聯合航空 (UAL) 2014 Q4 法說會逐字稿

Good morning and welcome to United Continental Holdings earnings conference call for the fourth quarter of 2014. My name is Brandon and I will be your conference facilitator today. Following the initial remarks from management, we will open the lines for questions. (Operator Instructions) This call is being recorded and is copyrighted. Please note that no portion of the call may be recorded, transcribed or rebroadcast without the Company's permission. Your participation implies your consent to our recording of this call. If you do not agree with these terms simply drop off the line.

I will now turn the presentation over to your host for today's call, Nene Foxhall and Jonathan Ireland. Please go ahead.

Thank you, Brandon. Good morning, everyone, and welcome to United's fourth-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 Operations Officer Greg Hart; and Executive Vice President; and Chief Financial Officer John Rainey.

Jeff will begin with some overview comments after which Jim will discuss revenue and capacity. Greg will follow with an update on our operations. John will follow that with a review of our costs, fleet, and capital structure after which we will open the call for questions, first from analysts and then from the media. We would appreciate it if you would limit yourself to one question and one follow-up. With that, I will turn it over to Jonathan Ireland.

Thanks, Nene. This morning we issued our earnings release and separate investor update. Both are available on our website IR.United.com. Information in this morning's earnings release and investor update and the remarks made during this conference call may contain forward-looking statements which represent the Company's current expectations or beliefs concerning future events and financial performance. All forward-looking statements are based upon information currently available for the Company. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our press release, Form 10-K, and other reports filed with the SEC by United Continental Holdings and United Airlines for a more thorough description of these factors.

Also, during the course of our call we will discuss several non-GAAP financial measures. For a reconciliation on 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 like to turn the call over to Jeff.

Thanks, Nene and Jonathan. And thank you for joining us on our fourth-quarter and full-year 2014 earnings call. Today we reported pretax earnings $2 billion for the full year 2014. We earned $5.06 per diluted share and achieved a pretax margin of 5.1%, both significant improvements over last year.

In 2014, we focused on improving our operations and customer service, driving more revenue and reducing our costs. We are pleased with the progress of our core business leading to a solid year of earnings improvement.

We earned over $900 million more than in 2013 even with the costly storms in the first quarter that disproportionately hit our Northern hubs. We achieved a 12.9% return on invested capital. Our unit costs came in better than expected. We exceeded our expectations for our project quality efficiency initiative. We grew our unit revenue by 1.6% with many of our revenue initiatives only beginning to take hold.

We launched a share buyback program sooner than anticipated. Have already returned more than $300 million in the program's first two quarters. We paid down expensive debt while financing aircraft at record low interest rates. We took delivery of 35 new aircraft and remodeled three terminals and eight clubs.

We improved our operation meaningfully throughout the year. We had an ambitious plan for 2014 and we executed well on nearly every level. I want to thank our employees for the progress we made in 2014. Our plans for 2015 call for growing our core earnings and margins, further improving operations, reducing our costs, and adding more customer pleasing offerings and service. While we have much work ahead of us to make United the airline we know it can be, we are excited by the terrific opportunities ahead for United, our employees, and our shareholders.

I'd like to take this opportunity to address the recent significant decline in oil prices and its impact on the way we run our business. First, we will only grow the airline as demand dictates. The US airline industry has transformed itself over the last several years through consolidation and capacity discipline; matching capacity with demand and United will continue its discipline growing capacity less than GDP regardless of the price of oil.

We will also be opportunistic with our use of the additional cash we expect to generate as a result of lower fuel prices. We will use this cash to accelerate our path towards longer-term goals we previously identified including reducing our financial leverage and continuing to return cash to shareholders through our share repurchase program.

At United, we will continue to improve our operations and customer service, grow our revenue, reduce our costs, and appropriately allocate our cash. We had a successful 2014 and I'm proud of the progress we made. Our team is excited about the significant opportunity ahead to achieve the level of earnings that we and our shareholders expect.

Now, I'll turn the call over to Jim, Greg, and John.

Thanks, Jeff. I'd like to first thank our customers for choosing United. We are working every day to provide you with reliable service and a flyer friendly experience to destinations you prefer. We appreciate your business throughout 2014, and we look forward to serving you again this year.

In the fourth quarter, our unit revenue increased 0.4%, slightly higher than our expectations. As we described previously, this result was negatively impacted by a 1.5 point headwind due to fourth-quarter 2013 interline ticket reconciliations. As this was one time in nature, it will not reoccur in the subsequent quarters.

