聯合航空 (UAL) 2015 Q3 法說會逐字稿

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

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

(Operator Instructions)

I will now turn the meeting over to your host for today's call, Jonathan Ireland.

Please go ahead, sir.

Thank you Brandon.

Morning everyone and welcome to United's third-quarter 2015 earnings conference call.

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

Both are available on our website at IR.

United.com.

Information in this morning's release and investor update, and our 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 reconciliation of these non-GAAP measures to GAAP measures, please refer to the tables at the end of our earnings release and investor updates, 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.

Joining us here in Chicago to discuss our results are acting CEO Brett Hart; Vice Chairman and Chief Revenue Officer Jim Compton; Executive Vice President and Chief Operations Officer Greg Hart; and Senior Vice President Finance and acting Chief Financial Officer, Gerry Laderman.

Greg will begin with some overview comments after which Greg will provide an update on our operations.

Jim will follow with a discussion on revenue and capacity.

Gerry will review our costs, fleet, and capital structure, after which we will open the call for questions.

First from analysts, and then from the media.

We'd appreciate if you would limit yourself to one question and one follow-up.

And now I would like to turn the call over to Brett.

Thanks, Jonathan, and thank you all for joining us on our third-quarter 2015 earnings call.

As you are no doubt aware, our new CEO, Oscar Munoz, is currently on medical leave while he recovers from a heart attack he suffered late last week.

The entire United family has Oscar in our thoughts and prayers.

To provide leadership during this period, our Board of Directors has asked me to work with our experienced leadership team and serve as acting CEO in Oscar's absence.

We'll continue to push forward the agenda we have laid out in the past six weeks.

It focuses on customer service, teamwork, and innovation, with safety always remaining paramount.

Like Oscar, I believe United has the people, the network, and the assets to achieve the same or greater margins as our peers, and I, with our entire management team, will continue to take steps necessary to get us there.

The last several weeks have been very eventful for United, with news of Oscar's heart attack hitting many of us hard.

However, I want to assure you that the United team has never been more unified and committed to the goal of making United great again.

Turning to our third-quarter results.

This morning we reported pretax earnings of $1.7 billion, marking the sixth consecutive quarter of margin expansion.

Our Return on Invested Capital was 19.8% over the last 12 months and we decreased our non fuel unit costs in the quarter.

Our employees' hard work was a significant contributor to these results.

And I want to personally thank them for their many contributions to our success.

I will now turn the call over to Greg to provide more information on United's operational performance.

Thanks, Brett, and thank you to everyone for joining the call this morning.

I would like to take this opportunity to thank our employees for their tremendous work through the busy summer season.

Day in and day out, United employees are showing their commitment to improving our operational performance, and the considerable progress we've made reflects their continued dedication and hard work.

Our entire team recognizes that United still has an opportunity to improve the operation, and we are all focused on raising our performance to the level we and our customers expect.

However, I do want to highlight the progress we have made this year.

Year to date, our consolidated on-time performance is five points better than the same period last year.

Year to date completion rate also improved significantly, as we have canceled over 30,000 fewer flights than last year, which translates into 2.7 million fewer impacted customers.

In fact, year to date, when including both the mainline and express operation, we have better completion rate than our main competitors in New York and Chicago, and we have better completion in Houston that our major competitor in Dallas.

Finally, in September, we set an all-time record for bag handling, and so far this year, our mishandled bag rate is 9% better.

Over the past several calls, I talked about the investments we made to improve the operation.

The third quarter results show that these investments, along with the hard work of our front-line employees, are beginning to take hold.

I'd also like to highlight our cargo operation.

Cargo revenue in the third quarter was approximately flat year-over-year.

While this year has been challenging, with the declining surcharges and increasing industry cargo capacity, the team has done excellent work offsetting this pressure through an intense focus on expanding our market share.

Year to date, United's market share amongst the A4A carriers improved approximately 10% compared to the same period last year.

This led to approximately 8% growth in cargo revenue over the last 12 months, a period in which our major competitors saw their revenue decline.

To the entire operations team, I want to thank you for a very good year so far.

While we still have a long journey ahead, you should all be proud of the significant progress we have made.

With that, I will turn the call over to Jim.

Thanks, Greg.

Again this quarter, I would like to thank our customers for flying United.

Many of you have noted the improvements in our product and our operation, and we are continuing to do more every day to deliver the product you desire.

In the third quarter, our consolidated unit revenue declined 5.8%, in line with our expectations.

The four factors we discussed in our prior earnings call, a strong US dollar, the effects of lower oil prices, pressure as a result of margin accretive initiatives, and competitive pricing actions contributed to negative unit revenue growth year over year.

