聯合航空 (UAL) 2015 Q4 法說會逐字稿

Good morning, and welcome to United Continental Holdings earnings conference call for the fourth quarter of 2015.

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

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, Jonathan Ireland.

You may begin, sir.

Thank you, Brandon.

Good morning, everyone, and welcome to United's fourth-quarter and full-year 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-K, and other reports filed with the SEC by United Continental Holdings and United Airlines for a more thorough description of these factors.

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

For a reconciliation 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.

Joining us here in Chicago to discuss our results are President and CEO, Oscar Munoz; 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.

Oscar will begin with some overview comments, followed by Brett's discussion of 2015 performance.

Next, Greg will provide an update on our operations.

Jim will follow with a discussion on our revenue and capacity.

Gerry will review our costs, fleet, and capital structure, after which, we will open the call for questions, first from the analysts, and then from the media.

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

Now, I'd like to turn the call over to Oscar.

Thank you, Jonathan, and thank you all for joining us today.

I'm certainly darn glad to be here, and I look forward to re-engaging with all of you across all our stakeholder network.

But today, let me start, frankly, by extending my thanks for all the well wishes I've received from across my United family during my situation.

I'm pleased to report that I feel great.

My recovery is progressing very nicely.

Already this week, in fact, over the course of the last month, I began to participate in meetings and certainly plan to increase my involvement each week going forward.

As far as expectation of full return, I certainly will be back full time by the end of the first quarter if not sooner, and I'm incredibly energized by that prospect.

So again, I look forward to seeing a lot of you out on the road.

As I'm thanking people, I want to thank Brett and the entire United Team for their excellent work in implementing our shared purpose and vision for United.

We really have made significant progress in both our operation and our financial performance.

And I'm frankly excited to be here today as we announce record profits for the fourth quarter and full year of 2015, and this, I tell you, could not have been done without the renewed engagement, excitement, and energy that exists with our front-line employees.

I'm very proud of what they do each and every day, and we are going to leverage and use this increased level of engagement to continue the momentum into 2016 and beyond.

So with that, let me turn the call over to Brett.

Thanks Oscar, and thank you all for joining us on our fourth-quarter and full-year 2015 earnings call.

The entire United family is very pleased to have Oscar in the room with us today.

And like him, we are all looking forward to his full-time return.

In the meantime, I and the Management Team want to thank our employees for making 2015 a great year for United.

We achieved record financial and operational performance, made meaningful strides towards enhancing the customer experience, and this fall, we committed to continuously earning the trust of customers and employees.

While we still have more work to do, I am proud of the tangible measures of success we have already demonstrated, none of which could have been accomplished without the hard work and commitment from the entire United Team.

Over the last three months, I have visited each of our hubs, and I am consistently impressed by our employees' enthusiasm, dedication, and strong desire to win, and it is an honor to work alongside them as we take the next steps toward improving United.

Today, we reported 2015 pretax earnings of $4.5 billion, our highest level of earnings in United's history.

I am pleased to announce that through our profit-sharing program, employees will be able to share in this success as we pay out $698 million, our largest distribution ever.

For the year, we achieved a return on invested capital of 21%, also marking the highest ROIC ever reported by United.

These numbers represent a meaningful improvement year over year, as well as progress closing the gap in financial performance of our two closest competitors.

A major contributor to our strong financial performance is the improvement in our operation.

When compared to last year, our completion rate improved by more than 1 point, and on-time performance was 6 points better for the full year 2015.

This was particularly evident in the fourth quarter, as our on-time performance and completion factor were the best since the merger.

A well-run operation is a top priority for customers, and we are working extremely hard to become the consistently reliable airline our customers can depend on.

We also want to be a great place to work for our employees.

We have a responsibility to provide them with contracts they deserve, and this fall, we made significant progress to do just that.

Evidence of this progress can be found in the two new agreements covering our pilots and technicians that are currently in the ratification process.

Additionally, we reached an agreement to open negotiations on new contracts for our airport and customer service work groups, more than one year in advance of the amendable date.

We are also continuing negotiations with our flight attendants and are hopeful that we reach an agreement with them this year.

I want to thank these union groups for their commitment to reaching agreements that will lead our workforce in the years to come.

I am pleased with the progress we made in 2015.

We took significant actions that have led to both strong financial and operational performance.

We are excited for the opportunities in 2016 as we focus on making the changes necessary to become the airline that we, our customers, and our shareholders expect it to be.

Now, I'll turn it over to Greg.

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

I'd like to take this opportunity to thank our employees for their efforts this year, particular during the busy holiday travel season.

As Brett mentioned, we have made meaningful improvements to our operation, and we couldn't have done it without the continued hard work and dedication of our employees.