Our three-pronged revenue initiative focused on revenue management, network planning, and our Express operation continues to deliver solid results. In the fourth quarter, we've rebanked our schedule in Denver and Houston and we will rebank our schedule in Chicago in the first quarter. The initial results of our rebanking have met our expectations and connecting yields in Denver and Houston have increased year over year. By expanding our connection opportunities in these hubs, we are able to improve the mix of originating and connecting customers.

We more seasonally shaped our schedules in the fourth quarter by reducing flying during the lower demand shoulder period and expect to increase flying during the higher demand summer period. These changes contributed to the unit revenue results in the Atlantic entity, which grew approximately 7% year over year. We anticipate the full-year 2015 effect across the network to increase both the unit revenue and margins.

During the quarter, we also made good progress consolidating frequency as we flew larger gauge planes and reduced our alliance on 50-seat aircraft. Frequency consolidation provides several benefits to the airline as it reduces costs, improves reliability, and expands the product offering by providing more premium seats and upsell opportunities.

In the fourth quarter, our gauge increased on average by 4% while departures decreased by 6%. We will continue to execute on this initiative throughout 2015 and expect our gauge to increase 6% on average for the full year as departures decreased 4%. Examples include the Denver to Minneapolis, O'Hare to Cleveland, and O'Hare to Philadelphia routes.

We continue to overhaul our Express operations by reducing the number of 50-seaters in our fleet. In 2014, we removed 39 50-seaters and introduced to 33 Embraer 175 76-seat aircraft. These newer, larger gauge airplanes have been very well received by our customers, and we have seen an increase in ancillary revenue since their introduction.

Ancillary revenue per passenger earned on an E175 is 15% higher than on the 50-seat aircraft they are replacing largely due to having 16 economy-plus seats and 12 first-class seats. This regional fleet overhaul will continue into 2015 as an additional 71 50-seaters will exit the fleet by the end of the year with 49 additional E175s entering the fleet.

Some of these E175s will also replace Q400 turboprop aircraft which will begin to leave the fleet this year. This transformation has had a positive impact on the reliability of the regional operation as our fourth-quarter controllable completion rate improved year over year. With a better product offering and a more reliable service, we expect these actions to generate additional revenue in unit cost benefits in 2015 and beyond.

In the fourth quarter, our corporate revenue portfolio increased by 4% year over year with strength coming primarily from the technology and healthcare sectors. We have been monitoring the impact of lower oil prices on our energy-related corporate traffic. In the fourth quarter, we noticed a small impact and we are working closely with these corporate partners as they begin planning travel for 2015.

Ancillary revenue continued to grow in the fourth quarter, increasing approximately 10% per passenger. And we achieved our goal of $3 billion of ancillary revenue in 2014 despite capacity growth being 1.2 points below our plan.

Our Economy Plus revenue per available Economy Plus seat was up 22% in the fourth quarter compared to last year. To date, we have installed Wi-Fi on 451 mainline aircraft and begun installation on our regional fleet. Our streaming video product is now on 194 aircraft and customers give it very positive reviews. Wi-Fi installation will be largely complete by the summer with streaming video installations complete by the end of the year.

For the first quarter, we anticipate our unit revenue to be essentially flat with several factors contributing to our revenue performance for the quarter. First, our unit revenue outlook is impacted by a shift in revenue from MileagePlus redemption tickets out of the first quarter. This is a result of having new, more accurate data which allows us to recognize passenger revenue in the periods in which the customer redeems miles for travel.

This does not impact cash or our full-year revenue outlook but will provide a headwind of approximately $75 million or about 1 point of PRASM year over year in the first quarter. Conversely, the third quarter and fourth quarter will experience a revenue tailwind of approximately $50 million and $25 million, respectively.

Second, we expect the average stage length of our routes to increase by approximately 1.5% in the quarter. This is mainly the result of restructuring our Pacific network. We now offer our customers a number of connections within Asia through our joint venture partner ANA allowing United to redeploy its aircraft to additional long-haul routes from the US.

For example, we eliminated certain shorter-haul flights out of Narita, such as Hong Kong and Bangkok. In addition, we ended our TAB flight between Melbourne and Sydney. In the same period, we have added several long-haul flights including Los Angeles to Melbourne and San Francisco to Taipei and Chengdu. While these decisions have proven to be margin accretive, they provide approximately half a point of PRASM headwind for the quarter.