In the third quarter, we amended our co-branded credit card agreement with Chase and Visa, more than two years before the original expiration date.

We expect a multi-year extension will generate an incremental $200 million of revenue in the second half of the year, at approximately $400 million of incremental revenue for 2016.

Turning to the fourth quarter, we expect our unit revenue to decline approximately 4% to 6% year over year.

The major drivers of a fourth-quarter decline are similar to those in the third quarter.

We expect the foreign exchange impact to account for 1.5 points of year-over-year PRASM pressure.

Assuming current conditions continue, we anticipate that the impact of lower surcharges, particularly in Japan, will account for approximately 1 point of weakness.

We continue to see degradation from our corporate energy customers, with revenue down approximately 35% year over year representing roughly 1 point of PRASM decline.

We also expect the current competitive pricing actions will drive approximately 1.5 points of decline in the quarter.

Finally, the margin accretive actions we are taking, such as installing slimline seats, are anticipated to drive approximately half a point PRASM decline.

I'd like to take this opportunity to speak briefly about our presence in China.

China continues to be an important and profitable market for United.

We are closely monitoring the changing dynamics of its economy.

Following the currency devaluation, and Chinese stock market decline in August, we saw a brief drop in bookings.

However, bookings recovered nicely and have rebounded to near pre-devaluation levels.

A second factor that we continue to experience is significant competitive capacity growth in China.

For the fourth quarter, we anticipate an approximately 35% increase in non-United capacity growth year over year.

Despite these pressures, our leadership position in the US China market is an asset which will produce returns on our investments now and over the longer term.

Results in Chengdu saw meaningful year over year improvement, and we're continuing to execute on our China strategy with our new nonstop service to Shiyan, China.

While the current revenue environment is challenging, it is important that we take steps to capture incremental revenue by better meeting our customers' needs.

For example, we know that our business customers prefer two-cabin aircraft over single cabin 50 seat aircraft.

We've responded by significantly increasing the number of two-cabin regional jets or mainline aircraft on routes where we previously flew small regional jets without materially affecting capacity.

To that end, 79% of the United's top 100 business markets are now operated exclusively with two cabin aircraft on weekdays.

This is up from 59% in November 2013.

To put it in a slightly different perspective, 94% of the flights in these markets will be flown with two cabin aircraft.

We will continue this transition in the quarters ahead.

While this is just one initiative, it is a good example of how we are listening to our customers and responding appropriately.

With respect to capacity, in the fourth quarter we expect grow approximately 1% to 2%.

This half-point increase versus our prior guidance is due to higher completion factor as improved operations are driving fewer canceled flights.

For the full year 2016, we anticipate growing capacity approximately 1.5% to 2.5% with a quarter of a point due to leap year adding an additional date to the calendar.

In conclusion, as we move into 2016 we will begin lapping many of the headwinds to revenue performance and expect quarter over quarter PRASM improvement.

We're working to return to PRASM growth which will be supported by our advancements in our operation, network, and customer service.

We want to be the carrier of choice and will continue to take the necessary actions to achieve that goal.

With that, I'll turn it over to Gerry.

Thanks, Jim, and good morning everyone.

Let me also thank our employees for another record quarter which was a direct result of their hard work and dedication.

In the third quarter, our pretax profit was $1.7 billion excluding special items, with a pretax margin of 16.6%.

We increased our earnings per share by 65% year-over-year generated $1.3 billion of operating cash flow, and achieved a 12month return on invested capital of 19.8%.

Our GAAP net income was $4.8 billion but that includes a non-cash special item of $3.2 billion related to the reversal of our tax valuation allowance in the quarter.

Non-fuel cost performance in the third quarter was excellent with consolidated CASM, excluding fuel profit sharing and third party business expense, decreasing 1.5% year-over-year.

We expect CASM, excluding those items, to be flat to up 1% for the fourth quarter and to be down approximately half a percent for the full year.

Sensible cost management is critical for United's financial success.

Through the first nine months of this year, we've achieved approximately $600 million in non-fuel savings through a project quality efficiency initiative and we expect to realize $800 million for the full year.

We continue to expect to achieve our goal of $1 billion in annual non-fuel cost savings by the end of next year, a full year in advance of our initial expectations.

Turning to fuel expense.

We recorded a hedge lost of approximately $250 million in the quarter for the fourth quarter, we are approximately 23% hedged and based on the October 15 forward curve, we expect to incur approximately $275 million in hedge losses while participating in approximately 81% of any future price declines.

For 2016, we have about 17% of our expected fuel consumption hedged.

