聯合航空 (UAL) 2015 Q1 法說會逐字稿

Good morning and welcome to United Continental Holdings' earnings conference call for the first quarter 2015.

My name is Brandon, and I'll be your operator today.

(Operator Instructions)

This call is be recorded and is copyrighted.

Please note that no portion of this 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 first-quarter 2015 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 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'll turn the call over to Jonathan Ireland.

Thanks, Nene.

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

Both are available on our website at IR.

United.com.

Information in this morning's 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 with the SEC by United Continental Holdings and United Airlines, for a more thorough description of these factors.

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

For a reconciliation of these non-GAAP measures to GAAP measures, please refer to the tables at the end of our earnings release 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'd like to turn the call over to Jeff.

Thanks, Nene and Jonathan, and thank you for joining us on our first quarter 2015 earnings call.

Today, we reported pretax earnings of $585 million, the highest first quarter profit in United's history, and over $1 billion improvement compared to the first quarter of last year.

We earned $1.52 per diluted share, achieved a pretax margin of 6.8%, and expanded our return on invested capital to 17.1% over the last 12 months.

In the quarter we generated more than $1 billion of free cash flow, and repurchased $200 million of our common stock.

Our cost discipline continued in the first quarter, with non fuel unit costs down 1.5% year-over-year, bringing our average non fuel unit cost over the prior four quarters to approximately flat, with only 0.4% capacity growth.

It is also the seventh straight quarter in which we improved productivity.

We continued to deliver on our goals under Project Quality, our $2 billion efficiency initiative, and we're making substantial progress on improving our balance sheet.

Additionally, in the first quarter, our operational performance improved nicely, with year-over-year improvements in our on-time arrival and completion performance.

This quarter, all four of our northern tier hubs experienced more snow days and more de-icing events than the first quarter of last year, which you will remember was a very tough winter, yet we canceled 17,000 fewer flights, inconveniencing 1.3 million fewer customers.

Importantly, we have delivered our operational improvements, while also increasing efficiency and productivity.

We made improvements across every part of our business in the first quarter, and we could not have done this without the dedication and professionalism of our employees.

I want to thank them for their great work and their pride in United.

I'm pleased that each quarter, we have been building on previous accomplishments.

We expect that the second quarter will be another record quarter for United, with pretax margin between 12% and 14%, driven by strong cost performance and lower oil prices.

At United, we manage our business to maximize shareholder value.

While unit revenue is an important metric, we ultimately make business decisions to maximize margin and return on invested capital.

In this morning's investor update, we provided second-quarter unit revenue guidance of down 4% to 6%.

Jim Compton will explain the components of our second quarter PRASM guide in more detail in just a minute, but I want to mention that some of the decline is directly related to earnings accretive actions, that, by their nature, are PRASM dilutive.

The remaining anticipated unit revenue decline is due to external factors that we are working to mitigate, where we can.

United has been the industry leader in capacity discipline, and as we have shown in the past, we will take the appropriate actions to ensure we are matching capacity with demand.

Accordingly, today, we reduced our full-year capacity guidance by 0.5 point, and now expect to grow 1% to 2% in 2015.

The first quarter was a good quarter for United, in which we improved our operations, expanded earnings, generated significant free cash flow, paid down debt, and returned cash to shareholders.

We will continue to work aggressively to bolster our revenue and increase our efficiency, while maintaining our focus on expanding our margins and return on invested capital.

Over the last several quarters, we have demonstrated that our plan is working, and we remain excited about the opportunities ahead.

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

Thanks, John.

I'd like to take this opportunity to thank our customers for flying United.

Every day, we are working to improve our reliability, our product, and our offering of destinations and schedule you desire.

In the first quarter, our unit revenue was up 0.4%, higher than the midpoint of our initial guidance.

Our domestic unit revenue was up 1.6%, and our international unit revenue was down 0.5%.

Our domestic unit revenue performance was largely driven by lower capacity in the quarter, better than anticipated results from our revenue initiatives, and the timing of Easter.

A contributor to our strong domestic performance was the rebaking of our schedules in Denver and Houston.

We have seen both yields and volume of connecting traffic increase year-over-year in these hubs.

We rebaked Chicago in March, and are pleased with the initial results.

Our domestic results were also positively impacted by the timing of Easter this year, as Easter travel began in the first quarter.

This provided a tailwind of 0.5 point to the consolidated network.

This Easter travel shift will reduce PRASM by a similar magnitude in the second quarter.

Transatlantic unit revenue increased 6.9% in the quarter, mostly driven by our seasonal shaping initiative, which reduces flying during the lower demand winter period, while increasing flying during the higher demand summer period.

This initiative helped offset the pressure from a strengthening dollar which generated a headwind of 1.4 points of PRASM in the Atlantic entity.

Pacific unit revenue was down 7.4%, primarily due to four factors.

First, the weakening currencies in the Pacific contributed approximately 2 points of unit revenue decline.

Second, we grew our Pacific stage length, as we revamped our Australia flying, and transitioned our unprofitable shorter-haul inter-Asia flying to our joint venture partner, A&A.