The third factor impacting our PRASM in the quarter is the effect of the strengthening dollar. While a strong dollar is good for our fuel purchasing, it reduces the revenue received from international ticket sales. The impact is somewhat muted because we spend a portion of our foreign currency to pay local expenses. In addition, we have entered into currency hedge contracts to protect United from further weakness.

Over the longer term, we believe that the strengthening dollar will generate additional demand in the US point-of-sale. For the first quarter, we estimate the foreign exchange impact to be approximately 1 point of PRASM headwind for the quarter.

Finally, while the domestic entity performed very well in 2014, it showed some signs of softening towards the end of the fourth quarter. We expect this to continue in the first quarter of 2015 with domestic unit revenues expected to be flat to up 2%. These unit revenue headwinds are partially offset by a 1.5 point tailwind in the first quarter as we don't anticipate the same level of weather-related disruption to our operation that we experienced in the first quarter of 2014.

Turning to capacity. In the first quarter, we expect our consolidated capacity to be between flat and up 1% with domestic to be flat to down 1%. We still expect full-year 2015 capacity to increase between 1.5% and 2.5% with domestic capacity of 0.5% to 1.5%.

The major driver of growth is the rollout of slim-line seats. We currently have installed these seats on more than 300 aircraft and installation will be 85% complete by the end of 2015. The remaining capacity growth will largely come from increasing our fleet utilization as our operation improves and the completion of aircraft modification of programs allows us to return aircraft to regular service. The impact of higher utilization will represent nearly 14 additional aircraft becoming part of our fleet without spending any additional capital.

In conclusion, I am pleased with the continuing progress of our revenue initiatives. Through the execution of our revenue plan, we are optimizing our network, our schedules, our revenue management practices, and our Express operation, which we expect will lead to meaningful revenue growth in the upcoming quarters. With that, I'll turn the call over to Greg.

Thanks, Jim. I would like to take this opportunity to thank our employees for their dedicated efforts in 2014. United is turning the corner towards operational excellence and you are the foundation of our success. I especially want to thank our employees who are working in tough winter conditions. Your commitment makes our management proud to be part of your team.

While we've made good progress in improving our operating performance, we realize we still have a lot of work to do. Our entire operation teams remain focused on running a better airline and we have hundreds of projects underway to support those efforts.

Today, I would like to talk about two initiatives designed to improve our departure and arrival performance. The first is focused on achieving on-time departures. The departure sequence of our flights is a fairly complex orchestration of dozens of activities. We are developing technology to alert our teams when anyone of these tasks is not going according to plan. This will allow our teams to properly address the specific issue and get the process back on track for an on-time departure.

We are also focused on improving our on-time arrivals. For instance, we have a host of initiatives underway to shorten the time it takes to arrive at the gate once the plane lands. We are in the early phase of rolling out systems that will allow our pilots to self guide the aircraft into the gate area rather than depend on our ramp agents to guide them in. This will free up our agents to focus on other critical tasks such as plugging the power and air units into the aircraft which will facilitate the timely placement of the jet bridge.

Additionally, we are working with a third-party provider to develop a gate management tool that integrates real-time information to more proactively manage our gate complexes at our hubs. This will reduce the instances in which are aircraft arrive and are forced to wait for a gate to become available. These initiatives will reduce delays, save on fuel burn, and improve the customer experience. These are just a few of the many initiatives we have underway to improve the operation.

This year will be a crucial year as we execute on our operational targets to become more reliable and efficient. I am confident that our dedicated workgroups will help bring United's operations to the level of excellence we all expect. With that, I will turn the call over to John.

Thanks, Greg. And thanks, everyone, for joining the call this morning. I'd also like to thank our employees for all their good work in 2014. Our success is dependent upon the job they do each and every day.

Today, we reported $462 million of pretax income for the fourth quarter with earnings per diluted share of $1.20 nearly double our earnings per share in the fourth quarter of last year. Our fourth-quarter pretax margin was 5%, about 200 basis points higher year over year.

The progress we've made in 2014 is reflected in the improvement in our financial performance. Our full-year pretax income was $2 billion with earnings per diluted share of $5.06 and a pretext margin of 5.1%, approximately 250 basis points higher than last year. We achieved a 12.9% return on invested capital, our stock price increase 77%, and we returned approximately $320 million of cash directly to our shareholders since initiating our share repurchase program last summer. We also prepaid $310 million of convertible debt that was convertible into 5.8 million shares.