This hedge is currently in a loss position of approximately $43 million but does allow us to participate in approximately 93% of any future decline in oil prices.

Looking ahead to the fourth quarter, we expect to achieve a pretax margin between 9.5% and 11.5% in the quarter with pressure coming from passenger revenue offset by improved mileage plus revenue, combined with lower fuel prices, and solid, non-fuel cost performance.

As part of our balanced approach to capital allocation, our top priority is investing in our business.

We believe it is critical that our employees are provided the tools to do their jobs efficiently and effectively.

Our investments are a major contributor to improving our operational performance and we will continue to look for investments to further advance our progress in this area.

In the quarter, we spent over $700 million on capital expenditures and continue to expect to spend approximately $3.2 billion for the full year.

Part of this capital is allocated to aircraft.

In the quarter, we took delivery of six 737-900ERs, four 787-9s, and one used 737-700.

We also added 16 additional 76 seat Embraer E175 regional aircraft and now have 75 of these customer pleasing regional aircraft in our fleet.

Debt repayments and pension funding a minimal in the quarter as we made excellent progress paying down debt and funding our pension in the first half of the year.

So far this year, we've made more than $900 million of debt prepayments and contributed $800 million to our pension plans.

Actions like these strengthen our balance sheet and demonstrate our commitment to reducing the financial risks in our business.

Additionally, providing a meaningful return to our investors is fundamental to our capital allocation plan.

In the third quarter we spent $262 million in share repurchases.

So far this month, we've spent approximately $100 million more to repurchase United stock and this morning we also entered into a $300 million accelerated share repurchase program that will be completed within three months.

Furthermore this program does not prohibit us from making additional open market repurchases of our stock throughout the duration of the program.

To wrap up, we are proud of our results this quarter, and will continue to focus on delivering strong earnings and allocating our capital in a thoughtful and balanced manner.

The investments we're making in our people and our product will ensure a bright future.

Finally, I just want to reiterate what was said earlier.

The thoughts of everyone here are with Oscar and his family.

I will now turn it back over to Brett for closing remarks.

Thanks, Gerry.

Thank you again to everyone who joined the call this morning.

This has been a challenging few weeks for us.

We're proud of how the United family has come together.

Not long ago, we asked our customers and our employees to tell us how we can do things better and we have heard from thousands of you.

We are reading and listening to every single suggestion and in the upcoming weeks, we will be announcing some changes that are a direct result of your feedback.

We believe, like you, that United can be great again, and it is with your ideas, your support and dedication that we will as one United team, be successful.

I will now turn the call over to Jonathan to open the call for questions.

Thank you, Brett.

First we'll take questions from the analyst community, then we'll take questions from the media.

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

Brandon, please describe the procedure to ask a question.

(Operator Instructions)

Michael Linenberg, Deutsche Bank.

Question to Jim.

Jim, when you highlighted the four issues that have been undermining the revenue performance, you talked about the fourth one being this competitive pricing issue.

And I know you sort of characterized it as such on this call.

We look at the guidance that was put out today, rather than competitive pricing, it's referenced as softening of domestic yields and maybe I'm just reading too much into it, but when I sort of see that tells me maybe this is a bigger issue and maybe it is more of a demand issue rather than just a carriers going rogue on pricing.

Can you just give us some additional thoughts on that?

Mike, thanks for the question.

Let's break it out and talk about the domestic based on your question.

We actually see what I will call as lukewarm or tepid demand.

And really good demand continuing kind of what we've seen in the third quarter and so forth as we head into the fourth quarter and so that as we think about our guidance, the items that I highlighted whether it be foreign-exchange, we still have that impact year-over-year, and if you took today's current exchange rates, you would begin to fully lap that in the second quarter of 2016.

Then there's the internationally jumping there is it the lower surcharges but that also flows across to domestic and impacts domestic also.

That, given current surcharges, with lap itself also in second quarter.

We are somewhat unique with the energy and in the energy as I mentioned, we're seeing about a 35% decline in our corporate revenue associated with that sector.

Quite frankly we talked about that being 20% in the first quarter, 30% in the second quarter to 35% in the third.

We continue to see it drift towards that 40% so as I think about the fourth quarter, that would be kind of demand may be that you're pointing to that we would see given our presence in Houston that might be what you are alluding to.

At the end of the day also if you think about the course of the year, our expectations of demand at the beginning of the year are clearly lower as reflected in where GDP has gone through the year.

So as we think about next year, many of those elements will start to lapse, but we're still focused on where the demand will be versus our expectations.

We are planning around a 2% to 3% GDP in 2016 but like this year, we want to keep our eyes and monitor where demand versus our expectations go.