Due to the great work of the United Team, in 2015 we had the best on-time arrival performance since the merger.

Additionally, we had a better completion rate than our network competitors in both New York and Chicago, and better completion in Houston than our network competitor in Dallas.

We also continue to deliver well on bag performance.

In fact, during 2015, we achieved record bag performance for 7 of the 12 months in the year.

As a reflection of our commitment to operational excellence, we recently launched a new United Global Performance Commitment for our corporate customers in 2016.

With this program, we will compensate eligible corporate accounts if we fail to meet our operational targets for the year.

This clearly demonstrates our level of confidence and commitment to continue to improve United's operational performance.

Looking forward to 2016, we have a number of opportunities to further improve the operation.

One change we implemented earlier this month was an increase in the amount of out-and-back flying we do.

Said differently, we are increasing the amount of flying that begins at a hub and then travels to another station before returning directly back to the originating hub.

In 2015, approximately 35% of our flights followed an out-and-back pattern.

At the beginning of this year, we transitioned to approximately 70% of our flights that now follow this pattern, a level which is more consistent with that of our peers.

This does two things for us.

First, it dramatically reduces the complexity of the operation.

In addition, it helps to isolate the impact of weather and air traffic control related events to the impacted hub, while mitigating the impact on our other hubs.

We believe that reducing this complexity and limiting the impact of weather on our operations will drive improved reliability and efficiency and provide a better experience for our customers and our employees.

In closing I want to thank the entire Operations Team for all their hard work in 2015.

I'm proud of the significant progress we made this year, and I look forward to building on these successes in 2016.

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

Thanks, Greg.

I would also like to thank our customers for their business in 2015.

As Brett indicated earlier, we want to be our customers' first choice on every trip they take.

We will achieve this by continually building their trust.

Accomplishing this won't be easy and won't happen overnight, but the entire Team is committed to this goal.

In the fourth quarter, our consolidated unit revenue declined 6%.

The four primary factors we identified at the beginning of the quarter impacted our revenue performance as expected, a strong US dollar, the effects of lower oil prices, pressure as a result of margin accretive initiatives, and competitive pricing actions.

However, we also faced some unanticipated headwinds during the quarter.

First, the attacks in Paris put pressure on bookings across the Atlantic during the weeks that followed the event.

Second, our strong operational performance resulted in more completed flights than initially planned.

While this is beneficial to margin and excellent for our customers, the additional capacity provided a tailwind to unit costs but a headwind to PRASM.

Additionally, in the quarter, we saw oil prices continue to fall, which provided incremental pressure to our Houston hub and corporate energy business, while ultimately being a tailwind to our fuel expense and overall earnings.

Finally, demand declined throughout the quarter, as demonstrated by downward revisions to fourth-quarter GDP expectations.

Turning to the first quarter, we expect our unit revenue to decline approximately 6% to 8% year over year, with domestic PRASM down approximately 4% to 6% and international PRASM down approximately 8% to 10%.

The major drivers for the first-quarter revenue performance are expected to be largely the same as the fourth quarter.

For the consolidated system, we expect foreign exchange impact to account for 1 point of year-over-year PRASM pressure.

Given further decline in oil prices, we anticipate continued pressure from lower surcharges, particularly in Japan, which we would expect will account for approximately 1 point of weakness; lower oil prices have reduced revenue from our corporate energy customers; and we are also beginning to see a decline in revenue from the broader non-energy Houston market.

The combined revenue pressure from both these energy contracts in the Houston hub is anticipated to be approximately 1 point.

Finally, we also expect the current competitive pricing actions will drive approximately 1.5 points of declines in the quarter.

As we've mentioned before, while PRASM is an important metric, there are other metrics at United that are equally or even more important, principally profit margin and earnings.

As we construct our network and deploy our assets across it, our primary goal is to increase earnings and margin.

To that end, there are certain decisions that may be dilutive to unit revenue but are margin accretive for the business.

Over the next several years, we have specific initiatives in place that may have just that effect.

Our up-gauging initiative is one such example.

By reducing departures and increasing the average gauge of our airplanes, we will grow our capacity very efficiently, which will be a tailwind for CASM, while putting pressure on our PRASM performance.

I would add that in the case where we replace a single-cabin 50-seat aircraft with a two-cabin regional small mainline aircraft, there is additional revenue that we can generate from having Economy Plus and first-class seats.

In 2016, we anticipate increasing our average gauge by approximately 5% and reducing our average departures by approximately 1% compared to 2015.

Another opportunity to grow earnings comes from further improvements to our pricing and segmentation capabilities.