Our fourth-quarter consolidated CASM excluding fuel, third-party business expense, and profit sharing increased 1.2% year over year. Full-year consolidated CASM excluding these items increased 1.3% on roughly flat capacity. Our full-year CASM was within our original guidance range of 1% to 2% despite lower capacity of 1.2 points from the guidance we provided at the beginning of the year.

2014 was our first full year of implementing our project quality initiatives, and we made good progress toward our $2 billion annual cost savings goal. In 2014, we achieved approximately $380 million of non-fuel savings, over 25% more than our original expectations. A major driver of the savings was improving productivity. This quarter we improved productivity by 3%, marking the sixth consecutive quarter in which our productivity has improved. We achieved our full-year target of a 3% year-over-year improvement, and we are on track to achieve our goal of a 15% to 20% productivity improvement by 2017.

Additionally, our fuel efficiency improved 1.3% in 2014 and 2.3% in the fourth quarter driven by more fuel-efficient aircraft and improved processes. Using the average 2014 fuel price, our project quality fuel savings were approximately $200 million. We remain on track to achieve a 7% improvement in fuel efficiency by 2017.

As we have outlined before, our goal is to take CASM growth to less than inflation. For the first quarter, we expect consolidated CASM excluding fuel, profit sharing, and third-party business expense to be approximately flat. For the full year 2015, we expect consolidated CASM, excluding these items, to be flat to up 1%.

There are some areas in business where costs are growing faster than inflation. The two most notable items include healthcare expense growing nearly 8%, and pension expense, which is negatively impacted by the lower discount rates and changes to the mortality tables. With our continued progress on a multiyear cost savings initiative, we are able to mute these pressures and expect another year of very good cost performance.

Turning to fuel expense, in the fourth quarter, our average fuel price was $2.83 per gallon which includes $0.25 from settled hedges. We recorded a $237 million hedge loss in the quarter which includes approximately $80 million from 2015 positions closed out in fourth quarter. This month, we also closed out virtually the entire remaining portion of our first-quarter hedge positions. We now expect to incur $190 million in hedge losses for the first quarter.

In the first quarter, we expect our average fuel price per gallon to be between $1.96 and $2.01 per gallon including the impact of settled hedges. Our current full-year hedge position allows us to participate in 84% of any future declines in the price of oil. Based on the January 15 forward curve, our existing open 2015 hedges beyond the first quarter are in a loss position of approximately $680 million. Using the midpoints of the guidance we provided, we expect our pretax margin to be between 5% and 7% in the first quarter.

We continue to take steps to strengthen our balance sheet. In 2014, we prepaid over $1.5 billion of debt including $248 million of our 6% convertible debt due 2030 that was prepaid in the fourth quarter. Additionally, this month, the last of our remaining convertible debt matured and in total we have eliminated $1.9 billion of convertible debt since the merger.

We also continue to finance aircraft at very low rates including our most recent double ETC transaction which had a blended interest rate of 3.9%. As a result of these and other transactions, our 2014 interest expense was approximately $50 million lower year over year.

Our capital expenditures in the fourth quarter were $1 billion and $3.1 billion for the full year. We expect full-year 2015 capital expenditures to be between $3 billion and $3.2 billion. In 2015, we expect to take delivery of 11 787-9s, 23 737-900ERs, 2 used 737-700s, and 49 E175s, 11 of which will go on our balance sheet.

As we've expressed in the past, we want to replace many of the 50-seat aircraft in our fleet today. To do this in a disciplined manner, we are continuing to explore opportunities in the used aircraft market to replace some of these aircraft without appreciably increasing our capital expenditures. In addition to taking advantage of the used aircraft market, we are making investments in our existing fleet to extend the useful life and better utilize the assets that we have as displayed by our recent decision to extend the life of some of our 767-300s.

Including the $3 billion to $3.2 billion of CapEx in 2015, we now expect average annual CapEx of $2.7 billion to $2.9 billion over the next three to four years.

In the fourth quarter, we repurchased approximately $100 million of United common stock and spent $248 million to retire convertible debt that was convertible into approximately 4.3 million shares. In 2014, we spent more than $600 million returning value to our shareholders through our share buyback program and the retirement of convertible debt. We are pleased with the early progress we've made in our $1 billion share buyback program and will continue to opportunistically repurchase additional shares over the coming quarters.

I want to take a moment to address United's outlook on capital allocation in this current low fuel price environment. We will continue to allocate capital in a manner to maximize shareholder value. It's reasonable to assume that we could accelerate our share buyback if cash flows turn out to be better than what we originally expected at the inception of this program. We will also continue to delever and at a pace that will allow us to achieve some of our capital structure goals more quickly than previously planned.