This change in our Pacific flying, although earnings accretive, drove approximately 2.5 points of unit revenue headwind.

Third, declining fuel surcharges, particularly in Japan, drove more than 2 points of Pacific PRASM pressure in the quarter.

Finally, competitive capacity additions in China continued in the first quarter, and accounted for 1.5 points of unit revenue degradation.

Turning to corporate revenue, in the first quarter our corporate portfolio decreased by approximately 1% year-over-year, as our oil-related corporate customers began to reduce their flying.

On a year-over-year basis, the revenue from our corporate energy accounts declined approximately 20%.

Excluding energy, the remaining corporate revenue portfolio increased 1% year-over-year, with strength coming primarily from the healthcare sector.

Ancillary revenue continued to grow the first quarter, averaging more than $23 per passenger, an 8.6% increase year-over-year.

Economy Plus pricing optimization continues to be a leading contributor to our ancillary revenue performance.

Quite simply, our customers value and are willing to pay for the extra space and comfort of our economy plus seats.

In the first quarter, our Economy Plus revenue per available Economy Plus seat was up 16%, compared to the first quarter of last year.

In the second quarter, we expect our unit revenue to decline 4% to 6% with capacity up 2.25% to 3.25%.

Based on our current projections, we believe that the second quarter will produce the lowest unit revenue performance of the year.

For the second quarter, we anticipate domestic PRASM will be down approximately 3%, and international down approximately 7%.

There are three primary contributors to the unit revenue weakness, that together will pressure our second quarter PRASM performance by 5.5 points.

First, the earnings accretive improvements we have made to United's network and fleet that are PRASM dilutive contribute 1 point of PRASM pressure.

Second, there are external factors driving 3.5 points of pressure, which consist primarily of the strong US dollar, lower oil prices, and 0.5 point headwind from the timing of Easter.

Third, competitive capacity and pricing pressures are generating approximately 1 point of unit revenue decline.

I will walk you through each of these in greater detail, and describe the actions we are taking.

First, we have made a number of network and fleet improvements, including several that reduce costs and expand margins, but are a drag on unit revenue.

These improvements include the installation of slimline seats, the extension of our stage length, and the consolidation of [frequencies], which in total, we expect to drive 1 point of unit revenue decline.

As an example, we've installed slimline seats on 386 aircraft to date, and expect to have 485 completed by year-end.

These slimline seats improve fuel efficiency, generate very low marginal non fuel CASM, and are highly accretive to earnings.

However, the additional seats create a headwind to PRASM, as they generate lower than average yields.

We remain committed to these network and fleet modifications, despite the unit revenue pressure they provide, as they generate significant cost benefit, are accretive to our margin, and will improve our operational reliability.

Second, external factors are also contributing to our expected second quarter revenue performance.

We expect that the strong US dollar will contribute 1.25% of consolidated unit revenue decline.

We anticipate that as we move into the summer, US point-of-sale will increase, and offset some of this projected weakness.

This will be more pronounced on the Atlantic entity, as we expect American consumers will take advantage of the strong dollar and take European vacations.

Where we don't anticipate this point of sale shift, we will benefit from capacity judgments we are making throughout our network.

In the second quarter, we will benefit from an 11% reduction in Japan capacity, and a 13% reduction in our Canadian capacity, to offset the weakening currencies in those countries.

We will continue to monitor ongoing capacity reductions into the winter months, to address continued foreign exchange pressure.

Our current expectation is to reduce Japan capacity in the fourth quarter by 7% year-over-year.

Declining oil prices are also affecting unit revenue.

As I mentioned earlier, many international surcharges throughout the world, but primarily in the Pacific, have decreased as a result of lower oil prices.

In the second quarter, we expect the average surcharge to decline compared to the first quarter, and contribute approximately 1 point of year-over-year PRASM pressure to the consolidated network.

Where demand permits, we have increased base fares to offset a portion of this headwind.

Additionally, the Japan capacity reduction I mentioned earlier will help offset the surcharge reduction.

We don't anticipate these actions can completely close the gap, but they should mitigate some of the effect.

Lower oil prices are also causing energy-related corporate customers to scale back their travel budgets.

We expect this to reduce consolidated unit revenue by approximately 0.75 of a point in the second quarter.

We are working closely with our corporate customers to address their travel needs, and we have begun taking appropriate capacity reductions in several energy centric markets to address their declining performance.

Coming into the summer, we plan to reduce capacity in these markets by 6 percentage points, compared to our original expectations.

We will continue to closely evaluate the performance in these markets, and are prepared to make additional changes, if necessary.

The third contributor to our unit revenue decline is the competitive capacity and pricing pressure we are confronting.

With respect to competitive capacity in the second quarter, our routes will face 6% competitive seat growth.

This growth will come largely in China, the transatlantic markets, and Hawaii.

We anticipate this will provide a 1 point headwind to PRASM.