Great, very helpful.

My second question and this is to Gerry on the fleet.

If I look at your latest fleet schedule and I kind of look back the last time you published it, doesn't seem like there's much change on mainline.

I think be holding a 747, you're holding onto it a little bit that maybe what you had previously expected.

But when I look at the regional side, it does look like that your holding onto some of those airplanes a little bit longer.

I think there was a bigger reduction in the regional fleet a few months back.

Is that a function of maybe some of the issues that one of your regional carriers is facing and so in order to maybe back fill for some of that it makes sense to maybe keep some of these airplanes in the fleet longer?

What's driving that?

Mike, it's really just kind of a timing issue on a few aircraft.

It doesn't change our long-term view on where the fleet is headed and you'll see over time less regional flying, more mainline flying as we up-gauge.

But I wouldn't read too much into the change in the year end number.

Great.

Dan McKenzie, Buckingham Research

Brett, congratulations on being selected to step up here and my condolences, I know you guys are all close to Oscar.

I know you're still getting your feet wet in the role here but given your customer service responsibility this year I'm wondering if that's something you would want to talk to.

What have you found?

Where's the low hanging fruit and where do we go from here?

I appreciate that, Dan.

We have been focused for some time during the course of the year on improving customer service and identifying areas where we can in fact make a difference and where possible make a difference in the short run.

Oscar certainly coming in and taking the time to talk to customers and employees, placed a laser focus on that area as well.

And this would be certainly one of those areas where we can say that our efforts are being expedited.

I think that you will see changes in improvement and you probably already are in areas like our ability to deal with irregular operations.

You will see us addressing the boarding process.

You will see a number of changes related to overall in-flight experience.

But we should keep in mind that at the very core, operational reliability is really the driver for customer satisfaction.

I can ask Greg to add anything that he'd like to it on this point as well.

Oscar obviously came as Brett mentioned with a laser-like focus on a number of things one of which was reliability.

It's really continuing the trend we started a little bit over a year ago in terms of making improvements in the operation and rethinking really everything we do each and every day.

The exciting thing for all of us is we're on the front end of a whole host of activities that we've been engaged in over the past year to improve the operation.

And we've got a wave of things that are coming that will help carriers forward in terms of improvements.

Very good.

Second follow-up.

One message I'm really hearing from you is 59% of the departures getting a heck of a lot better from a margin profitability perspective just given the RJ restructuring after obviously talking about getting back to margins relative to your peers.

What are you seeing exactly in that part of the business in terms of profit improvement and where do we go from here?

What inning are we in with the RJ restructuring?

Hey Dan, this is Jim.

If you think about it in two pieces, we've got a lot obviously strong initiatives introducing the E175's into the network, and we're very far along on that path and will finish that rolling out that path as we move into 2016 but very far along.

I would say in terms of the regional piece and becoming less dependent on it, if you think about continuing to remove 50-seat regional jets we're about halfway in total when you combine it with where we are in the 76-seater, in terms of restructuring (inaudible).

So we're very excited about it.

You're right, we are seeing the benefits of the product of a two class cabin.

It comes in a number of ways; one it's just more competitive in these high basis markets.

Secondly, it's introducing the ability to drive ancillary revenue which we've been very successful on this year.

It introduces, with that 76-seater, we put a mainline when it's substituting for a 50-seater a first-class and an Economy Plus.

So the network is responding really, really well in terms of, a really gauging strategy to be much more competitive across the domestic network.

Helane Becker, Cowen Securities.

One question here with respect to -- there were some stories in the press this morning about some of the Chinese airlines merging cargo and operations and then some speculation that maybe some of the larger airlines would merge.

I don't necessarily want you to comment on what you can't comment on, but I am kind of curious China Southern is a SkyTeam member and Air China is a Star Alliance member, so have you thought about how something like that would affect your operations in China going forward?

Hey Helane, this is Jim.

Air China is a tremendous partner of ours, and quite frankly we're continuing to build that relationship as we grow China.

A lot of different degrees here.

Obviously China is a very competitive market and as I mentioned we see non-UA capacity growing 35% in the fourth quarter.

I'll tell you it's very profitable for us and it's profitability quarter over quarter has continued through the first three quarters of this year and I expect that to continue into the fourth quarter.

And it's built on a really strong plan that we talked about in the past.

One is capturing the demand that is very strong out of China.

If you think about the demand in China what we're finding is that although there is that large capacity increase as the economy grows and simulates more traffic, there's also existing traffic from China to the US many times goes over other connecting points such as Korea.

So as non-stops come in, there is a capturing of that traffic too.