In conclusion, I'm pleased with our progress last year but even more excited about the opportunity in 2015. We will build on our solid foundation to increase revenue, control costs, improve the balance sheet, and return cash to shareholders. Through these actions we will expand core earnings and demonstrate our commitment to increasing shareholder value.

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

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 a question.

(Operator Instructions).

Michael Linenberg, Deutsche Bank.

I think Jim brought this up but maybe this is a question for John. Just with respect to currency hedging. That is, I guess, something we haven't seen you do in some time and you mentioned that you had entered into a position. What currencies, what are the positions, the strikes, details on that would be great.

Sure, Mike. So the four areas where we have the most exposure are China, Europe, the Canadian dollar, and the Japanese yen. In the past we have hedged more in the yen. Going forward into 2015, the only hedges we have in place are on the euro. And we are hedged about 60% of our exposure at a rate of about $1.22.

Okay that's perfect. And then just my second question and this is maybe it's John or Jim. Just looking at your fleet plan, I did see that it looks like you're going to retire two of your 74s by the end of this year. And I think about the movement in fuel prices and the amount of money that you put into those airplanes to get the reliability up.

I know there was some modifications. You've upgraded the entertainment options. What's driving that and then what replaces that? What do you have in line? I know there's been some headlines out there that you are looking at some of the larger 777s. I'm not sure if they are incremental or if they would come from the current order book. Just, I guess there's a bunch of questions in that, you know, thanks.

Yes, there is. (laughter)

Sorry, sorry.

Let me start with the 747s. You are right, Mike, we have made some improvements to the interiors of those planes. Any time we look at the retirement schedule for any fleets, you often take into account when heavy maintenance events come due.

And in particular with these 747s, this is a good time to retire those. We still intend to keep the remaining portion of the fleet for some period of time.

With respect to backfilling that, we are taking delivery of some dash-9s this year and of course you have seen some speculation the press about the 777-300 order. That is an aircraft that interests us. I don't want to necessarily comment on the rumors out there in the press. I will say that we have the ability to negotiate substitution rights with our manufacturers. And so that is something we are looking at.

This is Jim. Just to be clear, the rumored 777s that are rumored that we are looking at are not incremental airplanes.

Great, thanks Jeff, thanks John.

Julie Yates, Credit Suisse.

I'd like to revisit the first quarter unit revenue guide, and understanding there are certainly a lot of moving pieces here. But the last three quarters you've outpaced your initial PRASM guidance by about an average of 100 basis points at the midpoint. Should we think about a similar level of conservativism here with potential to outperform the initial guide or are there specific headwinds that will make that less likely?

Hey Julie, this is Jim. When we guide, we guide on the best information we have at the time, and so as I talk about the first quarter, we wanted to line out exactly -- so the tailwinds of the weather last year that was contributing 1.5 points of RASM for us in the first quarter but offset by the other items that I talked about whether be the MileagePlus, the stage length, or the foreign exchange. So a net impact of 1 point there.

That being said, I'll tell you the revenue team is always focused on beating where we are at but what we guide to is the information that we have now. But the revenue team, the sales team across the network is always working really hard to improve on that.

Okay, and then just the softness in the domestic market that you referenced towards the end of the fourth quarter, what do you attribute this to? Is this broad-based or more concentrated in some of your top hubs like Houston that might be feeling an impact from the fallen oil?

Julie, what I wanted to point out in regards to kind of guiding to the first quarter, particularly the domestic is that we did see in the fourth quarter a progression so that if you combined the months of November and December to eliminate all the holiday movements things like that then the November/December -- really industry domestic as well as for us growth rates were less than the previous months during the year. And we wanted to highlight that out as a base.

So that was more broad-based. There were no specific entities or sectors that would be specific to that but we wanted to kind of reset what we're thinking about in the first quarter that some of that deceleration we actually saw in the combined November/December months.

Okay, thank you very much.

Hunter Keay, Wolfe Research.

John, does the full year share count guidance include any assumptions for share buybacks?

No, it does not.

Okay, that's good. Maybe one for Jim. Jim, you made a comment about how rebanking, I think Denver and Houston, improved the mix of connecting and local traffic. I would've thought that rebanking would improve with actually increase the volume of connecting traffic.

So it's a two-part question. What is your connecting and local traffic go from and to before the rebanks. And when you said it improved the mix were you just talking about a higher-yielding connecting passenger?