We expect that this competitive pressure, combined with the external factors and large and accretive actions we are taking will put a total of 5.5 points of pressure on consolidated unit revenue in the second quarter.

With respect to capacity, today we lowered our full-year guidance by 0.5 point to 1% to 2% year-over-year.

With this level of capacity, we can accomplish our goals of durable, margin accretive growth, while also addressing the pressure points that we just discussed.

In conclusion, we are pleased with the progress we have made to expand our revenue premium over the last few quarters.

The current revenue environment has brought new challenges, and we will continue to manage our network, as we have for several years, with discipline.

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

Thanks, Jim.

I'd like to take a moment to thank all of our employees for their great work in the first quarter.

It was a challenging quarter and a tough winter, but our operational performance improved, as a result of their professionalism and their dedication.

As Jeff mentioned, in the first quarter, we faced record cold and had more snow days and more de-icing events than the first quarter of last year, the year of the polar vortex.

Despite these challenging conditions, our operational performance improved year-over-year.

One area of keen focus for United has been our Express operation.

In the first quarter, our Express completion factor improved by almost 5 points compared to last year.

Our mainline operation also had a strong quarter, with on-time performance increasing by 1.5 points year-over-year, and in February, we had the fewest cancellations of any major carrier, despite having four northern hubs.

Much of this improvement is due to process changes, and the investments we made to improve how we manage through and recover from irregular operations.

For example, in late January, we experienced a significant snow event at our Newark hub.

Using our new Crew Solver software, we were able to quickly and efficiently redeploy our flight crews after the storm, resulting in a quicker recovery for customers and employees.

On the following day, our on-time departure performance was at least 6 percentage points better than we would have achieved last year.

Additionally, we had the best Express recovery day in United's history.

Proactive planning, and the great work of employees, combined with new software and other technology solutions, all helped us to improve our operations in the first quarter.

While I'm pleased with our progress, we continue to take actions to improve our reliability.

And now, I will turn the call over to John.

Thanks, Greg, and thanks to everyone for joining the call this morning.

I'd also like to take this opportunity to thank our employees.

The progress we made this quarter demonstrates their commitment to improving United.

With their continued support, I know we can carry this momentum into the future.

Today, we reported our highest ever first quarter pretax profit of $585 million, and grew our earnings per share by $2.85.

We increased our trailing 12 month return on invested capital to 17.1%, and generated over $1 billion in free cash flow.

Both our earnings and free cash flow represent a $1 billion improvement over the first quarter of last year.

I'm pleased with the progress we've made, but even more excited about the opportunities that we have in front of us.

First quarter consolidated CASM, excluding fuel, profit-sharing, and third party business expense decreased 1.5% year-over-year, once again demonstrating the great progress we are making, reducing cost, becoming more efficient, and improving the operation.

We continued to make solid progress in executing our Project Quality efficiency initiative, including continued productivity improvements.

In the first quarter, productivity improved 2% year-over-year, marking our seventh consecutive quarter of improved productivity.

We also benefited from a strengthening dollar, which drove approximately 0.5 point of unit cost improvement.

Looking to the second quarter, we expect consolidated CASM, again excluding fuel, profit-sharing, and third-party business expense, to be up 0.25% to 1.25% year over year.

Our full-year guidance remains unchanged, as we continue to expect non fuel CASM to be between flat and up 1% versus 2014, despite reducing our full-year capacity guidance by 0.5 percentage point.

Project Quality continues to be key to achieving our cost goals.

In 2015, we expect to achieve $800 million in non fuel savings from these initiatives, and we expect productivity to improve by approximately 3% for the full year.

Turning to fuel expense, we recorded approximately a $200 million hedge loss in the quarter, which includes approximately $10 million from second-quarter positions closed out during the first quarter.

We are now 11% hedged for the second quarter, and based on the April 16 fuel curve, expect to incur approximately $190 million in hedge losses, while participating in 93% of any future price declines.

For the second half of 2015, our current hedge book is in a loss position of approximately $340 million, and allows us to participate in 79% of any decline in oil prices.

Based on our guidance, we expect our pretax margin to be between 12% and 14% in the second quarter, and expect to generate significant free cash flow again.

We plan to utilize this cash in a balanced fashion, to buy back stock, pay down debt, accelerate funding of our pension, and make appropriate investments in our business.

In the first quarter, we returned $200 million to shareholders through our share repurchase program, and have now completed $520 million of our $1 billion program.

Our current expectation is that we will complete the share buyback program in 2015.

We continue to make good progress in de-levering our balance sheet.

In the first quarter, we made $320 million of debt and capital lease payments, including prepayments of approximately $120 million, and also announced our intention to pre-pay $600 million of 6% notes in the second quarter.

By May 1, we will have prepaid approximately $750 million of debt year-to-date, generating $40 million in annual interest expense savings.

In addition, in the first quarter, we contributed $180 million to our pension plans, and now expect to fund approximately $700 million in 2015, well in excess of minimum funding requirements.

Our capital expenditures for the first quarter were $794 million, and we continue to expect full-year capital expenditures to be between $3 billion and $3.2 billion.

