聯合航空 (UAL) 2016 Q3 法說會逐字稿

Good morning and welcome to United Continental Holdings' earnings conference call for the third quarter 2016. My name is Brandon and I will 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 third-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-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.

Joining us here in Chicago to discuss our results are Chief Executive Officer, Oscar Munoz; President, Scott Kirby; Executive Vice President and Chief Commercial Officer, Julia Haywood; Executive Vice President and Chief Financial Officer, Andrew Levy. We also have Executive Vice President and Chief Operations Officer, Greg Hart, in the room to assist with Q&A.

And now I'd like to turn the call over to Oscar.

Thank you, Jonathan. Good morning, everybody. This quarter marked another period in which United took meaningful steps forward in transforming the direction of this Company. Notably, we saw our 25,000 flight attendants ratify a new contract; our over 9,000 technicians reached a tentative agreement for a joint contract, and we're excited to have that ratified soon.

Additionally in the quarter, as most of you know, I solidified my leadership team. This team has deep industry experience, incredible talent, in my opinion, and a very focused dedication to bring United into its next chapter, realizing the full potential of our great people and a great network in our assets.

On the business side, we also continued to run a solid operation in the quarter. In fact, we achieved the best third-quarter on-time performance in our history. I want to take this opportunity to thank the dedicated and professional United employees that make all of this happen.

Thanks to your commitment and determined efforts, we delivered a Company best performance for arrivals during the busy July 4 holiday travel period, and we also earned a first or second place ranking in key arrival and departure measures in the three months between Memorial Day and September 1. And culminated our great summer month performance with delivering the best Labor Day weekend [performance] numbers on record. So it's great to have our operating program and people back in a good, consistent application of their work.

On the financial side, we continue to record strong financial results including a pre-tax profit of $1.6 billion, and a pre-tax margin of 15.7%, both excluding special items.

As many of you know, we will host an Investor Day on November 15. With that in mind, today we will focus on this -- our discussion on our recent performance and near-term outlook, and wait until November for a discussion of our plans for beyond 2017, including our outlook for both CASM and capacity.

So with that said, I'd like to turn the call over to -- this is the maiden voyage of both Mr. Kirby, Ms. Haywood, and Mr. Levy. But before I do that, just let me say to them all: we're incredibly thrilled to have each of you join the United family, and very much looking forward to sharing our future with you.

With that, Scott?

Thank you, Oscar. Before turning to the slides, I just want to start by saying that I'm very excited to have joined the United team, and they're just fantastic opportunities ahead of us. This really is an exciting time for United. It's true that the last several years have been challenging, with an integration that took longer and was more complex than anticipated which created cultural, operating, and commercial challenges. But now, with integration largely in the past, we can all turn our focus to realizing the full potential of United for our employees, customers, and investors.

The foundation of a great airline is its people, and under Oscar's leadership, United has made tremendous progress by creating an integrated, united United.

Achieving our full potential will require lots of hard work. But with great people, the best network potential, the right plan, and a focus on solid execution, we can deliver a great network, operations, and customer service, which in turn will lead the financial results that reflect the full potential of this airline.

Julia will touch on some of the high-level opportunities in a moment, but before she does I'd like to take the time to run through the quarter's performance.

On slide 6, you can see that we've made meaningful strides in improving the operation over the past couple of years. On-time departures, arrivals, completion factors, and mishandled baggage performance have all seen meaningful improvement. Going forward, we expect we will to continue to improve our operational results through better processes, smart investments, and a commitment to be efficiency.

As we have talked about here in the past at United, running a reliable airline is a key to winning [other] customers and regaining customers that we've lost during some of the operational challenges that we had with integration from 2012 through 2014.

Turning to revenue, slide 7 shows consolidated [unit] revenue performance for the past quarter, which declined 5.8%. This was slightly better than initial expectations, due in part to better close-in bookings and yields at the end of the quarter.

For the fourth quarter, we forecast consolidated PRASM will decline between 4% and 6%. As you can see on the slide, we continue to see sequential second derivative unit revenue improvement as we're lapping many of the headwinds we have experienced over the past few quarters. For now, at least, it appears that we are mostly -- that most of the big one-time issues that have been affecting PRASM are in the past.

One of the stories in this slide is that the issues like currency, energy, et cetera, aren't really adding a meaningful impact year-over-year any longer. We continue to see the sequential improvement in unit revenues despite the fact that there's a meaningful calendar shift of revenues out of fourth quarter and into the third and first quarters.

Getting back to positive PRASM is now about at balanced supply/demand environment, advancements in product segmentation, as well as many United-specific opportunities that we'll talk in more detail about at Investor Day in a few weeks.