As we have seen in 2015, this has become an increasingly important component to revenue management.

The more we segment our fares, the better opportunity we will have to minimize revenue dilution.

The first phase is the rollout of our bundled fare offerings this month.

This allows customers to purchase a collection of products suited to their travel, as opposed to a more manual process of selecting from an a la carte menu.

The second phase, which we expect to launch in the second half of this year, will complement this bundled structure by introducing an entry-level fare that will appeal to the purely price-sensitive customer.

We believe this slate of offerings will allow further segmentation across United's customer base, while also avoiding some levels of revenue dilution built into our pricing structures today.

Another way we intend to improve our revenue performance is through continuing to improve the reliability of the operation.

Reliability is a top priority for our customers, and over the last several years, our revenue has suffered from the inconsistency in our operation.

As Greg mentioned, the operation has made significant strides forward, and we expect, over time, for this to generate additional revenue.

Earning the trust of our customers is critical for long-term earnings improvement, and the great work from Greg and his Team are a cornerstone for that success.

With respect to capacity, and as a result of reduced planned Atlantic flying, we reduced our expectations for first-quarter capacity and now anticipate growing approximately 1.5% to 2.5%.

For the full year, we still expect to grow 1.5% and 2.5%.

As we all know, there are certain pockets of the globe that are experiencing economic slowdowns.

We are thoughtfully addressing these issues by repositioning capacity to the areas that are experiencing the most economic growth.

An example of this is what we are doing in Houston.

Due to the decline in the energy business as we have discussed, our Houston hub has experienced significant yield pressure.

Consequently, we are shifting capacity away from Houston and into other growing markets, like Denver and San Francisco.

We will remain disciplined in allocating our capacity in the markets that will generate the highest profitability.

In conclusion, we are continuing to implement margin-accretive initiatives, product improvements, and other initiatives across the commercial organization to attract and retain more high-value business customers.

In 2016, we anticipate sequential quarter-over-quarter improvement and expect that the actions we are taking, along with an improving operation, will further earn the trust of our customers.

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

Thanks, Jim.

I would also like to thank our employees for helping to make 2015 a record year for United.

Their hard work led to our success this year, and I know they will bring the same energy and dedication to our efforts in 2016.

For the fourth quarter, we reported net income of $934 million, or $2.54 per share, excluding special items.

This is double what we earned in the fourth quarter of 2014 and marks the seventh straight quarter of record earnings.

For the full year 2015, we reported $4.5 billion of net income, or $11.88 per share, excluding special items, and we achieved a pretax margin of 11.9%, a 6.8-point increase versus last year, and the highest in United's history.

Disciplined cost management has been a key contributor to our results this year.

For the full year, our unit costs, excluding fuel, profit sharing, and third-party expenses, decreased 0.7%, more than 1 point lower than our initial 2015 guidance, despite nearly 0.5 points of capacity reduction from our original plans.

As Jim mentioned, our up-gauging strategy was a meaningful contributor to our CASM performance in 2015, and we expect this contribution will continue as we ramp up the program through 2019.

Looking forward to 2016, we expect our CASM, excluding the impact of new labor deals, to increase approximately 1%.

The new labor agreements with our pilots and technicians currently open for vote would add approximately 2.5 points of CASM for the year.

This is consistent with our commitment to maintain CASM growth below inflation over a planning cycle.

Two years ago, we set a goal to achieve $1 billion in annual non-fuel savings by 2017.

We now expect to achieve this goal in 2016, a full year in advance of our original timeline.

This focus on continuous improvement and durable savings will not end as we still have opportunities to improve efficiency and manage costs prudently.

Turning to fuel expense, for 2016 we are 17% hedged and are in a loss position of approximately $225 million.

Our portfolio allows us to participate in 98% of any future declines.

We are currently evaluating the structure of our hedge program, and in the meantime, we have not added any new hedges since July of 2015.

Based on the guidance we have provided for cost and revenue the first quarter of 2016, we expect our pretax margin to be between 8% and 10% in the first quarter.

Moving on to cash flow.

In 2015, we generated $6 billion of operating cash flow and $2.5 billion of free cash flow.

In deciding how best to allocate capital, I also look at cash flow net of aircraft financing, since the decision to lease versus purchase an aircraft can have a material impact on the traditional calculation of free cash flow.

When incorporating proceeds from long-term aircraft financing, we generated over $4 billion in adjusted free cash flow for 2015.

I am pleased that we continue to generate significant cash flow in excess of both what we need to run our business and what we need to secure our future.

Taking all that into account, in the fourth quarter, we spent approximately $520 million repurchasing United stock, about double the amount we spent in the prior quarter.