Hunter, this is Jim. I did talk about yield. What we saw was an increase in the connecting passengers in both hubs, but we what we saw was a greater change in the mix of passengers with that.

You are correct, as you bring the hubs tighter you create more connecting opportunities to participate within the industry, but at the same time you also allow the revenue management system to really work that increased demand.

And what we're excited about is we actually saw a greater increase yields relative to our overall yield, but we did also see an increase in passengers.

And what was the -- can you give me like some broad high-level changes in what the percentage shift was from local to connecting in the hubs? Was it five percentage points, something like that?

Yes, I'm not going to disclose that, but I'll emphasize that we saw an increase in passengers and an even greater increase in yields. So we're very excited about the initiative.

Great, thank you very much.

Dan McKenzie, Buckingham Research.

Thanks for the time here. One house-cleaning question. What were the remaining NOLs at December 31?

The NOLs, Dan?

Yes.

They were about $10 billion or $11 billion.

Okay very good. And then secondly, I'm hoping you can just clarify for us all here. How much weight should we assign to booking data that is publicly available? You guys have the ability to see it, what are the puts and takes?

And the reason I ask is, I just got too many calls to count from investors wondering if demand was weakening further out this year. So I guess I'm just wondering how do we interpret the data, and is there anything that you are seeing that worries you further out at this point?

Dan, this is Jim. You are right. I think some of the public data is never going to be -- obviously not the full picture and we have the full picture because of our direct channels and so forth.

And we are really comfortable with the demand levels right now over the next six weeks in terms of our book load factor and that across the system. So we are comfortable with where we they are at and it fits in well with the guidance that we gave in terms of PRASM.

Okay, thanks so much, guys.

Jamie Baker, JPMorgan.

Like Mike, I am interested in the reports about swapping 78s for 777-300ERs. I don't expect you to comment directly on the negotiations per se, but I'm interested in when the discussions began and the extent to which fuel might've been a catalyst.

If this is something that you started discussing with Boeing a year ago, that's says one thing, but if this is just a more of -- I don't know -- a post-OPEC phenomenon, it tells us something different. Any color there?

Well, Jamie, I'm not going to comment on discussions if there are any that are taking place. I will say that we take a very long-term perspective with respect to fleet planning. These are assets that we fly for 25 to 30 years.

If we are so fortunate that fuel prices remain at this level for years to come, we might adjust our view on what fuel prices we use when we make these fleet investment decisions. But for right now, we are still assuming the same fuel prices that we've used or that we've seen over the last few years, which is the $120 to $125 jet fuel.

Okay, fair enough. And Jeff, you know in your prepared remarks you said that you would size the airline to demand and I assume that comment was meant to allay any concern that lower fuel would mean an increase in capacity.

Does the comment cut both ways? I'm not of the view that revenue falls off a cliff, but if we do see fuel stay here and demand materially suffer for whatever reason, would you shrink the airline further, or would you simply maintain capacity until such time that most of the fuel price cushion had eroded?

No, Jamie, we're going to run the airline for profit maximization, and we're not going to be making decisions on any sort of short-term basis. We are very focused on maintaining capacity discipline vis-a-vis GDP. And we're going to continue that irrespective of what the fuel price is.

Irrespective of fuel price, if demand were to fall off, we would appropriately size the airline to it as we always have. If demand were to grow, if GDP were to grow, we would appropriately size the airline over time to that, too.

Excellent, that's what I was hoping to hear and thanks for the solid guide this morning. Take care.

Helane Becker, Cowen and Company.

I have two questions. One is as we think about the project quality initiative in fuel costs, I think you said that you were looking at 7% efficiency. So how should we think about the decline in jet fuel? Does that make it harder for you to achieve that, or does it make it easier for you? And is there any change to the $2 billion number as a result?

Helane, this is John. When we set that target at the end of 2013, we assumed a price per barrel of again roughly $100 to $125 jet fuel. And that is how we arrived at the $1 billion in savings. Obviously, as jet fuel has plummeted over the last few months, that eats away at the dollar amount of those savings that would be realized but fuel swings both ways.

And the thing that we're focused on is the efficiency gain. We are absolutely laser focused on achieving the 7% efficiency improvement between 2013 and 2017 because just as that potentially has swung to a $500 million or $600 million benefit today, that could be $1.5 billion to $2 billion in the future.

