聯合航空 (UAL) 2016 Q1 法說會逐字稿

Good morning, and welcome to United Continental Holdings conference call for the first quarter of 2016.

My name is Brandon and I'll be your conference facilitator today.

(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, Managing Director of Investor Relations.

Please go ahead, sir.

Thank you, Brandon.

Good morning, everyone, and welcome to United's first-quarter 2016 earnings conference call.

Yesterday we issued our earnings release and separate investor update.

Additionally, this morning we issued a presentation to accompany this call.

All three of these documents are available on our website at ir.united.com.

Information in yesterday's release and investor update and the remarks made during this conference call may contain forward-looking statements, which represent the Company's current expectations or beliefs concerning future events and financial performance.

All forward-looking statements are based upon information currently available to the Company.

A number of factors could cause actual results to differ materially from our current expectations.

Please refer to our press release, Form 10-Q and other reports filed with the SEC by United Continental Holdings and United Airlines for a more thorough description of these factors.

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

For a reconciliation of these non-GAAP measures to GAAP measures, please refer to the tables at the end of our earnings release and investor update, copies of which are available on our website.

Unless otherwise noted, special charges are excluded as we walk you through our numbers for the quarter.

These items are detailed in our earnings release.

Joining us here in Chicago to discuss our results our President and CEO Oscar Munoz, Vice Chairman and Chief Revenue Officer Jim Compton and Senior Vice President of Finance and Acting Chief Financial Officer, Gerry Laderman.

We also have Chief Operating Officer and Executive Vice President Greg Hart in the room to assist with Q&A.

Now, I would like to turn the call over to Oscar.

Thank you, Jonathan.

Thank you all for joining us this morning.

For the first quarter we recorded a pretax profit of $688 million excluding special items.

Our eighth consecutive quarter of profitability and our highest first quarter pretax profit ever.

We achieved diluted earnings per shares of $1.23 excluding special items, a 28% increase versus last year when adjusting for taxes.

And as you all know, we repurchased $1.5 billion of common stock.

Reflecting back on the quarter, I'm particularly proud of our operational performance, which again showed significant improvement.

Our first-quarter consolidated on-time performance was more than 12 points better year over year, and we had 3600 fewer cancellations, a 20% reduction versus the first quarter of last year.

This improvement demonstrates the dedication, passion and hard work of United's aviation professionals.

I know as I travel the system, I see the renewed engagement, excitement, and energy that our nearly 86,000 employees around the world are bringing to work every day.

I would like to thank them for their efforts and dedication, particularly the work through this winter season.

This quarter's results show great strides forward.

With our sense of shared purpose and the investments we continue to make in people, processes and systems, we are positioned for even greater success in the months ahead.

On the commercial side of the business, we launched our global performance guarantee, which makes our corporate contracts to operational performance, showing both our confidence and commitment to running a consistently reliable operation.

With respect to our network, as part of our industry-leading Pacific strategy, we announced an enhanced partnership with Air China and a joint venture with Air New Zealand, both of which are expected to expand our global reach.

We also announced several routes that further strengthen our global footprint, including the first ever non-stop service by a US carrier to Hangzhou, our sixth Chinese destination.

We also became the first US airline to serve Israel nonstop from the West Coast, connecting two of the world's most influential technology communities.

Now, having said this, we know we are facing some revenue challenges.

We are making good progress on a number of initiatives to improve revenue, but some of them like a more reliable operation and improved customer satisfaction, as you know, have a lagging effect.

I expect these improvements, along with other commercial initiatives, will drive improved revenue performance as we move into the back half of this year.

Now turning to our people, as I've said many times, reaching new agreements with our representative employees is one of my highest priorities.

We have already made great progress as our pilots, dispatchers and IM representative work groups all ratified contract extensions this year.

This represents half of our unionized workforce.

We remain focused on getting contract like these for our flight attendants and technicians, and we plan to work closely with the unions to make that happen.

Lastly, as you have heard, yesterday we announced additional changes to our Board.

I want to welcome the two new board members, and I look forward to working alongside them and our other recently elected members over the upcoming years.

Now I would like to turn the call over to Jim and Gerry.

Jim?

Thanks, Oscar.

As you can see on slide 6, through the first quarter, our consolidated unit revenue declined 7.4%.

The four primary drivers we identified at the beginning of the quarter impacted our PRASM performance in line with initial expectations.

In addition, while we had anticipated that the timing of Easter would have some impact on close and business travel, it proved to be greater than we had expected.

While we have seen total bookings return to pre-Easter levels, we are closely monitoring the mix of business and leisure bookings.

Turning to the second quarter.

We expect our passenger unit revenue to decline approximately 6.5% to 8.5% year over year.

With domestic PRASM expected to be down approximately 3.5% to 5.5% and international PRASM expected to be down approximately 11% to 13%.

While the primary drivers of this decline are consistent with the first quarter, we are beginning to lap some of the effects from last year, somewhat muting the impact on a year-over-year basis.

For the consolidated system, we expect the strong dollar, lower surcharges, the Houston and energy market weakness and competitive pressures to drive approximately 3.25 points of softness.

While these drivers explain a portion of the unit revenue decline, they don't capture all of it.

As can be seen on slide 7, the remaining revenue is largely driven by passenger demand, using GDP as a proxy not keeping pace with capacity.