For the full year 2015, we spent $1.2 billion in the share buyback program.

Looking forward, I expect that we will spend at least $750 million repurchasing stock in the first quarter and now plan to complete our current $3-billion program substantially earlier than originally anticipated.

One of the tools we use is a 10b5-1 plan, which allows us to purchase stock throughout the quarter, even during periods when we might otherwise be unable to be in the market.

As an example, we purchased shares on every trading day so far this month.

We also use our cash to fulfill one of my primary missions of ensuring that we continue to make all appropriate investments in our business.

In 2016, we expect to spend $2.7 billion to $2.9 billion for capital investments, including approximately $1.1 billion of non-aircraft CapEx.

This would be roughly $100 million more than 2015 for non-aircraft CapEx.

This increase is driven almost entirely by incremental technology investments.

We believe that further investment in our technology is critical for our ability to compete in the years to come.

We also expect to invest approximately $1.7 billion on our fleet in 2016.

We plan to take delivery of 14 737s, five 787-9s, our first 777-300ER, and nine used A319s.

We will also add 40 Embraer E175s to our regional fleet.

Our fleet investments this year also include pre-delivery deposits associated with the order we announced today for 40 737-700 aircraft to be delivered beginning mid-2017.

As we have stated in the past, we are continuing to shift more flying towards the mainline operation as our regional flying is being reduced.

It is our expectation that our current fleet of approximately 250 50-seat aircraft will be reduced by more than half by the end of 2019.

While this new 737 order does provide replacement capacity to partially offset the reduction in the regional operation, we are continuing to pursue additional aircraft to continue up-gauging and meet our capacity plans.

We are also utilizing our cash to continue to secure our future.

In 2015, we prepaid $1.2 billion of debt, including $300 million in the fourth quarter.

As of the end of the year, our gross debt balance, including capitalized operating leases, was $17 billion, $1.1 billion less than the end of the prior year.

In 2015, we also contributed more than $800 million to our pension plans.

And as of year-end, our unfunded pension liability is now $1.5 billion, a $700-million reduction from the prior year.

As we head towards well-funded status for our pensions, we anticipate contributing approximately $400 million to our pension plans in 2016.

In conclusion, 2015 was a very good year for United, as seen in nearly every financial metric.

Moving into 2016, we look forward to delivering strong earnings performance and demonstrating disciplined capital allocation.

I believe that the investments we are making in our people and our product will lead to a strong future that will benefit our employees, customers, and investors.

I'll now turn it back over to Jonathan.

Thank you, Gerry.

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.

Brandon, please describe the procedure to ask a question.

(Operator Instructions)

Joseph DeNardi from Stifel.

Good morning.

Jim, just on your comments around demand weakening through the quarter tied to the revisions to GDP, so are you seeing that show up in forward bookings, and does the guidance for first quarter assume that demand continues to weaken from here or that it starts to stabilize at some point?

Hey, Joe.

This is Jim.

As we look at first quarter, our guidance is obviously based on the information that we have today, both from a yield perspective and a bookings perspective.

What I would say is that the pressures that we saw in the fourth quarter, which are mainly yield, continue in the first quarter, so we see strong demand.

I have to always separate a little of that with Houston and the energy.

There are certain sectors that in high-yield demand, we're seeing weakness.

But overall, our bookings, book-load factors look where they were last year in terms of a book-load factor point of view.

It's the yield pressure that we see in the first quarter.

Okay.

And then Gerry, just on the profit-sharing accrual in first quarter, it's, I think, about 60% higher than first quarter on a much less increase in op income.

So, have there been any changes to that just based on some of the new labor contracts, or how should we think about in 2016?

There have been some minor changes.

For example, we added a layer for our M&A employees at 10% over a certain threshold.

Other than that, it's pretty similar.

Okay.

Thanks.

Helane Becker from Cowen and Company.

Thanks very much, operator.

Oscar, welcome back.

Do you guys ever release or tell us -- and this is probably for Jim -- what percent of the cabin, the front of the cabin is being sold versus used for upgrades?

Hey, Helene.

We haven't released that.

It's one of those we've talked about in the past growing our paid first-class load factor, and we continue to do that.

I'll tell you, we are also focused on making sure that we keep that in balance with our loyalty customers.

There's a lifetime value with our MileagePlus customers that's very important to the overall economics as we go forward, so it's a balance.

Internally, we continue to debate what that is, whether it's fare products to offer to get into first class, lower price points in first class, but also balancing that with the upgrades to our loyal customers.

This is Oscar.

Let me just add my perception.

As I travel around our networking system, I spend a lot of time on our aircraft, and I spend a lot of time with some of our high-value customers, and that is a particular sore subject with them.