Okay, and then my other question is something you said you said with respect to Denver. Can you parse out how much of the benefit that you've seen in Denver is a result of changes that Frontier has actually been making? Or is the shift in mix all related to the changes that you've been making?

Hey Helene, this is Jim. We've been very focused on Denver and the team in Denver has done an incredible job over the last couple of years as the market -- the competition has either reshaped itself or adjusted in the market. But we are talking about the benefits are clearly a result of tightening up the bank. The other benefits we are receiving in Denver are separate from that, but that Denver has been performing very well for us and the team has done a terrific job there.

Okay, great, thanks very much.

Duane Pfennigwerth, Evercore Partners.

I wonder if you could -- and obviously your guidance is very strong here into the first quarter, but wonder if you could elaborate a little bit on your percentage of revenue that comes from the energy industry and any additional detail you can give on the early signs of softness that you referred to in the fourth quarter.

Hi, this is Jim. You know, we don't disclose the absolute percent that's associated to the energy. We are -- and partly because it affects the network in many different ways. One of the specific ways, though, is through our corporate partners and the work we do with our partners in the energy sector. And historically, our sales team has always had a very close relationship with them.

Over the years as oil has gone up and down, we've always worked very closely with them and how we can help them in their travel needs and understand their travel needs. So today, the corporate salesforce team is in those discussions with those companies to get a sense of what they're seeing in terms of 2015.

As expected, as we've seen in the past, they are looking at all of their costs as they react to the lower oil prices in their industry. But to this date, we've seen just a small impact from our corporate business that we can measure very closely. But we'll stay on top of it and monitor it as we go through the year.

Okay, John, can you just remind us how much is left on your capital return program? And then how do you think about it -- I appreciate those comments that as cash flow is higher, it would be either debt reduction or buyback. But how do you think about kind of updating the market about size of that program?

We've achieved or completed about $320 million of buybacks thus far. So we've got $680 million to go, and we are very focused on the existing buyback program that we have in place. As cash flows come in better than what we expected, I think it's reasonable to assume, as I said, that we can accelerate that.

And the timeframe is yet to be determined on that, but we are very focused on properly balancing capital allocation and an important component of that is returning cash to shareholders. So this, as we've said, is an evolution. This was our first step and we hope to build on that.

Okay, thank you.

Bill Greene, Morgan Stanley.

I wanted to ask about whether you think that the increase in the industry's overall returns will cause the industry domestically to start to lose some of this discipline that you and Delta have both highlighted on their calls as it relates to capacity. Do you worry at all about that, or is that something that you think is not likely to happen given the structure we've got today?

Bill, this is Jeff. Look, we can only speak to United. We will absolutely not lose our capacity to split. We found that to be very healthy for us. It's clearly very healthy for the industry, and we're committed to it.

Make sense. Do you feel that overseas we have more of a reason to worry, given that you would think that this lower fuel price will help Asian carriers quite a bit, for example? Do we have reason to worry about capacity growth overseas in a bigger way?

Well, I do think that the capacity of discipline that has been shown by US carriers is not necessarily shown by international carriers. And I think that that's certainly a possibility, particularly in areas worth with a lot of growth such as low-cost carriers in Asia.

Right. Okay, great, thanks for the time.

Joe DeNardi, Stifel Nicolaus.

John, on the capital deployment side, is a dividend just kind of not on the radar at this point, or what would you need to see to maybe consider that?

It's not on the radar in so much as we are focused on our existing share repurchase program. We have a lot of discussions as a management team and with our Board on the right way to allocate capital. We still believe that the reasons that we're behind the share repurchase program or are still there today in the sense that we don't think we are trading at our fair value.

If you look at our market cap compared to our peers and our conviction in the plan that we have in place to get us where we need to be, that there's still a lot of opportunity to buy back stock at discounted prices to the intrinsic value.

Okay, yes, that makes sense. And then in terms of the team's expectations with regard to fuel surcharges coming down internationally, what are your expectations for how that plays out through the year?

Joe, this is Jim. We don't comment on future pricing. I will say there are -- for instance, in Japan it's by law indexed, and so we expect obviously that will move as the rules of that index move and so we'll see it there. But in terms of international surcharges, we don't comment on pricing.

David Fintzen, Barclays.

A couple of questions for Jim. Just one following up on a bit of the comments on rebanking. How should we think about some of the upcoming competitive rebankings that are going on call it midcontinent? Is that -- can you sustain or carry through a lot of these benefits as other -- as American hubs specifically are rebanked, or should we be factoring some of that into our thinking on RASM?