In the quarter, we took delivery of 12 mainline aircraft, consisting of nine Boeing 737-900ER's and three Boeing 787-9s.

We also introduced 12 more new 76-seat E175s in service.

In addition, this morning we announced several refinements to our fleet plan, which will further our efforts to achieve our long-term capacity goals, while being disciplined with our capital investment.

We have discussed for some time our need to reduce our dependence on 50-seat RJs, and to do it in a capital disciplined manner.

We are in final negotiations to lease between 10 and 20 used narrow-body aircraft, which we would take delivery of over the next few years.

These aircraft require only modest reconfigurations, in order to be common with our current fleet.

Additionally, we are extending the useful life of 11 more of our 767-300ER aircrafts, which are in addition to the 10 we previously announced.

By adding an all-new interior, which will include new wide back seats, a state-of-the-art entertainment system with Wi-Fi, winglets, and modifications to improved aircraft reliability, we expect these aircraft to continue to be productive for years to come.

Importantly, these fleet changes allow us to reduce our reliance on 50 seat RJs from approximately 8% of our ASM at the beginning of last year, to about 4% by the end of next year.

And finally, we signed an agreement with Boeing to substitute 10 787s for 10 777-300ERs without any material change to our capital spending.

The increased gauge of the 777-300ER will allow us to better serve certain high demand markets, and will integrate seamlessly with our existing 777 fleet.

These decisions are significant steps in achieving our long-term capacity plans, including the elimination of a significant portion of our 50 seat fleet.

In conclusion, I'm pleased with our performance in the first quarter.

We have demonstrated great progress for four consecutive quarters, and are executing against our plan to continue to increase shareholder value.

We will take the appropriate actions required to expand earnings, grow margins, generate free cash flow, return cash to shareholders, and increase our return on invested capital.

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)

Joe DeNardi, Stifel.

Thanks.

Good morning.

On the fleet changes you announced, the transitioning of some the wide-bodies under the domestic entity, I understand you're looking to pull down some international capacity.

But can you just walk through how that impacts the domestic capacity trend over the next few years?

Joe, this is Jim.

I sense that the main question out there is whether this fuels domestic capacity growth or not; and the answer is, no, it doesn't.

What this is going to allow us to do, it's going to permit us to reduce frequencies and increase gauge, which is part of our network optimization plan.

So this is a seat neutral initiative that we're doing here.

Let me give you an example of where we fly high frequencies in our hub-to-hub markets.

Take the example of San Francisco to O'Hare.

Within 90 minutes at the late flights of the night, red eyes, we fly three narrow-body aircraft.

This is going to allow us to consolidate frequency to use that 777 in that market.

And I'll tie it to John's comment, where he on numerous times mentioned removing our reliance on 50-seat regional jets.

These narrow bodies then will be able to free up and do exactly that.

It's our 50-seat reliance; as we move away from that, it generates the narrow bodies to cover that.

So there's a cascading effect to it.

So in general, it really promotes more cost efficient flying while serving the demand that's out there.

Joe, I'll just add -- this is John.

This is, bigger picture, all part of our plan to utilize the assets that we have more efficiently, and to improve our return on invested capital so that we can deploy capital in a manner that best creates shareholder value.

That's helpful.

And, John, I feel like there have been a number of changes since you talked about Project Quality that are impacting the cost structure a bit with the fleet changes here.

Can you just talk about how some of those initiatives are going, and what impact that these fleet changes are having on project quality, and whether the better-than-expected performance continues into next year?

Sure.

And you're probably alluding to the fact that half of our Project Quality savings are fuel savings.

And we have a goal of becoming about $1 billion more efficient in fuel by 2015.

Certainly, today's fuel prices impacted that.

And on the margin, some of these decisions -- whether it's taking delivery of used narrow-body aircraft that are maybe less efficient or extending the life of some of the older planes that we have -- they will have some impact.

But the progress that we've seen to date in the fuel efficiency line with Project Quality, we're very pleased with.

We expect to achieve about $500 million this year of our Project Quality fuel savings initiative.

And so I don't think that really detracts from our overall goal.

Okay, thank you.

Jamie Baker, JPMorgan.

Please go ahead.

Hello, good morning.

Good morning.

Thoughts on the LaGuardia perimeter rule and the impact on PS out of JFK.

Also wondering if this ties to the domestic widebody phenomenon?

You clearly have the aircraft required for transcons out of LaGuardia on its 7,000-foot runway.

But the facilities there are lacking, in my opinion, with the lounges landside.

And obviously, your slot portfolio isn't quite as rich as Delta or American's.

Does this tie together?

And what are your aggregate thoughts on this topic?

Jamie, this is Jeff.

Let me take a crack at that.

The perimeter rule has been in place, I think, for something like 60 years.

It's worked pretty well as is.

We're certainly consulting with the Port Authority about what their thoughts are and our thoughts.

And different carriers have different views on that.

As for operations in JFK, I don't think really at this point we want to comment on that.