Like any supply versus demand relationship, this is creating downward pressure on pricing.

This is particularly evident in the international markets where United is more exposed than any other US carrier.

While United has consistently grown at or below the rate of GDP, this dynamic is creating a unit revenue headwind to United of approximately 2.5 points.

Turning to slide 8. We are taking specific actions in each market to improve our unit revenue performance in this environment, with a focus on maximizing near-term profitability while also positioning ourselves for longer term success.

In the domestic market, this includes redirecting capacity to capitalize on changing demand patterns, introducing entry level fares to increase segmenation and reduce dilution, launching marketing and sales initiatives that leverage our improving liability and further rolling out two-cabin service in top business markets.

We expect that these actions, along with improving reliability and customer satisfaction, will drive domestic unit revenue to be flat to positive in the fourth quarter.

With respect to the international markets, we expect Latin PRASM to turn positive by the fourth quarter, benefiting from reduced Brazil flying.

While we are currently experiencing softness in the Atlantic due to recent events, we see strong summer bookings and expect to get close to flat PRASM by fourth quarter.

Unit recovery in the Pacific will take more time, as surcharges and a strong US dollar continue to impact our performance.

In spite of this, we are very optimistic that the Pacific entity, one of our true competitive differentiators, will see sequential quarter-over-quarter improvement this year despite continued pressure from industry growth, which is not uncommon in developing high-opportunity markets like China.

We are also prepared to reduce overall capacity where appropriate.

We have made some targeted reductions to our schedule, pulling down flying in Houston, Brazil and the Middle East.

And as you can see on slide 9, we now expect our 2016 capacity to grow 1% to 2%, a 0.5 point reduction from our previous full-year capacity guidance.

In conclusion, during the first quarter, we continue to generate high levels of profitability, despite the unit revenue pressures we experienced across our system.

We are taking very deliberate actions within our network, and we will continue to adjust our flying with a goal to maximize long-term profitability and return to positive unit revenues.

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

Thanks, Jim.

Good morning, everyone.

A summary of our financial performance for the quarter can be seen on slide 11.

Our net income declined by approximately $200 million year over year as this quarter was the first quarter in a number of years in which we booked significant federal taxes.

Pretax earnings improved by approximately $100 million due to lower oil prices partially offset by lower revenue and higher non-fuel expense.

Our pretax margin was 8.4%, a meaningful improvement compared to last year.

More significantly, when adjusted for taxes, our earnings per share of $1.23 increased 28% versus last year.

Details on our fuel expense which decreased by almost $700 million year over year are shown on slide 12.

This decrease was driven by lower fuel prices, improved fuel efficiency and reduced hedge losses.

Looking forward, while we have not added to our hedge book since July of 2015, we are still 12% hedged for the remaining nine months of 2016.

And as of yesterday, are in a loss position of approximately $80 million including premium expense.

Moving to slide 13, non-fuel unit costs for the quarter grew 1.3% when excluding special charges, profit sharing and third-party expenses.

We continue to manage air costs to improve the efficiency and cost structure of the airline.

For the second quarter, we expect non-fuel unit costs to grow 2.5% to 3.5%, and for the full year we now expect unit costs to grow 2% to 3%.

This guidance includes the benefit of annual efficiency savings initiative totaling over $1.1 billion.

These savings initiatives were achieved a full year in advance from our initial expectations and are providing over $100 million more in sustainable savings than our original goal.

Our guidance also includes the impact of the three recently ratified labor agreements.

We expect the newly ratified IAM agreement to have a marginal impact on 2016 expenses.

For 2017, we expect the impact of the three contracts to be approximately 0.75 of a point to CASM.

Based on the guidance we have provided for cost and revenue, we expect our pretax margin to be between 13% and 15% for the second quarter.

With respect to cash, in the first quarter we generated approximately $1.2 billion of operating cash flow and $376 million of free cash flow.

As you can see on slide 14, during the quarter, we invested approximately $820 million in the business.

We took delivery of three 787s, two 737s and one used A319 and we added six Embrear E-175s to our regional fleet.

We also announced additional aircraft orders for 65 Boeing 737-700 aircraft.

These aircraft will allow us to reduce the size of our 50-seat regional fleet to address the regional pilot shortage while providing customers with larger, two-cabin aircraft with greater amenities.

Importantly, as we transition out of 50-seat aircraft into larger gauge mainline aircraft, we expect to begin generating structural cost benefits of upgauging and reducing departures.

During the quarter, we also announced plans to accelerate deliveries of certain widebody aircraft to facilitate the early retirement of our 747s, as the 747s cost and complexity to operate continues to be a burden.

This decision does not represent an increase to overall CapEx capacity or total fleet size.

Our sustained cash generation over the last few quarters and the discounted value of our stock led us to repurchase $1.5 billion worth of stock in the first quarter, representing 8% of shares outstanding.

Based on the progress we have made to date and cash flow expectations for the rest of the year, we now anticipate completing a $3 billion share repurchase authorization by the end of the third quarter this year.

In conclusion, we showed once again the first quarter solid cost discipline while investing in our business and returning significant cash to shareholders.

Going forward, we will continue to execute on our plan to improve our financial performance and secure a strong future for our employees, customers, and shareholders.

I will now turn it back over to Oscar.

Thank you, sir.