And so that balance that Jim speaks about, I think, is a very important one that we have to strike.

Okay.

Thanks very much, gentlemen.

Those were all really all my questions for now.

Hunter Keay from Wolfe Research.

Good morning.

Gerry, it's nice to see the buyback tick up, and thank you for the update.

But if we assume you guys have significantly more cash of which to dispose this year, which I'm putting at about $6 billion to $7 billion, factoring in pension contributions, assumptions around financed CapEx, and maybe a little bit of excess cash, shouldn't it be a fairly obvious decision to make, that the level of buybacks this year exceeds your capital spending, given the immediate accretion that you get to EPS, not to mention the signal you'll send your long-term shareholders about the trajectory of earnings beyond this year?

Hunter, that's a good question.

Let me talk about capital allocation generally just to set the stage.

We have, really, the three components to it, so we are very focused on making the investments we have to make.

To paraphrase an old friend of mine, I know what happens when you take the cheese off the pizza, so we will first and foremost make the right investments, but they have to drive the value that we expect or we would stop making some of them.

And then we turn to the balance sheet, and in securing the future -- we're in a pretty good spot with the balance sheet, so I would not anticipate the level of debt prepayment that you see in the past.

Having said that, the way we will continue to manage the balance sheet is through the amount of new aircraft financing.

So I would expect this year to finance some -- probably not all -- of the aircraft this year, and that's going to potentially leave some cash.

I would say, first and foremost, I want to see that cash before I spend the cash, but as we continue to manage our cash down to the target range that we feel comfortable with, that $5 billion to $6 billion of liquidity that we have stated as our comfortable target range, there's absolutely the opportunity for additional cash in the buyback.

And as I said in my comments, that $750 million is the minimum.

So we'll continue to have this dialogue through the year.

But I hope you're right.

I hope that this is a year that generates those significant cash flows.

Hunter, if I can (multiple speakers) --

Hi, Oscar.

If you don't mind, if I can just weigh in on that subject, as well.

I think if you check my history, you'll see the willingness to allocate capital to shareowners in a very broad and distributed way.

I don't think that changes with regard to this.

I think the at least qualifier to the $750 million was added on purpose.

And I don't necessarily disagree with the premise and thesis behind the concept, but we do have to strike a balance.

And so, this is one of the places where I have been engaged a little bit and will become more increasingly engaged, and you'll get more definitive direction and thoughts from us on that going forward.

Oscar, I'm glad you're here, because you do have a bit of a reputation of being a capital deployer, so I think it would be helpful for everybody, including your owners who have been sweating out a pretty difficult year.

It's very hard to buy an airline stock.

It's very hard to do that as an investor.

And a lot of your owners felt like they've been hung out to dry a little bit.

So I think it would go a long way, Oscar, if you would commit that, barring any major change in the environment, which is, I think, an easy enough out for you to make right here on this call, to come out and say, barring no major changes in the economy or anything like that exogenous, that we will spend more buying back stock than we will on capital spending this year.

I think that would go a long way if you would be willing to make that commitment here today.

We're going to spend a lot of time with our shareowners directly and individually and discuss all their viewpoints, and we will make the proper public commitments as we see fit.

But again, history does tend to repeat itself, and I'm very excited to get back into this conversation and debate because it's a great one.

Thanks, Hunter.

Thanks for your time.

Dan McKenzie from Buckingham Research.

Good morning.

Thanks for the time here.

One quick house cleaning question.

What were the NOLs at the year end of 2015?

About $9 billion.

Okay.

And so, extrapolating forward, is perhaps 2018 the first year you might conceivably become a taxpayer, if that's the case, or should we take think about cash taxes sooner than that?

So, I can tell you that we are working hard now that we are in a mode of booking taxes and seeing a future of being a cash tax payer, that we are doing some good tax planning.

I don't want to, at this point, tell you when we anticipate being a cash tax payer.

Obviously, that depends on future earnings.

But it's reasonable to anticipate, if the earning trends continue, you would see a relatively rapid utilization of those NOLs.

I see.

Okay.

And then as a follow-up question here, this one is for Jim.

You mentioned sequential quarter-over-quarter revenue improvement, which I believe was on business travel spend.

Is the right way to think about that is 20% of the passenger revenue getting sequentially better each quarter?

The reason for the clarification here is we do have some FX headwinds and some competitive headwinds, so I'm just trying to reconcile the comment with other revenue externalities.

Hey, Dan.

There's a couple things happening as you think about 2016 as we move through the year.

You touched on a couple of them just now.

The currency, obviously, is a big driver of what we look going forward.