Jamie, I would add -- this is Jim.

Our transcon product continues to improve and perform very well across all the airports there.

So we're excited about the product that we're bringing in and what we can do in that market across our network.

Okay, great.

And a follow-up question probably for Greg.

As we think longer term about the ramifications of potentially pursuing more of a used aircraft strategy.

I think Delta would argue one reason their strategy has been successful is that they have the sufficient tech ops in place that one really needs to support a somewhat older fleet.

Is there a corresponding investment in maintenance for United that we should think about modeling as it relates to this strategy?

Or do you have those systems and people in place?

And I realize we're only really talking 10 to 20 shelves for now.

I'm just trying to think a little bit longer term.

Yes, Jamie, thanks for the question.

I think we're particularly well-positioned to be able to manage any used aircraft we bring into the market with our facilities in San Francisco.

Which we think are some of the best in the world at the services we provide there.

So I think we're very well-positioned.

As well, a lot of what the aircraft we're looking at are actually similar vintage to what we already have in our fleet today.

Okay, perfect.

Thank you, gentlemen.

Appreciate it.

Julie Yates, Credit Suisse.

Please go ahead.

Good morning.

Thanks for taking my question.

Q1 was a very strong quarter for free cash flow of over $1 billion.

But only $700 million looks to have been deployed for debt, pension, and buybacks.

And I assume that free cash continues to improve in Q2 and Q3.

John, you mentioned balanced deployment.

But can you offer more color on the cadence of that deployment between the different opportunities and why we aren't seeing more buybacks?

Especially with the year-to-date stock performance?

Certainly, Julie.

We've talked for some time about our need to continue to de-lever.

And we've set some intermediate targets out there of gross debt goals in the neighborhood of $15 billion.

The steps that we took to prepay the debt thus far this year that we've announced will help achieve some of that.

I do firmly believe that there's significant shareholder value opportunity with de-levering our balance sheet.

We are too heavily levered today, and it's a vestige from an industry which we're not operating in anymore.

It's a much more reformed industry.

As we look at the opportunities that we have to de-lever, we don't have a lot of other options to prepay debt where it makes sense.

Save for the secured debt that we have, the term loan facility of about $1.3 billion.

So as we begin to pick off these pieces of debt, like the 6% notes, there are less opportunities to prepay that.

And you'll see us probably veer more towards returning cash to shareholders at that point.

Understood, okay.

And then just on the pension, is there a benefit to expense from the higher discretionary contribution?

There is; there is.

And we treat pension just like debt.

And we'll continue to fund that appropriately.

We're in a situation today where in a low interest rate environment, we want to be careful about being in a position where you could actually find yourself having an overfunded pension.

Where you're not getting a good return on that cash.

So we'll be prudent with respect to how much we fund there.

Okay.

And then just lastly, can you offer any update in terms of what amount of the CapEx for this year you intend to finance?

Well, it's a good question.

And typically what we've done, if you look at our CapEx profile this year of $3 billion to $3.2 billion, about two-thirds of that is aircraft.

And in the past, we've tended to lever up and borrow most of the amount of that for aircraft.

To your earlier question about limited opportunities to prepay debt.

If we're in a situation where we're generating enough free cash flow, the next best opportunity to de-lever is actually not borrowing incremental money for new aircraft.

And so that's not a decision that we've made yet, and we'll wait to see how cash flows pan out for the year.

But it's reasonable to expect that going forward, we will borrow less money for aircraft and spend more cash upfront.

Okay, excellent.

Thank you very much.

Michael Linenberg, Deutsche Bank.

Please go ahead.

Yes, hello.

Two questions here if I could.

First to John.

John, I want make sure I heard you correctly.

I think you indicated that you were going to pre-fund the pension by $700 million this year?

That's correct.

Okay.

So, I mean, I don't think you've put out your annual yet.

But just based on where the deficit was plus the $700 million this year, it sounds like you're actually pretty close to removing the underfunding.

We could be a year or so away from that.

Is that right?

Well, that's fairly close.

At the end of the first quarter, we've got an unfunded liability position of about $2.5 billion.

Okay, okay.

And what I was alluding to earlier, you could actually find yourself in a situation where if you closed that entire gap and then interest rates were to rise again, that reduces the projected benefit obligation.

So you could actually been in a situation where you have an overfunded pension.

And that's not necessarily the best use of capital.

So we're very thoughtful about the amount that we're going to fund, so that we can get close to fully funded but not be in a situation where we'd be overfunded.

Perfect.

And then just my second question to Jim.

On the 777s, thanks -- the ones that are being redeployed to domestic -- appreciate the example that you provided.

I mean, the way we should interpret that or think about that airplane, is it going to be utilized hub to hub flying or Hawaii?

Is that going to be the primary use as those airplanes come back into the domestic?

Hello, Michael, this is Jim.

Hello.

You hit it right on the head.

It'll support us in frequency consolidation hub to hub and also support our Hawaii.

And so that's exactly right.

Great, thank you.

Hunter Keay, Wolfe Research.