So while I'm pleased with all of the accomplishments within the quarter, I have got to say it's the future that has me and us excited.

Thus, after spending time with many of you share owners over the last few months, I know there's a strong desire to learn more about certain initiatives we have underway and of course their impact to the bottom line.

To that end, we will be holding an investor call on June 21 to describe in more detail many of these initiatives and their contributions to earnings over the next several years.

I look forward to that conversation.

Before opening it for questions, I would like to thank our customers for choosing United.

We know you have a choice and I appreciate your business.

With that, I will turn it over back to Jonathan.

Thank you, Oscar.

We will now take questions from the analyst community.

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

Operator, please describe the procedure to ask a question.

(Operator Instructions)

David Fintzen, Barclays Capital.

Good morning, everyone.

Question really for Oscar.

Now that you've gotten a little more time in the seat, can you talk us through a little bit of how you see the earnings gap to your peers?

And in large buckets, how do you think about the mix of revenue and cost in closing that gap over time?

So, there's no mistaking that our various airlines domestically are built differently, and we clearly have our own strength and challenges.

Our higher cost hubs, structurally we're a bit less reliable.

I think of it from the standpoint that we have, I believe, better business markets and certainly better international gateways.

Those are a little more competitive than others, but as we think about building a playbook, our own playbook, not copying others, is I think the strategic work that we have to continue to do.

And so as I think of your question, I think we have to double down on three areas of strategic focus.

Certainly, we need to win on revenue.

It's just not just markets and schedule and price, but it's product and service.

Execution, which we're doing a great job already, reliability, certainly.

Productivity, you just heard Gerry talk about that in a significant way.

Cost of course is included in that.

And in technology, which we haven't talked about, and we look forward to sharing some of that in June.

And then, people always kind of wink at me when we say this, but winning on trust with our employees, and then speaking to them, and then prove to our customers and of course invariably, to you as shareholders.

So we're still in the early innings, the momentum is building in the system across all the areas.

But it's a combination of all of those, David.

Okay.

And then when I look at the international RASM outlook, should we think of those things as just short-term oversupply issues or more of the macro?

Or do you think you're -- I'm going back to the revenue side, in closing that gap?

Is this something that you think is more structural in nature that's further devolving?

David, this is Jim.

The way I think on the international side is clearly, depending on the regions of the world, take China, for instance, where passenger demand is growing at a fast pace, even in that high capacity.

So we believe that over the long-term that capacity demand will come in line.

What we were excited about is our uniqueness as to how we're participating in China.

It's unique in the sense that as Oscar mentioned, two new secondary cities in China, that growth that I mentioned out of China, half of that will come from secondary cities.

With the fleet that we have and the flexibility of the 787, it's really allowing us to play in that market in its early, early stage, in a very profitable entity that runs at a high profitability, quite frankly at a profitability that's no different than our domestic.

So we believe that as demand catches up to the capacity level out there, we'll be able to close that year-over-year RASM.

And I'd mentioned in my comments, we actually see closing much of that during the year as we move to the fourth quarter.

Okay.

I appreciate that, and I look forward to learning more about the playbook.

Thanks.

Joseph DeNardi, Stifel.

Thanks, good morning.

Jim, just two questions for you.

One just on your, not sure what you guys want to call it, but the basic economy fare that you guys plan to roll out.

Do you have any updated timing on when that's going to be launched?

And is the benefit from that factored into your expectation for flat domestic PRASM by 4Q?

Hello, Joseph.

We're targeting second half of the year, so no change to our timeline that we talked about in various [sides].

And yes, it's a piece of the -- it's one of the initiatives that as I described in my comments of how we're very much focused on moving PRASM to flatten upward, and that is a big piece of it.

The concept of it is to allow us to compete more effectively with low-cost carriers.

And the second piece of it, it will allow us to move some of the dilution that happens in the marketplace given the fare structure that we have today.

So yes, absolutely, that is part of our path to at flat to positive PRASM in the fourth quarter.

Okay, and then just one for Oscar actually.

I think that the CapEx increase that you guys announced surprised some people.

Oscar, I'm just wondering if you can talk about, given how short of a time period you've been there, you don't have a permanent CFO in place at this point.

What made you feel comfortable to announce such a big increase to your CapEx profile over the next couple of years?

It's a combination of things.

Certainly the aging of the 47 fleet that needed to be replaced, plain and simple.

And on the 37s, it's actually economically viable and accretive rather than not, and having to jump on those slots with regard, to what was available to us.

So a combination of those things.

I can tell you that not only myself but the team was very deep involved in that conversation and we didn't do that lightly, knowing that the reaction might be with regards to increased CapEx.

Jim, would you add anything?

The only thing that I would add is on the 737s, keep in mind, we had a real problem.

There is a regional pilot shortage that compelled us to deal with the significant reduction in 50-seat flying.

And when we did our analysis to say, okay, what should replace that?

Looking in the new and the used market, we took some used aircraft, as many as made economic sense.

In the new aircraft market we looked at all of the available options.

They're all good aircraft, but the lowest cost choice for us is the 737 and 700.

Okay.

Thank you.

Jamie Baker, JPMorgan.

Hello.

Oscar, there's little question that you delivered a pretty unimpressive guide for the second quarter.

I realize that with everything going on with the Board, that may have been a distraction and you're getting involved with the flight attendant negotiations.