So where currencies are at today, we would begin to lap some of the currency effects in the second quarter this year.

When you look at things such as surcharges, and as you know, over the past year, we've talked a lot about surcharges, particularly in Japan, that by law are tied to where oil trades.

We will begin to lap those pretty significantly in the third quarter of this year, but again, there are still some surcharges out of Japan that most recently have come down, so the full effect of that will be more toward the end of the first quarter in 2017.

The competitive pricing actions we've talked about through the year, based on where they're at today, we begin to lap those in the third quarter of 2016.

Then lastly, oil, we've reported on our corporate energy portfolio through the year being down 20% in the first quarter, 30% in the second quarter, 35% in the third, and we saw it drop to 40% in the fourth quarter.

So that lapping, given where current oil prices are and the expectations that oil prices will stay low longer, that lapping effect will take longer than what we've talked about in the past.

All being said, there are things that, as we lap through the year, are -- we will have less headwind on our RASM performance, and that's why we talk about quarter-to-quarter improvement based on the factors I described.

I always qualify it because, as I mentioned in the fourth quarter, we saw GDP expectations come down from our initial expectations, so that and the volatility in oil prices is still that one thing that we don't like to talk about a specific, but I think given what we see lapping during the year, we feel good about quarter-over-quarter improvement as we move through 2016.

Okay, very good.

Thanks for that perspective.

Michael Linenberg from Deutsche Bank.

Good morning, everybody, and welcome back, Oscar.

Thank you.

To start off, maybe to Jim, Jim you guys are the biggest carrier to China, and we have seen a more significant devaluation of that currency over the past few months.

Is there anything, just given your footprint in that market, are you seeing anything, anything on the trends?

And I say that within the context of some of your commentary about the revenue weakness.

You talked about yield softness in international markets, as well as domestic, and I didn't know if you were calling out China or other markets in total.

What's -- can you address that?

Hey, Mike.

Yes, and I think there are things that are unique to us.

Obviously Houston, that I talked about already, and as you mentioned, our exposure to China.

I will tell you, demand in China continues to grow at the pace of industry capacity.

We're seeing a little bit lower yields, but we're actually seeing -- obviously, it's been very profitable for us, and that profitability maintained.

So from a demand perspective, we're seeing demand keep pace with the capacity that we've talked about over the past several quarters.

Again in the first quarter, we see about 19% industry capacity from China to the US, but yet we are also seeing bookings for the industry growing at that rate.

You put that with our strength in San Francisco, the best gateway to Asia, we feel really good about our current position, and quite frankly, the long-term position for China going forward.

Great.

And then just a second question.

When you look at your overall revenue performance and you compare yourself versus, notably, the other big two, American and Delta, and you look at yourselves on even a unit revenue basis, I appreciate the fact that, obviously, there are some initiatives that you are pursuing that are, obviously, margin accretive and ROIC accretive, and therefore, one consequence is that they may be RASM or PRASM dilutive.

But I think there's another view out there, or at least a perception, that maybe strategically, you are falling a bit behind your peers.

And whether it's on the alliance front or the joint venture front, you look at some of the announcements and some of the relationships and how some of your competitors have grown those relationships, and yet, when you look at United, you have a strong, or at least I believe you have a strong relationship with Lufthansa, and you have a good relationship with Air China, and you also have a relationship with ANA.

But a lot of times, we don't hear much commentary on it and it doesn't look like it's showing up in the numbers.

Is that perception real, or are there things that over the next year or so that you plan to roll out that maybe will help mitigate some of those revenue differences?

Mike, a couple thoughts.

One is you mentioned Lufthansa in the transatlantic.

A terrific partner for us.

Our Atlantic performance in the fourth quarter, albeit down, was in the 2% RASM decline, was really an industry-leading performance, and our relative performance in the transatlantic against our peers, we've widened our RASM premium versus our peers in that.

That's, with the great work of our Team in terms of seasonally balancing the network, and quite frankly working very closely with Lufthansa.

That JV for us, in that particular area, is obviously very mature.

It goes back into the 1990s relationship.

So we've had great success in that.

And then if you look at the Pacific, which is really a really growth market for us, ANA plays a big part of that, and that relationship from a JV, a little bit younger, but we've made great strides, and we've talked about some of the Tokyo linear flying to places in Asia that we now connect into ANA, which has allowed us to grow our San Francisco hub long haul.

So I think we have used the JVs to help leverage our market and grow our relative performance, both in the transatlantic, as well as into Asia.

Recently our investment and our commercial agreement with Azul, although it's Brazil, is a challenged market right now.