Not only is it a market that's growing in new demand, we're actually recapturing some of that connecting traffic over hubs such as in Korea.

That being said, our strategy is also dependent on secondary cities not just the Beijings and Shanghai.

A lot of studies have shown that demand for China will double by 2020.

Half of that demand is going to come from secondary cities, so when we already look at our Chengdu service out of San Francisco, it's exceeding our expectations and doing very well year-over-year, and that is part of that strategy which is why we're excited about our second secondary city, San Francisco to Shiyan.

I don't know if I answered your question.

China is an appoint part of our network.

Very profitable, extremely competitive, whether it's cargo or whether it's passenger carriers, but we think we're really well positioned to keep building a profitability that we have there.

This is Brett.

Just to put a point on, I think the second part of your question.

We just out in a position to speculate on rumors related to potential mergers.

I have a completely un-related question.

How far along are you in this -- I'm not saying it the right way.

How close are you to the cap on 70-seat aircraft with respect to your scope clause?

Helane, based on what we have in the pipeline, we would hit that cap sometime next year as we bring in the rest of the 175s.

Hunter Keay, Wolfe Research.

One of the things that investors point to continually with United is the free cash flow yield.

But you guys don't really talk about cash flow.

You don't talk about free cash, I don't think you've ever (inaudible), and if you talk with people that believe in your stock, it has the potential to be one of the best free cash flow stories around.

Good, and even bad, industrial companies [guide] to free cash flow regularly so I guess two questions for you.

Why aren't you talking about your free cash flow more, and highlighting what can really be sort of industry best in story there?

Is it something that we need to know about that maybe we're getting ahead of ourselves and if you care to put in a guidepost how should think about free cash generation next year, I'd love to hear that too.

It's Gerry.

This year as you know has been a great year for free cash flow and really kind of the first year that we've made terrific progress in that direction.

So it is something we look at.

I personally get a little bothered by the way it's typically calculated only because an airline has a significant CapEx exposure to new aircraft and depending on how we choose to finance a new aircraft that has a material impact on free cash flow.

So what we're doing is kind of thinking about the best way to look at that and manage that and work with you and others on how best to deliver that message.

But it is a focus of ours.

In the context of capital returns, I know that you guys said that you're going to be ramping up the buyback in the fourth quarter which is great.

It's good to see that certainly, but do we need new leadership to come in and to really sort of bless a more aggressive capital deployment strategy?

Or is this something that the current leadership team has the willingness and ability to do on an interim, basis in the event that you can be opportunistic on your stock in terms of buying it back and in the event that you guys do have a bunch of cash coming into the business next year, either via debt which you are going to raise for new aircraft acquisitions, or the free cash flow itself, is there any recent think why the pace of the share buyback should not materially increase in an all equal environment as we move through the course of 2016?

Hunter, as Brett said earlier, we're moving forward with our plans, and certainly my plan in finance, is the balanced capital deployment that's been in place for quite a while.

Granted in the third quarter, our share buyback may not have been what some people would have expected, but keep in mind -- with the circumstances we were dealing with in the third quarter, we just thought it was prudent to maintain the steady pace we were at.

But as you can see what we've done this month already, between what we've actually purchased in the open market and the ASR that we entered into that's $400 million dedicated to the share repurchase in this month.

So we are absolutely committed to completing our current $3 billion program at or ahead of schedule, so that will continue.

Let me talk about the other parts of the capital deployment strategy.

It is absolutely essential that we make the investments we have to make in our people and our processes in our systems and our product.

It's going to be done sensibly and these investments need to be margin neutral or margin accretive.

And I think that those investments will be made within the CapEx guidance that we've been giving out.

And that we've got the continued de-risking of our balance sheet.

We don't have the luxury anymore of prepaying substantial amounts of hard coupon debt.

As you know we've done all that so going forward as we continue to manage to the right level of debt that will be a combination of the debt that amortizes over the next few years its billions of dollars, plus the way we manage finance for new aircraft.

It's an interesting situation because that's an area that we can access capital really, really cheaply, whether it's through the capital markets or through the banks.

And we continue to manage that, and in the process, while I would expect that we will continue to finance most of our aircraft deliveries, we may not finance them to the level that we have in the past and that's another way of getting to our goal of deleveraging.

But there's no question and as you saw given our commitment this month, we are very focused on as part of that also doing the right thing with returning capital to shareholders.

Julie Yates, Credit Suisse.

Are you guys ready to give a split between the domestic and international growth embedded in the 2016 capacity guide?

Julie, this is Jim.

We've guided to consolidated 1.5% to 2.5%.