Please go ahead.

Hello.

Thank you.

Good morning.

A question, John.

It looks like your ancillary business expense guidance ticked up by about $100 million incrementally in the back half of the year.

Is there any revenue attached to this?

And, if not, how come the CASM mix fuel guide did not come down from the prior guide?

Because even with a little bit lower capacity and given how Project Quality is going, I would think that that would sort of lead to a reduction in the full-year CASM mix fuel guide.

Unless, again, this is a new initiative and there's some other revenue I can put in the model in the back half.

That's an insightful observation, Hunter.

We do have in that guidance an assumption about resuming some of the third-party sales we've done for fuel.

Just this quarter alone, that's about $130 million variance to the previous year.

So to the extent that we've got increased other revenue there, we would have, more or less, an offsetting expense.

It's a profitable business, but it's pretty low margin.

Right.

Okay, that's good.

And then I think one of the things that I'm concerned about, and I think I'm hearing this on increasing basis from some investors, is that big airports continue to get more service; and the smaller to midsize airports continue to get less.

Jim, you touched on some of the competitive capacity growth causing some pricing headwinds for you in Q2.

You're not alone.

Everybody has competitive capacity growth in their markets.

And you're putting 777s in big airports.

That's going to theoretically, I think, exacerbate that problem going forward.

Is there anything that you can tell us now?

Why we should not be concerned about how even though the headline number on capacity continues to trend better on the increment, the competitive capacity trends appear to be getting worse.

So how do we feel good about United's ability to compete in that environment as the biggest airports are getting more and more competitive?

Hunter, this is Jim.

It's a great question.

Obviously, I'll speak from United's perspective and how we think about this.

But the base of it is that we are really committed to a disciplined capacity approach.

So even the 777 that I talked about, it will be seat neutral; and we'll manage that capacity discipline.

As a matter fact, over the last eight years, United has grown its capacity at GDP or less for every year.

And so that's really a strong part of our plan that we feel allows us to grow our margins and reinvest in our business.

And so we'll continue to do that.

An example -- as we've done that, what's the test of that?

We've lowered our guidance one-half point this year -- from 1.5% to 2.5%, to 1% to 2%.

A lot of the work we're doing to offset and mitigate some of the foreign exchange has been in place.

In the first quarter, our Japan capacity was down 11% year over year.

So it gets back to that general principle of always staying disciplined and allowing us to be flexible to move with what's happening in the marketplace and with demand.

So from United's perspective, there's nothing about what we've been doing over the last several years that's going to change going forward.

There's a change in how we're approaching capacity.

The capacity that we're adding is really efficient.

And so when I talk about the slimline seats and that's going to grow our capacity growth up 2% in the domestics in the second quarter, it's that efficient slimline capacity growth.

It comes at a lower average yield, which drives RASM down.

But it's very cost-effective and margin accretive.

So our commitment's to that, and we're going to continue to do that.

Thank you, John and Jim.

Helane Becker, Cowen & Company.

Thanks very much, Operator.

Hello, everybody.

Thanks for the time.

This may be a question for Jeff.

You are now the second largest US airline, and you're not included in the S&P yet.

And I'm just kind of wondering if you think about that at all, if it's a priority?

And if you do think about getting included, is there stuff you can do to perhaps move the process along?

Helane, I think about that every night right before I go to bed.

(laughter)

I hope that's not true.

(laughter)

I'm a really boring guy.

Yes, it is something that we do think about.

It is something that we think is appropriate.

And as for anything we can do to get there, that I'll turn over to John.

Yes, Helane, we meet the qualifications today for inclusion in the S&P 500.

There's not anything that we can do to get them to be more interested in us.

I think part of it is, you've got to have someone leave the S&P 500 to actually be included.

So it's something that I think would help our stock long term -- having a fund in us like that.

And it's something that we certainly desire, but it's largely outside of our control.

Okay.

And then, can I just ask a labor-related question?

I think you've still got a couple of contracts that don't have merged seniority lists.

Can you do an update for us on where that stands?

Sure.

Helane, this is Jeff.

First of all, we've got 28 out of our 30 contracts to get done.

So we only have two left.

Those are with our technicians and with our flight attendants.

We're in negotiations with both groups.

I won't comment on the negotiations themselves; but I'll tell you, we very much are desirous of getting those done.

We believe that our employee groups wish to get them done.

But we have to approach that in the appropriate disciplined manner to reach agreements that are good for the Company and good for the employees.

Great, okay.

Thanks for your help, everybody.

You bet.

Thank you.

William Greene, Morgan Stanley.

Please go ahead.

Hello, good morning.

Jim, I'm wondering if you can clarify one point on some of the RASM commentary?

You talked about second quarter being a trough; and so, obviously, things will get better.

Do you feel like that's more on balance a capacity statement?

Or is it more on balance a demand statement?

Do you have enough visibility into the back half to understand what demand looks like?

Or is it really just a capacity comment?

Or even comps, I guess, could be the other answer too.