Nobody is accusing you of not having a full plate here.

But traditionally when companies start falling further and further behind their competitors, and based on the guide, that is what you expect in the second quarter, they're faced with three choices.

You can do nothing.

You can simply try harder.

Or you can come up with a new plan.

So my question is simple.

Does mediocrity suffice?

Is fixing United as simple as rolling up your sleeves and relying on easier comps?

Or is something significantly more radical, a change in course, ultimately required?

Is that a leading question, Jamie?

(Laughter) I'm going to go with mediocrity for $200, please.

I think one of the things that is important to know is that we are not conceding anything on anyone.

So what we've been doing is flying profitably.

I have watched and monitored how that works.

We need to be, in my mind, a bit more disruptive in the marketplace.

I think we've been standing by a little bit too much.

Not exactly what that means and how we do it thoughtfully, and from a value-creating perspective, is the work we're beginning to do.

Interesting enough I have a couple new Board members that have a lot of knowledge and ability in that space.

I will lean on them hard on them with that regard.

But no, it definitely has to change.

Accepting the same thing constantly over and over, especially in this market, the decreasing demand, overall global economic picture, our increase in expenses on the labor side, and all those things, we have to do things differently through many, many factors.

And so you will see some of that thrust here over the next few months, as far as the initiatives.

Some of the values initiatives will be there.

But again, there's a lagging effect.

But no, there's no one standing by here just waiting for things to clear up and hoping it gets better.

We've got to take some action.

Okay, that helps.

And on that lagging effect, presumably the investments that you're making in labor aren't driven by a sense of charity, rather they're intended to generate a return at some point, presumably in the form of better RASM, more corporate share, preference by business travelers to make United their first choice, all of that kind of stuff.

So in your mind, once labor is embraced, compensated, and energized, how long do you think it's likely to take before you start to generate a financial return on those efforts?

Yes.

Well I'll just correct one thing.

I think my family here is damn energized already.

So we've got a good hard step on that.

How long it will take?

I don't know that I'm capable at this point in time of projecting that.

The way I'll see it and monitor it and present it very transparent to you, every little step we take forward, we're going to highlight for you, and how long it's going to take, it's hard to tell.

We didn't get here overnight, and we're likely not to get out overnight.

But I want to have initiatives that have a more immediate value that you can see.

And I really believe in this concept of proof, not promises.

Again, my history is laden with that.

And that's what we've got to work through.

So again, as far as timing, it's too early for me to tell you any specific time frame.

Oscar, thank you for your answers.

Take care.

Helane Becker, Cowen and Company.

Thanks very much, operator.

Hi, everybody, and thank you very much for the time.

I know that the first quarter is generally your toughest quarter anyway, and you generally underperform your peer group.

When you look at the performance in the first quarter to the second quarter, given that the unit revenue guide is flattish to maybe even a little worse, can you just talk about the dynamics that get that revenue decline continued, as opposed to sequential improvement?

Helane, this is Jim.

You're right, seasonally our first quarter is our more difficult quarter, and we are working hard in terms of that sequential RASM to improve that.

I do want to emphasize the international exposure.

The domestic RASM from the first quarter to the second quarter does, with our guidance show a sequential improvement.

So we are focused very much so on that international side in particular, and we've made some capacity adjustments.

That's part of our guidance down to 1% to 2% capacity guidance.

That 0.5 point drop from our previous guidance is all international.

So one is to react to the market out there on the international side and to make sure that our capacity moves more in line with demand.

As we move through, particularly it's still the second quarter, a shoulder period, for instance, in transatlantic.

We see strong bookings in the summertime for transatlantic that will help with that sequential PRASM as we move through the year.

We've made initiatives in Latin America that beginning in the second quarter our capacity through the rest of the year is basically flat after doing seasonally adjusted capacities to capture demand in each markets, for instance, that drove our capacity up, very strong margins, but it put pressure on PRASM.

So our focus is on that international side, the initiatives to move capacity to the right places as well as to drive the initiatives.

And in addition, the great work by the operations team, and reliability, given that work, we're beginning to see already in our hubs signs of our share beginning to improve.

And we think that will continue and spread and drive that RASM as we go through the year.

Okay.

Thanks for that very comprehensive answer.

I just have a question about, in first quarter, the decline in regional capacity purchase expense.

As you shift more capacity to the main line from the regionals, shouldn't that expense line actually decline further?

And how should we think about the mix between main line and regional revenue, given that your main line revenue declined more than regional for the first quarter, and maybe it should have been more balanced?

Helane, let me address the cost piece of it, but clearly as we shift from regional to main line, you will see a continued drop in regional expense.

Some of that though is going to be offset by the increased cost of the regional [fine], as they have, the regional airlines have their own pressures that they have to deal with and that becomes a more expensive fine.

But generally with the decline of the 50-seat fine, you will see a drop in regional expense.

Great.

Thanks very much for all those answers.

Helane, I would just add to that as we shift to the main line, remember it creates revenue opportunity.

Those 50-seaters don't have Economy Plus.

They don't have a First Class cabin.

And we continue to see great upsell in the First Class cabin as well as strong Economy upsell.

Okay.

That's really helpful.

Thank you, Jim.

Dan McKenzie, Buckingham Research.

Thanks.

Good morning, guys.

Jim, thanks for the commentary.