Over the long term, we think that's going to pay terrific dividends, and it's already generating connecting traffic at numbers that are exceeding our expectations, albeit at a lower yields, given what's happening in Brazil, as well as the currency situation.

So I think we're very focused on the alliance side to make sure we have the right partners, extend our network, and we'll do it in a way that, obviously, allows our customers to have more choice and more opportunity.

Okay, great.

Thanks, Jim.

Thanks for that comprehensive answer.

Jamie Baker from JPMorgan.

Good morning, and a warm welcome back to Oscar.

First question, probably for Gerry and Oscar.

That incremental 2.5% of potential labor-related CASM, was that for -- I apologize -- for all working groups or just the two TAs that are out for ratification right now, one of which comes back tomorrow?

Jamie, that was just for the two that are out.

Okay.

And for Oscar, you've talked with us about winning back the front line.

Do these increases in wages accomplish this in your mind, or are there still incremental expenses that are required that might not be captured in the labor line, whether that's better tools for employees, new uniforms, that sort of thing, that could pressure CASM a little bit further?

Jim, it's probably a little early for me to actually quantify what the impacts of these are, but my commitment is to balance both our commitment to our employees and make the appropriate investments and prioritize investments, while understanding that we have broader stakeholder basis.

It's a delicate balance between those two.

And again, the more time I spend out in the field understanding the needs, the needs aren't as great as you think expense wise.

Certainly, comp is one, but beyond that, I think building the right systems tools, the uniforms, and things like coffee and peanuts and all that, all add up, but they are just appropriate level investments that we'll strike a balance with.

But again, I can't quantify anything at this point in time.

Jamie, let me just add that that process has started.

It started last year.

And the CASM guidance you see for this year includes some of that already.

Some of the tools and some of the other investments we are making, that's rolling into the CASM guidance that you see.

(multiple speakers)

And let me just -- by the way, I need to clarify to Dan, on the NOL, as of 12-31-15, the remaining NOL is a little closer to $8 billion than $9 billion.

Sorry to interrupt you.

That's fine.

Actually, for a follow-up while I have you, Gerry, the 73-700 is a larger gauge than at least I thought you were looking at in terms of potentially bridging that gap between 76-seat RJs and the A319s.

What shifted in terms of the decision-making process?

Does this entirely eliminate the need for something smaller than the 319 in the mainline?

How did the price of fuel impact the calculus?

Any additional color there?

Sure.

I would say the price of fuel really doesn't impact our decisions on long-term fleet orders.

But I would say that for this batch of aircraft where we looked at all the variations, in fact the 319, as well as the 737 and the 100-seat opportunities from both Embraer and Bombardier, for this batch of aircraft, the 700 was the winner.

As I mentioned, we will continue to look at aircraft, and we will continue to look at each of those aircraft types going forward.

Okay.

I appreciate it.

Thanks very much, gentlemen.

Julie Yates from Credit Suisse.

Good morning, and welcome back, Oscar.

Gerry, a follow-up on the buyback.

How should we think about just the seasonality of cash flow generation and then the timing of other cash requirements like debt payments and pension funding just as the year progresses?

It depends on the type.

So for pension funding, we have a fair amount of flexibility.

I would assume right now, relatively even through at least the first three quarters.

On aircraft CapEx, we have some in the first quarter.

There's a bit of a lag, and then some in the back half of the year.

And everything else is fairly flat through the year.

Okay.

Jim, one for you.

You noted competitive capacity actions at about 1.5 points of headwind again in the first quarter.

Are you noticing any changes in competitive pricing actions, either domestically or internationally?

And do you worry that those worsen in a lower fuel environment?

Julie, I don't want to comment on competitive pricing.

Obviously, it's a -- this business is very competitive, and we, obviously, match capacity and our demand given the pricing structures that are out there, but I don't want to make any comments on competitive pricing actions.

We will, as I mentioned in the script, that given where competitive pricing actions are today, that the hypothetical, the assumption that that's where you are today, we begin to lap some of that effect by the time you get to third quarter.

Okay.

Understood.

Just on the phases of cabin segmentation, that was certainly helpful.

At some point do you anticipate being able to put some quantification around what that can add in terms of revenues?

Yes.

We look forward to doing that.

That segmentation that I've talked about, we've been working hard on it in 2015, and so we are excited about rolling it out going forward.

What that will do for us is a couple things.

One, it will allow us to compete with ultra-low-cost carriers much more effectively, which means more pure product for customers that are looking for just that price point.

And it will also, as I mentioned, help us remove some of the dilution that we have in our pricing structure today.

So I'm not ready yet to quantify, but as we roll it out in the second half of the year, I look forward to updating you on that.

Okay great.

Thanks very much.