Well, from a PRASM point of view, second quarter being the low point is driven by many of the things I talked about on the call.

The largest effect, for instance, of fuel surcharges in Japan hitting us in the second quarter.

And as you go through the year and get into the fourth quarter, you begin to kind of mitigate some of that just on a year-over-year basis.

Some of it is just the seasonality -- seasonal shaping that was really successful in the first quarter, particularly in the transatlantic.

We plan, obviously, to grow that capacity as we move into the summer strong periods and take advantage of the higher RASM in the third summer period throughout, for instance, the transatlantic.

So it's a combination of some of the effects year over year kind of balancing it out.

Tied with the initiatives that we are doing to reduce our capacity in some of the oil-related markets.

As well as, for instance, in the transatlantic, we'll be flat to down year over year in the fourth quarter now.

Which drives our guidance of reducing it by 0.5 a point to 1% to 2%.

So those things -- that market basket of things -- kind of makes the second quarter the low watermark then, based on what we see today.

Okay.

John, I wanted to follow up one question for you on fuel.

Obviously, we're redoing the hedge book; and we'll participate in a lot of the downside.

When you think about deployment of cash, do you think at all about trying to lock in, longer term, some of the current fuel prices in any way?

Or is that just not a part of the use of cash?

That's a good question, Bill.

And absolutely, when we look at forward projections for earnings today at the fuel prices that we see today - which, arguably, are lower than the long-term average -- we absolutely think about protecting some of that.

Because the opportunities that we have to improve our business with a type of cash flow that we can generate are huge.

And so spending a little bit of money to protect against any pop in oil prices is something that we will likely do.

As we look at opportunities, we're more focused on 2016 than 2015 at this point.

But I think that's a reasonable use of cash, given what we can do with the cash flows in terms of improving shareholder value.

Yes.

Okay.

I appreciate the time.

Thank you.

David Fintzen, Barclays.

Please go ahead.

Hello, good morning, everyone.

Just a question for Jim.

You alluded to it or you mentioned, sort of, point-of-sale starts to shift into the summer.

And just given the speed and historic degree of the move in the euro, is there a different dynamic in point-of-sale shift into the summer than maybe you've seen in the past where you clean up a lot of it with US point-of-sale?

Just how is that trending?

Is it different this time?

There's a general shift to point-of-sale to the US side that happens as you head into the summer.

We do think that given the exchange rate and the strength of the dollar that we'll see that accelerate this year.

And, quite frankly, in our bookings we're already starting to see some of that.

So some of that foreign exchange impact that's affecting us in the transatlantic will thus be offset by an even stronger point-of-sale out of the US in the transatlantic as we head into the summer.

So we're beginning to see those trends happen.

They're above the rate that they normally do.

Okay, but more 3Q than 2Q is what you're alluding to.

Absolutely.

Even our seasonal shaping of capacity was meant to hit the June through August period.

So we're really well-aligned with the seasonal shaping of the transatlantic that we set out for this year.

Okay.

And then, just on a similar topic, the euro hedge.

If you didn't have that hedge in the second quarter, what would the incremental FX hit be?

And then how does that run off through the course of the year?

It's not a huge amount, David.

We're hedged 47% for the balance of the year at around 122, 123.

And so I don't think it's that big of a number for the second quarter.

I don't have the specific number that you've asked off of the top of my head.

But I don't believe it's material as I'm thinking through it.

Okay, all right.

That's helpful.

Just one quick one, just with the energy-related comments on travel demand.

I mean, the way I kind of interpret that, is that predominately international travel that's energy-related that you're seeing?

Or are you seeing a broader Houston impact?

Well, it's both of those.

But the energy travel is that it really flies.

When it flies internationally, it flies in business class.

And so a big portion of that revenue is international because of that.

But even in Houston, a data point is that we saw our Houston RASM in the first quarter down 5%.

And our consolidated RASM was up 0.4%.

So that gives you a little context that, yes, a lot of that oil traffic is international.

But it also affects the domestic.

And we're adjusting some of that domestic capacity, for instance, to North Dakota and Canada to address some of the demand issues that are associated with that.

Okay.

That's all very helpful.

Thank you.

Duane Pfennigwerth, Evercore ISI.

Please go ahead.

Hello, thanks.

Just two questions from me.

Appreciate the time.

To what extent did pilot availability factor into your decision to accelerate some of these regional fleet changes?

And wonder if you can offer any comment on your partners' ability to fly the schedule that you want them to fly?

This is Jeff.

I'll talk a little bit about that.

Pilot availability clearly, particularly for the 50-seat operation, is an issue for us which does indeed affect the ability of our Express operators to fly the schedule.

And moreover, the 50-seat product is something that is not as good a product as the 76-seaters are.

For example, the new Embraer 175s that are in the market are a spectacular product.

It's a very attractive airplane, very comfortable airplane.

It has Wi-Fi.

It has putting first-class food up front.

It has better ancillary revenue opportunities of seats, and it's a very good product.

But the shift of pilots, or reduction in the availability of pilots for smaller airplanes, is clearly affecting us.