I appreciate the presentation as well, everybody.

But Jim, in your commentary, you talked about being open to adjusting overall capacity, and I'm wondering if you can elaborate a little bit further.

Specifically, I'm just wondering, what international entity is driving the biggest sequential revenue deterioration exactly?

And I'm wondering what demand trends need to transpire before you might get more aggressive?

And however you might talk about that, whether it be bookings or revenues that might be falling short, and how quickly you might be able to respond.

Hey, Dan.

Thanks for the question.

I think the Pacific is, quite frankly, the biggest sequential driver on unit revenue impact to us.

And as I mentioned, some of the capacity reduction, actually all of that 0.5 point reduction in guidance is on the international.

So we'll stay really focused on the demand environment relative to the capacity that we have.

I will say about the Pacific, it's also [infected] but we'll start to lap some of the foreign exchange, and the surcharge impact is most dramatic in the Pacific.

So we'll lap some of that.

So we believe even in that entity that we'll continue to close, move towards flat RASM in the Pacific as we move through the year.

The Pacific, as I mentioned, even the markets we're adding, Oscar mentioned two of the secondary cities.

When you think about San Fran to Singapore, very unique and innovative for us, it's the first nonstop markets in the US just from Singapore.

San Fran-Auckland, building on our relationship and growing our relationship with Air New Zealand.

San Fran-Tel Aviv that we launched on March 30, off to a great start, connecting two high-tech communities and seeing great bookings there.

So all of those would say that uniqueness of our expansion, we think serves us well and comes at a high level of profitability.

All that being said, we've been consistent.

We'll keep track of capacity demand and make sure that we're keeping them in line.

But also remembering that the international is a longer-term play that we're excited about.

Very good.

I appreciate that, Jim.

Just staying on the Pacific for a second here, United did sign a multi-year agreement to strengthen its partnership with Air China, per the release.

I'm just wondering, what is that exactly and how and when might that tie to, say, increased revenue contribution on that entity?

Yes, Dan, we recently signed an enhanced agreement with them that quite frankly builds that relationship over a longer number of years.

I want to be clear, it's based on the concept of the alliance world, it's not a JV world.

China is not open skies and so it doesn't come with antitrust immunity.

But we think we have a lot of ability to grow together, both relationship-wise as we learn about the market from each other, both Air China learning about the US market, and us quite frankly learning a lot about the Chinese market.

That will bring us closer together in marketing.

It will bring us closer together in some sales initiatives that allows us to understand the marketplace.

And we think that will enhance our connections through the market as we build not only in Beijing, but as we build in some of the secondary cities.

So we can increase the connecting opportunities that we have with Air China.

We connect close to 200 a day over the Air China network in Beijing today.

And we think there's upside building that relationship.

So it's within the alliance world.

We're bringing much more higher level executive attention to it.

The team of senior executives will much more frequently meet with senior executives of Air China to work on those initiatives that I talked about.

Very good.

Thanks for the time, guys.

Hunter Keay, Wolfe Research.

Good morning.

So when we talk about the structural margin gap, I think everybody just talks about market share and hubs.

And I think that's important but I think that gets focused on a little too much.

So how much of the gap is attributable to the fact that you have a 1,500 mile stage length versus about 1,000 mile stage length for your two biggest peers.

And that seems to me like it's as structural as anything.

And given that, or a change in that, wouldn't it just be unreasonable to assume that you have any possibility of closing the margin gap, particularly now that your costs are going to be going higher?

And shouldn't we just expect this margin gap to be permanently structural, if for no other reason than the stage length alone?

Hunter, it's Oscar.

I'm going to let Jim answer the stage length question specifically as we have discussed it.

I'm not sure we'll give you some additional facts there to warrant maybe a different opinion.

With regards to again the concept of, from the long-term perspective, in effect conceding that that margin gap will be there forever, as I've stayed in the market and the industry over the last decade, being on the Board, I know that things can change very quickly in one way or another.

So not quite ready to concede anything in that regard.

And we'll continue to work the initiatives to close and narrow that margin gap in the near term.

But with regard to the stage length, Jim, why don't you cover some of that with him?

Thanks, Oscar.

Hunter, yes, there are structural differences between networks and I think of them as mainly driven by geography.

We clearly have two east-west coast hubs.

That by definition's going to indicate longer stage length.

It's also those coastal hubs are tremendous international gateways, which is why our network is really built for strong international presence and growth over time in that international flying.

Our hubs are also very business-centered markets, which also means there's lots of competition.

And I think you're referring to, [sea chair] and so forth.

That's a result of those competitions of large business-centered markets.

We don't have a dominant hub.

They're very competitive.

And, again, the geography of the coastal hubs, large business-centered markets, drives more competition.

And by definition, drives more stage length.

So we haven't evidence that correlates stage length directly to profitability.

Stage length is somewhat a result of the geography and the strength of our hubs.

And we think that that hub stretch works for us really well.

For instance, in New York, it is the only true connecting hub in New York.

And it allows us to make revenue management decisions on high yield flow traffic versus low yield connect traffic that's unique to us.

All of those things will drive an actual stage length.

I think I would add to that real quickly, Hunter, as we begin the discussion on this in earnest, certainly that's one area, but there are a lot of other factors that affect our network.

And to optimize that network, that's the discussions we're having with regards to moving forward.