Duane Pfennigwerth from Evercore ISI.

Thanks.

Good morning.

Just a couple questions from me.

We get a lot of questions from investors about closing the gap from a margin perspective to the industry.

It looks like, based on the 1Q guidance, and certainly, 1Q is not the year and you've got some hedge impact there, but it looks like that gap actually widens in the March quarter.

So is closing that gap still a goal for the Company?

What should we be advising investors in that regard?

And if so, over what time frame?

Hey, Duane.

I'll start.

This is Gerry.

It is still a goal.

We've never put a time frame on it, but we are very focused on doing what we can do, both on the cost side and the revenue side, to continue to maximize our margin.

But we haven't, at this point, put a time frame on it.

From the network side, we're very focused on growing efficiently, and so we've talked about up-gauging a lot over the past year, and 2015 was the first phase of that where we -- our seat growth with the use of slimline, as Gerry mentioned, contributed to the CASM side, comes at a lower RASM, but had significant contribution to the CASM side.

We will continue to do that as we also look at frequency reduction and up-gauging into the mainline aircraft from the regional aircraft.

And we can do that seat neutral in certain markets.

As we up-gauge, that drives lower departures, it actually is really efficient growth, and it comes with efficient fuel cost.

And so it all works together, and we are very much focused on driving that this year.

Duane, if I could just be maybe slightly more definitive on the issue of industry comparisons and all of that, it's a competitive industry, and I'm a competitive guy.

Lest anything else be said, we will always have our eyesight on folks that are maybe, at this point in time, performing a little better than us.

I'll tell you what the most critical question around that is, do you have the potential, do you have the capacity, do you have the ability with your network, with your people, with all of that.

And one of the things I've seen in the relatively short time I've been here is a tremendous amount of all of those things, starting with the energy and excitement of our front-line employees, where frankly, it's where it really starts.

So at the end of the day, over the long term, we certainly believe our relative earnings profile will improve.

And when and how and all that, that's the work that I've got to get done here over the next few months.

And Duane, on up-gauging, remember that 2016 is a year where there's a dip in that process from 2015.

It's just the cadence of new aircraft orders.

That ramps up again in 2017 and continues nicely through 2019.

Appreciate that comment, and Oscar, personally, we are all amazed that you are on this call and wish you a continued strong recovery.

Just on the network side, had one question.

Please check us on this.

But we went back and looked at utilization changes, aircraft hours per day over the course of 2015, and many had a nice year-to-year improvement in that, and frankly, that was what was driving capacity growth.

In the case of United, it looks like utilization was actually modestly down.

We assume this is an effort to improve reliability, maybe more spares.

Can you just talk about if this is the case and the reasons behind it and if there's any cost opportunity there longer term?

Thanks for taking the questions.

One of the things we're driving is our seats per aircraft are going up, so we're driving growth that way.

But clearly, as we've reinvested in reliability, we want to make sure that the network is driving the right results from a reliability stage.

In addition, part of our strategy of growing seats is to lower our stage length, and so some of that utilization to drive an improved network is from a lower stage length, which is driving block down.

So it's a combination of a couple things, both investment reliability, as well as our network strategy going forward to set us up to grow efficiently.

Thank you.

This concludes the analyst and investor portion of our call today.

We will now take questions from the media.

(Operator Instructions)

From Flightglobal, we have Edward Russell on the line.

I was wondering if you could elaborate a bit on where you're cutting capacity out of Houston and where you plan to grow in San Francisco and Denver for the network side?

Hey, Edward.

This is Jim.

I think if you think about what we're looking at for Houston in 2016, we're going to grow Houston approximately slightly up, about 2%.

I think given what we're seeing in the market, and as my comments on the energy and what's happening to Houston's hub, we'll probably keep that relatively flat for the year.

That capacity, as we looked at places of strength, San Fran and Denver to the East Coast are what we are focused on to fill in some holes that we don't serve today.

They'll be clearly focused on business markets, but you will see the strong commitment in Houston adjusted slightly to use that capacity in markets that are performing better right now.

And that's -- you're keeping growth in Houston at 2% this year, that's correct?

I'm sorry, could you say that again?

You said you're keeping growth in Houston at about capacity, or is that about 2% in 2016?

No, our plan was to grow at about 2%.

I think you will see it relatively flat in 2016, given the market.

Thank you.

We have no further questions at this time.

Jonathan, I will turn it back to you for closing remarks.

As we're out of time, we will conclude.

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

Please call media relations or investor relations if you have any further questions, and we look forward to talking to you next quarter.

Goodbye.

Thank you.

Ladies and gentlemen, this concludes today's conference.

You may now disconnect.