David, this is Jim. You know, we're obviously very focused on optimizing the revenue through are rebanking structure and the work we are doing there. And that's our main focus.

That being said, you're right. It's a competitive business, and as we have rebanked and tightened our bank, those are connections that we are participating in that were participating somewhere else before.

And so if you see incremental rebanking similar to what we are doing that will be a competitive balance in there, but our focus is clearly to optimize the revenue. That's why we're really excited about the yield piece because we think the revenue management team can drive incremental revenue even with those competitive natures out there in terms of other people rebanking.

Okay, that's helpful. And then you mentioned on the regional re-fleeting side, I think you said 15% bump in ancillary. How should we think about the other side of that? Any dilution on the passenger revenue side? Or put another way: is it TRASM neutral as you are up gauging or is it still somewhat dilutive to TRASM?

It's a great question right because it's a wonderful product that we expect to attract a business market that wasn't attracted to a 50-seater. You've got to remember also there's structural changes. We increased the length of haul using that aircraft. There is a structural question on RASM that happens.

All being said, adjusting for all those things, it's a wonderful product that we think is already attracting a better business mix and will continue to do so, as well as to your first point that we're able to attach 15% per passenger more ancillary revenue than we are on the 50-seater.

Okay, I appreciate that. Thanks for the time.

We have time for one final question. Savi Syth, Raymond James.

Just on the international growth, I know you talked about matching supply with demand and I was just curious given the trends we are seeing in the international markets where just economic growth is slower, I was curious as to if your outlook on international growth has been modified. It doesn't seem like it's changed much since you talked about it last in December.

Hey, Savi, this is Jim. Our focus again to Jeff's point earlier of making sure that capacity is in line with demand. So on the international front, a big part of our initiative is quite frankly the seasonal adjustment and peaking and de-peaking what we're doing by flying less into low peak demands right now in the winter. And when the demand is there in the summer we can -- able to up gauge that.

So it's a perfect example that even in the environment that we are in we're matching capacity with demand. In addition, that global demand, particularly into Europe, has been soft. And yet we have over 7% unit revenue growth in the fourth quarter. Another example of us really keeping capacity in line with demand.

We are aware of the competitive nature that's out there. The growth in Asia, particularly in China, is running at 20% growth rate. We see that going through the year. That being said, our network is the best position to take that traffic with San Francisco and its local market leading the way, and that's where you've seen many of the routes that we've added, San Francisco to Chengdu and Taipei to other parts of Asia.

So, we are aware of the competitive balance out there. We think we are well positioned. We've been in the market since 1986. We have strong relationships across Asia, and we see really good things coming.

An interesting note though in particular to China, WTO in 2006 talked about 100 million passengers outbound in China by 2020. Now they think that will happen in 2015. And now people are talking about by 2020 200 million outbound travelers. That's to all points outside of China, but the US is a big part of that play. And we are extremely well positioned as we take a long-term view on our Asia strategy to capture that.

Got it, thanks. That's helpful. And then just as a follow-up, for John. Just on the debt side, if you do have this kind of additional cash and can pay down more debt, how much debt can you prepay before it starts to be too costly?

Well, we've got quite a bit that we can take advantage of. I will say that some of the debt that is pre-payable, the rates on that are pretty attractive right now. So one thing that we could look at is actually using cash to purchase airplanes as well.

Got it, all right. Thanks, guys.

Ladies and gentlemen, this concludes the analyst and investor portion of our call today. We will now take questions from the media. (Operator Instructions). Jeffrey Dastin, Thomson Reuters.

Just a follow on that last point. Could you add more color on how much you're willing to spend the savings to purchase new aircraft?

I'm sorry, Jeffrey, I couldn't understand your question.

My apologies. On that last question, could you add some more color on how much money -- how much you would dip into savings to purchase new aircraft? How big -- how much are you looking out for 2015?

Jeffrey, this is Jeff. I think perhaps we're being sort of past each other here. The question that Savi had was prepayment of debt and what John was talking about was we have debt that we can prepay, but at some level your prepaying debt that has an interest rate that's attractive that you wouldn't want to prepay. So another use the cash would be to use the cash to purchase aircraft as opposed to financing those aircraft, which has the effect of reducing the debt that otherwise would be on your balance sheet.

Okay, thanks for clarifying that.

Sure.

Okay, we'll conclude the call at this time. Thanks to all of you for joining us today. Please call media relations if you have any further questions, and we look forward to talking to you next quarter. Goodbye.

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