So many factors there.

All right, yes, thank you very much, and look, I appreciate the commentary on the 4Q PRASM trajectory.

The market doesn't appear to believe you.

Your stock has actually sold off more since you guys provided that.

So I think it has been one step forward, and one step back with United for the last four years.

And as you talk about this margin gap closure, it becomes all people that are focused on.

So it's actually the fact that it's widening as your operational metrics are improving is arguably even more concerning.

So the existence -- the argument against the existence of a structural disadvantage seems more feeble as time goes on.

So is there a conclusion that you might draw here, if that doesn't happen, that you don't close the margin gap or the PRASM gap, that maybe there's a conclusion that United is just too big?

And is there a scenario where a couple years down the road, if you're not getting to where you need to be, that we're talking about major surgery here to the network, involving asset divestitures, or real estate divestitures, or something like that?

Is there a scenario where we see a structural overhaul of the network involving shrinking the size of this Company?

Hunter, I think it's way too early for anyone, particularly me, to answer that question, and so stand by.

I understand your viewpoint, and I understand the market's reaction.

I understand the situation we're in.

That's what I'm here to do.

And that's what we'll get at very quickly.

All right.

Thank you for the time.

Julie Yates, Credit Suisse.

Good morning.

Thanks for taking my question.

Jim, in your prepared remarks you noted strong summer bookings, particularly in the transatlantic, and one of your peers last week highlighted strength in advanced summer yields domestically, are you seeing similar dynamics on the domestic market?

Hey, Julie.

As we look at the demand environment in the second quarter, from a business travel point of view, we saw softness in margin that continued into April.

We do see signs mid-May and into June, positive signs that would point to strengthening in yield as we get up closer to that time.

It's a little bit early on the business traffic, the window.

But where our yield's at right now, we feel pretty good that we see some demand picking up as we move towards the summer, beginning in mid-May.

I would emphasize corporate is still a little bit soft.

We saw our corporate portfolio in the first quarter down 3%.

If you took out energy, it's down about 2%.

So the energy sector is impacting us.

We expect that to continue through the second quarter, given where oil prices are.

So the corporate -- the energy sector, as well as the overall Houston hub will put pressure on us.

So we see good demand, we see strong demand but quite frankly, it's at lower yields.

And then I'll point to the slide I showed in the presentation.

We do have some supply and demand dynamics affecting and diluting yield as we think about the near term.

But I'll close it with that we see demand picking up mid-May, June, with some signs of stronger yields.

Okay.

And then is there any additional color you can offer on the transatlantic and the dynamics causing the weakness there, the sequential deterioration in PRASM in Q1 was a little worse than I would have expected given the actions that you've taken on seasonal shaping.

Is there lingering impact of Paris and Brussels that's going to impact Q2 as well, or what are some of the dynamics there?

Julie, I think the recent events and the tragedy in Brussels has impacted bookings.

What we generally see is a slowdown in bookings after events like that.

Those begin to pick back up, but quite frankly, you lose days, even weeks of the booking curve and that is impacting the second quarter.

Which is in why in the transatlantic, as you move towards the summer period, that booking curve still has plenty of time to fill up and we see that demand.

So I tie it more to the recent events that, particularly in Brussels, that is affecting the overall travel to the transatlantic.

Great.

Thanks.

Michael Linenberg, Deutsche Bank.

Good morning, everybody.

Just two questions here.

Jim, going back to the slides, and by the way, thanks, I really appreciate the slides.

Very helpful with the call.

On the slide, I think it's slide 8 where you look at the different geographic regions and you call out China performing better than domestic.

Now, is that on a PRASM basis or is that on a profitability basis?

Mike, this is Jim.

It's on a profitability analysis.

You can thank my boss for those slides.

Great, and then, thanks, Oscar.

And then my second question is to Gerry.

With respect to the fleet, when we look at your fleet and how it's evolved, it looks like versus the last update, there is a larger reduction in the number of CRJ700s.

And as I think about it, I would have maybe anticipated the bigger decline in 50-seaters rather than 70-seaters.

And I'm just curious if that reduction is a function of the fact that you're bringing in a lot of 175s, the Embraer aircraft, and maybe that you're up against scope and so as 175s come in you've got to take out CRJ700s.

So if you could just provide an explanation for that, that'd be great.

Thank you.

It's a combination, I think of two things.

One, as you said, it's scope limitation that we dictate some of the swapping out of the CRJs for the 175s.

And also timing on when the 50-seat aircraft leases expire.

We try not to take that aircraft that we're still paying for.

So between the two, that would drive what you're seeing.

Okay.

Great.

Thank you.

Duane Pfennigwerth, Evercore ISI

Good morning.

Thanks for the time.

Jim, I wonder, you gave a lot of stats there pretty quickly.

I wonder if you could just repeat by regional entity where you think we'll be in the fourth quarter and what gets us there.

Hello, Duane.

Yes.

This is Jim.

As I said on domestic, we expect given our initiatives, improved reliability.

We're seeing that translate into some of the highest customer satisfaction scores that we've seen.

And as we build on that momentum, coupled with the initiatives, I talked about entry level fare initiative that comes in the second half of the month.

The ability to upsell into First Class as we put more two-cabin aircraft into the domestic system.

And other marketing initiatives that will leverage that reliability that we're seeing in our system.