As it is affecting all of our competitors who operate this aircraft.

Thanks, Jeff.

And then just on seasonality of free cash flow generation.

Strong number here in the first quarter.

Obviously, earnings seasonally stronger in second quarter.

But is it fair to assume that free cash flow generation will actually be higher sequentially in 2Q?

And thanks for taking the questions.

It's fair to assume that, Duane.

A lot depends upon on earnings.

But to your point, we tend to build a lot more cash in the first and second quarters.

And we expect very strong cash generation there.

We have a goal, though, of being free cash flow positive in every quarter.

And given the earnings profile of this business, that's not an unreasonable assumption.

Is that something you think you could hit this year, potentially?

Again, it depends upon your earnings assumption.

But yes, potentially.

Thank you.

Dan McKenzie, Buckingham.

Please go ahead.

Oh, hello, Thanks for squeezing me in here.

Apologies for yet another 777 question, but I can't resist.

And I guess I'm just wondering if the move is a potential prelude to adding a fourth cabin domestically.

And how should we think about the pros and cons of that kind of a strategy?

Hello, Dan, this is Jim.

We have no plans to add a fourth cabin domestically.

Given what we're doing on ancillary revenue, particularly with Economy Plus, we actually feel we're very early in the game of driving ancillary revenue with that product today.

So we're going to continue to build on that.

And so the answer would be no.

Okay.

Very good.

John, just following up on the free cash flow commentary.

Obviously, you're completing the share repurchase well ahead of schedule here.

And I believe investors are concluding that United may not actually announce another capital return program this year.

But I guess I'm wondering if we should preclude that possibility?

I mean, what's the right way to think about expectations here?

Well, I think it's reasonable to assume that as we conclude our existing share repurchase program that we'll be in the market with something additional.

Whether it be a share repurchase dividend, whatever we think is the best way to return cash to shareholders at that point in time.

Fantastic.

Thanks.

Thank you.

Thank you.

Ladies and gentleman, this concludes the analyst and investor portion of our call today.

We will now take questions from the media.

(Operator Instructions)

And once again, please hold for a moment while we assemble our queue.

Jeffrey Dastin, Thomson Reuters.

Please go ahead.

Many thanks.

How does the 747 fit into United's fleet plan -- retirement plan in 2015?

And has the airline considered retiring a significant portion of 74s going forward?

Jeffrey, this is John.

The 747 is something that we do intend to keep for a few more years.

We have a couple coming out of our fleet in the near future.

But some of these, we've made some improvements to the operating reliability of the aircraft.

And we could expect to keep them for another few years.

They have another sort of big maintenance event in the 2020 timeframe.

That'll be another decision point for us.

Whether we want to extend them further at that point or go ahead and retire them.

Great.

And just a separate fleet-related question.

Which model of streamliner did United exchange for the 777s?

And might United elaborate on what discount it may have received for them?

We have not disclosed which model we substituted.

And, we might not elaborate on the discount.

(laughter) That's something we'd like to keep us between us and Boeing.

Got it.

Thank you very much.

You bet.

Ted Reed, The Street.

Please go ahead,

Thank you,

I don't quite understand why you're trading in 787 orders for 777 orders.

I thought the 787orders were a big advantage for United.

So I'd like to know why you're doing it, apart from price?

And give me an example of where it would benefit you.

We're still a big believer in the 787.

It's a great aircraft in our fleet today.

The 777-300ER is also a very good aircraft and happens to have the best reliability of any plane in the sky today.

We have an opportunity to put that in some markets that it's a better aircraft than with the 787 or some of our other existing planes out there today.

So this is all part of normal fleet planning that we do from time to time.

And there's nothing to read into this about the 787.

Can you give me an example of a route that the 777 might be better?

I won't give you a specific route.

But clearly, it integrates well with the 777 we fly out of Newark.

It allows us to upgauge Newark, which has always been a strategy of ours given the constraints there and the demand that we're seeing in New York with the hub and how it's working in New York.

So that's a great aircraft to upgauge in New York with that 777-300.

All right, thank you.

I had one other thing.

Delta said it would cut international capacity growth in the fourth quarter by 3%.

I can't quite figure out from what you said, is that about what you're doing?

I know you have some big cuts in Japan, but can you compare to Delta?

We haven't disclosed what the fourth quarter in terms of international in total.

We are bringing our Atlantic capacity to flat to down year over year.

Again, for us, we've been very much focused on capacity discipline.

So our Japan capacity, for instance, in the first quarter was down 11%.

It's already planned to be down 7% in the fourth quarter.

So we've been ahead of this as we create the flexibility in our fleet plan to match capacity and demand.

All right.

Thank you.

Edward Russell, Flight Global.

Please go ahead.

Yes.

I was wondering if you could provide some guidance on the timeline for the 777-200s coming into the domestic fleet?

It won't be this year.

It won't be this year.

Great.

Thank you.

Okay, with that, we're out of time and we'll conclude.

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

Please call Human Relations for your further questions.

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.