basis?

  • Jim Compton - Vice Chairman, Chief Revenue Officer

  • Hey, Joe. Yes, the Pacific performed better than our expectation in the second quarter, so we are pleased with with the progress that we are making on the Pacific initiatives. Remember, it falls - it falls into four categories, restructuring our (Inaudible) of flying, working with our ANA - with our JV partner, ANA, to - to do that, which means for instance, in March 2014, we suspended flying the (Inaudible) to Bangkok, and are now connecting that traffic that [we carry] over the Trans-Pacific over ANA to Bangkok. The Tech Ops team, the Maintenance team, invested in a great program in the reliability of the 747 last year, we talked about that.

  • The second quarter was the beginning of the repositioning of those 747s, and allowing those airplanes to fly the missions that, from a network perspective, from a revenue perspective, they want to fly. That has - in addition, our secondary Asian city strategy really is exceeding our expectations in our new routes from San Fran to Taipei and Chengdu are exceeding our expectations as that third prong of the strategy. The last one is right-sizing the missions with the 787. We used to fly San Francisco to Osaka on a larger airplane, it's now on a 787, and the economics are significantly better, as an example of the flexibility of our fleet that we have as we take deliveries of (Inaudible) 787s to optimize the network going forward.

  • So in the context of the competitive pressure that you talked about we - we are building on the great footprint we have in the Pacific, and the uniqueness that we can bring to the market allow us to manage against that pressure that we see as the capacity, particularly the China, accelerates through the rest of this year.

  • Joe Denardi - Analyst

  • Okay, thanks.

  • Operator

  • From Raymond James we have Savanthi Syth online. Please go ahead.

  • Savanthi Syth - Analyst

  • Good morning. I just wanted to ask about what you're seeing in the Latin American region. It looks like your capacity has been increasing, but it's - it's seen a bit of recovery, and maybe not similar to what we have seen elsewhere, and I was just wondering if it - what you are seeing, and then maybe where the growth is being concentrated.

  • Jim Compton - Vice Chairman, Chief Revenue Officer

  • We are seeing increase in Latin, in - in our investor update, we actually talked about over the next several weeks we are booked up about 4.5 points in the Latin American division. So we're confident with our capacity growth in the market. We're seeing strong growth looking forward in the leisure beach destinations, as well as into Mexico business markets, and I will tell you that a lot is driven by the Houston hub. It's a great connecting point, it's a great facility as a gateway into Latin America. So as we, again, as we face competitive pressures, we will monitor what's happening in the marketplace, and make sure that we keep capacity in line with demand, but we are really confident where we are at, and the results we are seeing in Latin America right now.

  • Savanthi Syth - Analyst

  • Got it. Then - just as you look across your hubs, I - I was wondering, have you've seen a lot more of Frontier adding a lot of capacity into more of your markets, and I know that's a very different product, but I was just wondering what the impact has been, and what your response has been.

  • Jim Compton - Vice Chairman, Chief Revenue Officer

  • Obviously, we compete with many carriers across our system, and we think that we have a terrific product. It is a different product than the ultra low cost carrier product, and we view that as we build our operational reliability, as we improve on the predictability of a product that we have in the marketplace, we are well-positioned to compete really against anybody, including Frontier.

  • Savanthi Syth - Analyst

  • Got it. All right, thank you very much.

  • Operator

  • Thank you, ladies and gentlemen, this concludes the analyst and investor portion of our call today. We will now take calls from the media. (Operator Instructions.) From The Street, we have Ted Reed, please go ahead.

  • Ted Reed - Media

  • Thanks for taking my call. I have two questions, one is easy and one is hard. The easy one is about Chengdu. You said the flights are doing well. I'd like you to say a little more about that, and the reason for it, and might you increase frequencies?Secondly to Jeff, there's been a lot of complaints, a couple of months ago from the pilots. I haven't heard you address that, but have you been listening to that, consulting with them? Does that explain any of the improvement? Thank you.

  • Jim Compton - Vice Chairman, Chief Revenue Officer

  • Hey, Ted, this is Jim. The first question on Chengdu; relative to our expectations, what we are really pleased with is the point of sale out of China exceeding our expectations, and so that's where we have seen most of the upside versus what our - what our initial forecast says. We're looking forward to that continuing. We work really closely with the officials in Chengdu, and have developed great relationships and we are seeing the fruit of that bear out. As - but again, like any route, we'll met - we will monitor capacity and demand, and if the demand is there to warrant increase in frequency, we clearly have the opportunity again, and I'll go back to the 787, it's a terrific airplane that allows us to do many things in the Pacific and across our network. So we will continue like we do in every market, monitor the capacity and demand, and react to that appropriately.

  • Ted Reed - Media

  • This must give you a lot of faith that you can continue to do great things with the 787 in China, open more cities.

  • Jim Compton - Vice Chairman, Chief Revenue Officer

  • That's exactly right. China is a market that is an economy that continues to grow at a very strong pace, and there are many opportunities in China that you can develop market, particularly with that 787.

  • Ted Reed - Media

  • Great.

  • Jeff Smisek - Chairman of the Board, President, CEO

  • Ted, this is Jeff, in answer to your second question. Certainly at the beginning of the year, with a - moving everybody to a single crew management system and FAR 117 new flight duty time, we had hiccups in some of the implementation, which adversely affect someday of our pilots. But we have certainly also brought an enormous amount of focus to that all of our folks in ops and technology work together hard to make sure to make their lives more predictable and reliable, and certainly the amount of focus we have had and investment we have had in improving our operational reliability, makes the pilots' lives better, makes the flight attendants' lives better, makes our passengers' lives better. I think we have a good relationship with (Inaudible). We're in close consultations with our pilots on many matters, and we continue to develop that relationship and we expect that relationship will continue to improve over time. We want to make sure that we have the right culture with everybody at this Company, including our pilots, and I think we are making good progress.

  • Ted Reed - Media

  • All right, thank you.

  • Operator

  • We have time for one more question. From the Associated Press, we have David Koenig on the line. Please go ahead.

  • David Koenig - Media

  • Thank you very much. I wanted to ask about the Tel Aviv flights, and did you plan to resume those all along as soon at the FAA lifted the NOTAM, or - or did you conduct your own assessment, and if it is the latter, can you please explain your decision, what went into it?

  • Jim Compton - Vice Chairman, Chief Revenue Officer

  • Sure. First of all, the safety of our passengers and crew is paramount, and we don't fly missions that we don't have confidence they're safe. We have consulted extensively with the US Government, as well as our own people on the ground in Tel Aviv, and that is -- and we believe it's safe to fly, and that's why we are recommencing our flights.

  • David Koenig - Media

  • Okay. Thanks.

  • Nene Foxhall - EVP, Communications and Government

  • Okay, with that, we are out of time, so we will conclude. Thanks to all of you for joining us today. Please call Media Relations if you have any further questions. We look forward to talking to you next quarter. Good-bye.

  • Operator

  • Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.