We think those initiatives put us on the path to flat to positive PRASM in the domestic, consolidate domestic system in the fourth quarter.

In the Latin, we also believe we have a path of progression to hit the flat Latin America PRASM by the fourth quarter, as well as in the transatlantic.

The one area that will probably lag it, because of things that are -- particularly the strong dollar, the R&D, the Chinese currency, it's relative -- the dollar relative strength to that currency has a longer tail to it, for lack of better words, than what we saw with the yen and the euro.

So we think Pacific will take a little bit longer to get to flat PRASM by the fourth quarter.

But we're really excited about it.

We have a good path to it.

We understand the importance of PRASM and what it means to drive in top line revenue, and the team is very much focused on it.

Flat to positive in domestic, Atlantic, and Latin, which just feels like, given the relative size of those, feels like a consolidated flat to positive despite Pacific.

Is that a reasonable way to think about it?

I'd put it consolidated closer to flat.

Again, the domestic we think we have a path from flat to positive.

The other international entities, given the capacity growth, will move closer to flat.

So you weight those together, I would want to call it consolidated positive at this point.

Okay.

And then just for my second question, as we think about losing a bunch of these 50-seaters, can you give us some basic building blocks?

So maybe a ratio for every three 50-seaters that goes away, you take one of these main line deliveries associated with that order.

And then just the inputs to profit improvement to help us build up to what this fleet transition could mean for you over the next couple of years.

Well, I'm jump in and then let Gerry.

As you think about from a network perspective, you can think of, you're right, the three 50-seaters, two to three, in line with each of those 737s that come in to replace those.

And so we think of concepts in markets where there's receipt neutral, and where we can work with frequency and use that main line aircraft to fill in the pattern that previously had much more higher frequency of 50-seaters.

So you can think of that two to three range in terms of that replacement.

And can you give us any sense for profit improvement for each of these that goes away?

We haven't, but I really want to stress the ability to drive ancillary revenue firsthand, given the Economy Plus section that comes with that.

It's a great First Class cabin.

It comes with wi-fi.

It comes with our personal device entertainment system.

So it has a lot of the attributes that customers are looking for.

And it will come with increased reliability.

And so we think from a customer's point of view it will drive great benefit.

I think it's one of the things that Oscar mentioned on our investor call in June.

We can highlight and walk you through some specific steps on that.

And just on the cost side [of that], clearly the larger aircraft is going to be more efficient on a seat cost basis and fuel efficiency as well.

There will be some meaningful savings there.

Okay.

Thanks for the time.

Darryl Genovesi, UBS.

Hi, guys.

Thanks for the time.

With regard to the changes that we're seeing at Newark, in the regulatory changes at Newark, do you have a sense of just how much, if any, additional capacity may be accommodated?

Not necessarily your own, but in total Newark capacity as a result of the F.A.A.

relaxing some of the restrictions there?

Darrell, this is Jim.

We don't, and the marketplace will obviously will determine that.

Again, our big concern in a highly congested, most congested air space is the risk of a more congested air space.

And so what that would mean for our customers.

But in terms of what the market dynamics or what the results, we just don't have a sense of that right now.

Okay.

Thanks for that.

And then maybe to follow on some of the other questions that we've heard, what it might help is if you could give us some reassurance perhaps in the level of commitment to actually getting to a positive unit revenue trajectory.

Meaning, I've heard some people ask you if you should get smaller.

And I think that's a fair question.

And I've heard some people ask you how confident really are you that you can get to a flat or modestly positive RASM trajectory in some of these markets by the end of the year.

But just wondering, you have the ability to get to positive unit revenue in just about any demand environment, it just depends how small you're willing to get.

So would you be willing to provide a commitment to the investment community to achieve a flat unit revenue trajectory by the end of the year?

This is Oscar.

I think as far as future guidance, I want to hold my powder dry a little bit until I understand it a little more thoroughly and get a lot of input from all of you as well as our team here.

I think on the June call, I think we'll be able to give you a sense.

I know that's a couple of months and it gives us a little more certainty about the year.

What I don't want to do is begin commit on these calls the thing that I know the market wants.

I know the optics want to be there.

We need to fly profitably.

We have to fly the way that we at United fly with our current network, and over some point in time if that needs to change or adjust accordingly, we'd make those changes.

But we'll make them thoughtfully and with a lot, a lot of research and internal analysis.

Those are not shooting from the hip kind of conversations that I want to have on a call.

So if you will allow me a little more patience, now that we're getting back to work, we'll talk a little bit more about this in June.

Okay.

Thank you.

Jack Atkins, Stephens.

Good morning, guys.

Thanks for the time.

When it comes to rolling out that basic economy fare later on this year, what are the gating factors that would prevent you guys from getting that out as expected?

What needs to happen internally?

Is it IT or something else?

Hey, Jack, this is Jim.

We're really confident on our timeline.

The IT team here is very focused.

It's a very collaborative process.

Quite frankly it's collaborative with our operations team because we want to make sure that across the enterprise the understanding of what the customer is purchasing and what their expectations are for that product are really clear.

So we're really confident on the timeline.

And I don't see any gates, as you mentioned, in our way.

There's a huge collaboration going on and IT is right behind us with it.

Okay.

That's great.