Right now as we look at capacity for 2016, we'd be up 1% to 2% on the domestic side and 2% to 3% on the international, so that's how we would split that 1.5% to 2.5%.

I'll always say were going to keep our eye on demand and make sure that we have best aligned our demand with capacity but we're really comfortable with that breakout right now.

Any comments directionally how that 2% to 3% internationally was split between the three geographies?

I'll give you some direction on that.

We recently -- we're very excited about some markets we just announced, San Fran to Auckland, San Fran to Shiyan, China, as well as San Fran Tel Aviv.

San Francisco is a key focus for us to continue to capture the benefit in Asia, as well as we have a terrific long history in Israel that we feel really excited about with the San Francisco, Tel Aviv flights.

A lot of that off West Coast, there's a little bit of [run rate] in some areas this year but that would be things that were ready to talk about right now.

Very helpful.

Jim, on the domestic PRASM, looks like that improved sequentially to a decline of 1.6% in Q3 which is about 180 basis points better than Q2, primarily on load factor.

That's nicely ahead of the A4A average, it's pretty impressive given the pressures in Chicago and Houston.

What's allowing you guys to outperform on domestic unit revenues and do you expect the domestic entity can continue to improve sequentially in the fourth quarter and into 2016 as well?

Julie, think it's a number of things.

First point to some of the things that Greg talked about improving on the operations as we've gone through the year.

The operations team has done a tremendous job.

And so we're building that reliability that we need to build, and as Greg mentioned, we have more to go and we're going to continue to do that.

And so from a revenue perspective, you can clearly see that, when you've become carrier of choice and at the margin you can build on that you see that incremental revenue come to us so we're very excited about that.

The revenue management team, although there is competitive pricing out there, we approach that as not a one-size-fits-all and so not to get into a lot of detail, but the revenue management team works extremely hard particularly in high demand periods to make sure that the best mix of demand is on the aircraft and I think they pulled it off a really strong way.

The network, as we've talked about, as we have begun our up gauging and introducing two-cabin aircraft into business markets it's at the early stages of getting those results.

So a number of those things and yet we do have those pressures not because a price expansion but the fact that the energy sector is down I think the team's done a terrific job.

Actually if you take a look at it and you reference the A4A, our consolidated domestic length [apologist arousing] in the third quarter was the highest it's been since 2011 on a relative basis to our A4A peers.

We're really excited about the initiatives our teams are driving and I'm more excited about what we have coming forward.

That's great.

Jamie Baker, JPMorgan.

A question for Brett.

We met with Oscar recently and he indicated, and these are his words, that United had lost its front line.

And I for one appreciated the bluntness of that statement.

He also indicated that he expected to have the final bench, the final managerial bench in place by year end.

I know you spoke about pushing forward with the current agenda but I'm curious if your views on the front line and the timetable for management clarity are consistent with his.

I appreciate that question, Jamie.

I think first we have to put it into context.

What Oscar was doing in his seven weeks with the Company and his commitment first and foremost was to get out into the operations, to get down into the break rooms, to get out on the ramp, to talk to employees.

The focus was very specifically on what they would like to see changed.

And he heard it.

He heard it at every location that he went to.

It's very healthy for us to receive that feedback.

And Oscar had a level of urgency with respect to addressing, getting our employees the tools that they need to provide terrific customer service, which at the end of the day is clearly our objective.

What you may have read from that perspective into Oscar's comments was a real sense of urgency which we all need to have about ensuring that our employees, our front-line employees are able to provide the level of service that they would like to provide and in some respects we clearly acknowledge that we can do better and we are working very hard on that but I wouldn't misinterpret Oscar's desire to create urgency in that area which is appropriate, with an outblown perspective on the disconnect between the front-line employees and management.

So we're very focused on it and we expect to continue to move forward with the momentum that Oscar brought in that area.

As it relates to the management team, look, this is at its core this is a team that has been here through first quarter, which resulted in record results, and second-quarter which also resulted in records results, and the third quarter, which resulted in record results.

We would expect that you would expect every new CEO to come in and evaluate its management team.

That is the CEO's prerogative, and any changes that are made are based upon what's perceived as being needed.

And in part what that CEO perceives that he or she needs.

So I don't think that's out of the ordinary for a new CEO.

I will tell you that the team that we have here now is fully capable of that and will in fact execute the plan through the rest of this year.

And we feel very confident about that and we feel very confident about our ability to continue to connect with the front-line employees and move forward as a unified organization.

Excellent.

I appreciate that.

Second question is a follow up with Jim on domestic pricing.