And then when it comes to thinking about fuel hedging, could you guys give us an update on your thought process around, perhaps, increasing your forward hedging given the volatility to the upside we've been seeing in fuel over the last several months?

Sure.

Yes, hedging is just one tool that can help provide better certainty as we try to achieve our business plan.

It's no longer for us a hedging of near-term volatility.

That's a very expensive insurance policy.

We can self insure that risk.

So it is just one tool, there are a number of factors that we'll look at, including our net exposure to fuel.

One of the benefits of the Houston hub works in the other way, that as fuel prices rise, there's a correlation on revenue, particularly in Houston.

So it would be that net exposure that we would focus on.

The competitive landscape, what others are doing that could impact the industry.

And the overall economic environment.

So we'll be thoughtful about our hedging.

As I mentioned in my prepared remarks, we have not done any hedging since last summer, and while there's been some volatility in fuel recently, from a historical perspective, it's still a very low fuel environment.

Okay.

Thank you again for the time.

Savi Syth, Raymond James.

Good morning.

Just on the CapEx program, could you just talk a little bit about your thoughts on financing?

Just, I know that you mentioned about maybe 50% of aircrafts are debt-financed this year.

But as you look forward, thoughts on operating leases or debt financing, and how should we think about liquidity and debt targets?

Sure, Savi.

Let me talk about leasing first.

I would absolutely love to lease some of these aircraft.

But it's got to make economic sense.

And there are a number of factors.

Let me give you three.

One is just the cost of money, cost of debt.

As you know, we can finance -- debt finance aircraft at a very low cost.

That creates a high hurdle for the leasing companies to overcome.

And historically they haven't been able to do that.

They're better able to today, to pass through their lower cost of funds to us.

But that's one factor.

Probably the bigger one is residual value.

You need to make leasing work.

A situation where the leasing company is going to be more optimistic on residual value than we are.

And then tenor.

Think of it like buying an automobile.

You're going to trade in your automobile every two or three years, leasing might make sense.

If you're going to keep the auto through its useful life, leasing becomes very expensive.

So when we look at these aircraft, these are largely core aircraft that we expect to keep very long term, 25, 30 years.

And leasing can get expensive.

But that's not to say that leasing can't work.

And like we've done historically, we will continue to look at leasing opportunities to see if we can make anything work in that space.

But that's one of the reasons why when we talk about free cash flow and capitalization allocation, I look at adjusted free adjusted cash flow.

So for me, I'm going to adjust for the financing.

So whether it's a lease or whether we use WTCs or other the debt financing that's going to drive the availability of liquidity that we can use in our capital allocation program, where top priority is still going to be returning cash to shareholders.

And as we continue to have strong earnings, we would continue with that program.

That's very helpful color.

Thank you.

And for a follow-up, just on the reliability, and that has been a big focus and there will be a lot of investments here made to continue to improve reliability.

Could you discuss what metrics you're looking to measure how you're performing on that?

And then just from a timing perspective, when do you expect that to manifest itself into revenue and costs as a benefit?

This is Greg, Savi.

I'll take the first piece and then defer it to Jim and Gerry on the cost and revenue piece.

We look at a ton of factors and a ton of measurements in terms of how we're performing, everything from bag delivery and performance to two different ways of looking at arrival and departure performance to how quickly we shut doors on an aircraft and literally tens and tens of metrics each and every day.

And we've managed this quarter, through the hard work of the United team and the 86,000 people out in the field working the flights each and every day, to actually set record performance across many, many metrics.

And as proud of that performance as we are, we're more excited about where we're headed because we feel like we still have a lot of opportunity to improve from there.

This is Jim.

I would just add that reliability that we're seeing and the great progress in that area, we actually are seeing in our hubs, our share growing and taking hold the beginnings of that.

And when I talk about moving towards flat to positive RASM by the fourth quarter in domestic, again, a piece of that is the momentum that we're capturing there.

So it's hard to put a timeline on what net revenue, Oscar referred to that earlier.

But we're seeing signs in our hubs of that share.

We want to obviously expand that to some of those spoke cities and get some traction there.

But we're really confident with reliability, with the initiatives we have out there.

That's part of our success in moving towards flat to positive [in the fourth quarter].

Yes, and from the cost side, we're seeing some of that benefit already.

You think about missed connects and having to deal with the cost of putting customers up at hotels and meals and whatnot, and crew costs as well.

So all of that we see immediately as we run more reliable operations.

But there's still more to come on that as we can gain greater efficiency in the operations.

So while we have some cost savings we're already seeing, it will increase over time.

Savi, this is Oscar.

I'll add one thing, at least from my operational background that I think applies across any industry.

As you invest to become more reliable, that investment is purely a cost one.

As you get more reliable, how you reduce that cost or that safety cushion, how quickly you do it, how effectively you do it, is a key attribute that Mr. Hart will be challenged with very quickly.

But again, we just had Denver and Houston over the last couple of weeks have been massively hit.

We had 700 people not able to come to work on a day.

And so it's all of those things and all those different moving parts that you have to address.

But that safety cushion that's across the system will have to be managed better, and then therefore cost comes out.

But it starts with having a reliable product.

So thank you.

All right, that's very helpful, thank you.

Thanks, Savi, and thanks to all of you for joining the call today.

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

Thank you, ladies and gentlemen.

This concludes today's conference.

You may now disconnect.