How much stronger are pricing trends in markets where discounters do not file fares, than in the O&Ds where they do and the reason I ask he question is that I've tried to assess whether domestic revenue pressures are a function solely of discounter influence or perhaps there's also room for pricing improvements in markets where discounters do not have an influence.

Any color on that?

Jamie, Jim.

Clearly the competitive pricing pressures that we talked about in Houston, Dallas, and Chicago continues, and so it is those competitive pricing pressures are more isolated in those markets.

I would add that the energy sector becomes a little bit more spread both international and with domestic where we see that demand.

Outside of that we could see strong demand, relative to obviously the energy relatively strong demand.

So I think that as we manage price relative to that demand, we'll continue to do that.

I think there is strong demand outside those markets that you referred to.

That's helpful.

Thank you.

Joseph DeNardi, Stifel.

Brett, on your comments about closing the margin gap between you and your peers I guess you're a few innings into on the cost side and a fuel-adjusted basis margin haven't closed much so is the story here that you just have to wait for Houston and domestic yields in the Pacific to get better before that gap starts to close or what are the main levers over the next 24 months that you see closing that gap?

This is Jim.

Clearly, the energy is putting the pressure on us and so as the sector moves and whether it softens a little bit more or begins to improve it will obviously have an impact on us because the corporate energy business and that sector and our hub in Houston is very much affected by that business.

In terms of growing margin, so from a network perspective, I separate that because the network is on a path that I thought needs to be kind of referred to what were doing with two-cabin aircraft becoming less dependent on regional jets, that our up gauging strategy is very much a margin accretive strategy and so we're going to continue that is on our path to continue into 2016.

In addition, that up gauging just a piece of that is a slimline activity that we began this year.

Remember, we talked about it before.

It comes at a 4% to 6% PRASM depending on the fleet and the market, and it comes about a $0.01 to $0.02 CASM depending on the market.

Very margin accretive.

In the teams initiative going forward, are to continue to drive incremental margin.

We're really confident that we can to that.

There are some external things obviously such as the energy that puts pressure on that, but moving forward the network will continue to contribute to that.

Joe, it's Gerry.

On the cost side, keep in mind that for instance next year as we continue with the project quality initiatives, and we hit that run rate of $1 billion, that's a couple of hundred million incremental to this year, so there is some real benefit there.

We've got the continued deleveraging that helps on interest expense and don't forget, as we continue on all the reliability initiatives, that efficiency is going to drive cost down as well.

Gerry, on project quality, the $200 million in savings expected in 4Q, just given the pace that you guys are moving out there, how much upside is there to the $1 billion at this point?

And then, if you could just -- is there an interest expense target that you think is appropriate for next year just given the deleveraging?

Project quality.

It's too soon to tell you kind of the pace going forward beyond the initial initiative.

We'll have color I think when we start talking about 2016 cost guidance in January.

I can tell you that nobody's stopping.

The billion dollars we'll reach and the sort of sensible cost management culture is embedded in everyone's DNA here so we'll continue with those efficiencies.

As Jim said, as we up-gauge we're going to get some benefits there on the cost side as well.

So we'll have more color for you into next year, but we're hopeful that we'll continue with the progress we've made.

On the interest expense, is there a target you think you guys can get to ask year?

Not really.

We're not guiding to that yet.

We'll take a look at where the opportunities are there and we'll have more color on that in January.

Andrew Didora, Bank of America.

My first question for Jim -- certainly appreciate all the color around what you're seeing in China right now.

It seems like from a booking standpoint you aren't seeing much of a change.

But with the capacity increases you noted I guess will unit revenues in the region get worse before they get better or do you see can you continue sequential improvement on the Pacific like you're seeing from a system wide perspective?

Andrew, Jim.

Obviously that capacity if you think about China by itself that capacity does put pressure on unit revenue and we see that 35% growth in the first quarter.

On the other hand, demand is growing strong.

But as I mentioned, there's a couple sources of that demand whether it's traffic that's making itself to the US over other connecting points or the economy stimulating it.

So we are filling much of that capacity, and as you think about going forward, the Chinese carriers continue to use the rights and as you move beyond 2016, given the current allocation of rights we should begin to see that capacity growth debate.

My follow-up question.

At this time, are you willing to say when you think you could get back to a flat system wide PRASM?

Andrew, this is Jim.

I'm not.

I talk a little bit about the pieces that are moving, foreign exchange given current levels of foreign exchange.

The negative impact to PRASM will begin to fully lap in the second quarter.

The lower surcharges will lap fully in the second quarter given where they are at today.

The energy business is the one that we're watching really, really closely.

We've seen it soften a little bit more from the second quarter, and we talked about being 35% down in the third quarter.

Based on the pricing structure today, that would lap itself in the third quarter of next year.

So it's difficult to pinpoint when that PRASM would be flat year-over-year, but we think those pressures, those negative pressures begin to abate as we move toward that.

And the last piece is that, as I mentioned on an earlier comment, we're going to keep our eye on demand.

Demand at the beginning of this year expectations were to be greater than what we've seen.

And so it makes it difficult to pinpoint that.

As I mentioned in my comments, we do see that quarter over quarter sequential improvement as we head toward growing PRASM.

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

We will now take questions from the media.

(Operator Instructions)

From Reuters, Jeffrey Dastin.

Brett, how does your vision, or the initiatives you'll introduce to realize that vision, differ at all from Mr. Munoz's vision or initiatives?

Hello, Jeffrey.

They don't differ at all.

We have a plan in place and we are going to work to execute that plan over the course of the next couple of months to finish out this fiscal year.

Oscar's focus and what he brought to us during the time that he was here, was a renewed focus on our customers, on getting our employees the tools they need to succeed and to provide excellent customer service.

Making sure that our systems and our processes are geared towards those objectives and he had a very strong focus first and foremost on safety.

We are using what he provided in terms of vision as a lens for executing on our plan for the rest of this fiscal year.

So those perspectives are entirely aligned and there will be no dramatic changes.

In line with that, what is on the table besides a new tone that allow United to conclude contract with flight attendants and its maintenance technicians, and if you may, is there anything that's going to be a game changer to the in-flight experience in line with what you guys are thinking now?

On the first part of the question, we remain very focused on achieving joint collective bargaining agreements.

And we think that Oscar's focus again was on connecting immediately with our front-line employees and with our labor leaders.

And we will continue the process.

Obviously with any eye towards achieving agreements that are fair to our employees and fair to the Company over the long run.

We'll remain focused on that.

In terms of the in-flight experience, I will allow Greg or Jim to provide a perspective on that.

Jeffrey, Jim.

On the products let me jump in on the product side.

I think what you're going to see what I call a cadence.

We've been doing a deep review of our product, and quite frankly listening to our customers and our employees being involved in the conversation about different things we can do.

It's a cadence.

I would say that we're down to three choices of premium coffee and that was something we heard loud and clear and I think we're really, really close as we kind of go through that process, bringing our employees quite frankly into the process and our customers are going to enjoy that, and so forth.

It's a small example of a cadence that you're going to see across the Company.

Relatively quickly.

I don't want to say that this is going to come slowly.

And recognizing our best customers -- flight attendants today are doing a terrific job of offering a free drink to some of our best customers in the economy cabin when they don't get their upgrade.

That's another example of a cadence of things from a product point of view.

I put all that -- we have a number of product things happening, whether it's the continuation of rolling out Wi-fi, whether it's the reconfiguration of our aircraft and growing flatbed seats, Newark to San Francisco and Newark LA will be a 100 flatbed seat, beginning October 25 with our PS service in Newark.

So a number of product things are going to be happening as well as the things we're hearing from our customers and employees.

David Koenig, Associated Press.

I was going to ask the same thing about the in-flight experience.

How quickly are you going to have more details on that, there some reference to some other initiatives coming out and maybe some guidance in January.

When do expect to have more details on anything additional on the in-flight experience?

More details?

I think that over the next weeks and will be starting to announce more of those details.

Again, it's a cadence.

A cadence as we can implement that.

Some items take longer to implement in planning.

But as we move through the next several weeks and through the end of the year, you'll hear many of those details.

Anything you can say more on the boarding process?

That something that carriers constantly tinker with.

Is just part of the fleet that's giving you a problem or are you looking at everything and what might you change?

It's interesting you asked.

We're always looking at the boarding process because it's one of the things quite frankly that we hear a lot about and how we can improve it.

And we're actually doing some testing of the boarding process here at O'Hare beginning this week, changes to it.

So nothing to announce yet but again an example of there's a lot of activity happening based on what we're hearing from our employees and from our customers so you will hear more on that.

We'll at least describe how that testing went, but at O'Hare, we'll be experimenting with some different boarding processes to get some better details on how we can improve.

Can you say what you're testing?

I'm sorry?

Can you say what you are testing?

I won't now because the testing is literally starting this week.

I would encourage people to walk by [B8] at O'Hare and you can see that testing live if you're hitting one of the time periods we're doing it.

Brendan, this will conclude our call.

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

Please call media relations if you have any further questions.

We look forward to talking with you next quarter.

Goodbye.

Ladies and gentlemen, this concludes today's conference.

Thank you for joining.

You may now disconnect.