Slide 8 has some additional detail on each of the geographic regions. Domestically, we're seeing positive close-in corporate booking trends and a better alignment of supply and demand. Additionally, the domestic pricing environment is beginning to feel more rational. We expect the Atlantic to remain the weakest region of the world. Overall capacity continues to grow at high rates at the same time demand is growing more slowly, putting pressure on unit revenues.

In the Pacific, we expect to see a continuation of recent trends with modest unit revenue declines; modest, at least as compared to the Atlantic. And we expect Latin America to be the first region to return to positive year-over-year PRASM, driven by good results across the region, but particularly strong results in Brazil.

In summary, we think the revenue environment has bottomed, and we're starting to see signs of recovery in all regions, with the possible exception of the Atlantic.

At this time, I'd like to now turn the call over to Julia to share with you our high-level thoughts on commercial opportunities that we've identified at United, each of which we'll discuss in greater detail at next month's Investor Day.

Great. Thanks, Scott. I'm also very proud to join the United team. Ever since I began working with United, I can see the potential of our Company, and I'm excited to be part of the team to unlock the potential. We see a number of opportunities throughout our commercial landscape to improve earnings over the next several years, with the largest opportunity being in revenue management, network optimization, product segmentation, and product improvement.

I will provide some high-level thoughts on each today. And we look forward to our upcoming Investor Day, where we will provide more details on these opportunities, including actions that we are taking and the associated financial impact.

So first, with respect to revenue management, we believe there are a variety of both near-term and longer-term opportunities to improve here at United. Solutions to these opportunities can range from small but meaningful tweaks to our revenue management system to making more wholesale changes to our strategies for managing both pricing and inventory. And while much of this work has been delayed during United's integration, we are now moving quickly ahead.

Second, with respect to our network, let me start by echoing Scott's earlier comment. United has the best network potential of any US carrier, but we are not utilizing it fully today. We have spent the summer working to refine the mission of each of our hubs, and we look forward to sharing some of our thoughts with you at Investor Day. But as an important note, the full details of our network playbook won't be fully revealed in order to protect competitively sensitive information.

The third area of opportunity we will discuss is product segmentation. As you know, the work being done in this area signals a meaningful step change for our customers, and I believe that over time it will have an even larger financial impact than the introduction of bag fees. We will use the time at our Investor Day to describe in more detail our entry-level fare product, while also providing further plans to advance the segmentation progress in other areas here at United.

Finally, we will discuss the changes we are making with respect to our product and travel experience for our customers. In particular, we are now investing in the premium experience, rolling out United Polaris, our all-new business class service, transforming United clubs and elevating our food and beverage offering.

In summary, we are looking forward to this day and sharing with you the hard work we have been doing to establish a commercial plan for the organization. Like Scott, I am thrilled to be part of this team and could not be more excited about the opportunities I see ahead for United.

So as I wrap up, I'd like to take a moment to thank our customers. In my past life, I spent more hours than I'd like to recount on planes and in airports, and I understand how important it is that we deliver to you the travel experience that you expect. The team here has made great strides over the past year, and I know that there are even more opportunities to come.

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

Thanks, Julia. I, too, am excited to be part of the United team. We have a lot of work ahead of us, but I'm confident we will be successful in making United the best airline in the world. Yesterday afternoon, we released our third-quarter earnings and fourth-quarter investor update. While I will discuss both our results and outlook today at a high level, please refer to both of these documents for additional details.

With that said, let's review the Company's third-quarter financial performance and fourth-quarter outlook. Slide 12 shows a summary of our GAAP financials, and slide 13 has our non-GAAP results. The Company generated pre-tax income, excluding special items, of $1.6 billion, with a pre-tax margin of 15.7%. Net income was $1 billion, a decline from $1.7 billion in the third quarter of 2015, due almost entirely to a higher booked tax rate in 2016. Adjusting for booked taxes, net income was down 9% but earnings per share increased 7%, due to the 15% reduction in share count as compared with 3Q 2015.

Moving to slide 14, non-fuel unit costs in the third quarter increased 3.4%, excluding special items, profit sharing, and third-party business expenses. Approximately 2 percentage points of this increase was due to the impact of labor agreements ratified in 2016 with our pilots, flight attendants, dispatchers, and IAM-represented employees.

We can expect fourth-quarter non-fuel unit costs, excluding special items, profit sharing, and third-party business expenses, to increase between 4.75% and 5.75%. Approximately 4 percentage points of this increase is due to the impact of these new labor agreements. Our projections, however, do not include the effects of the recently ratified tentative agreement with our maintenance technicians, since it has not yet been ratified.

As you can on slide 15, we expect full-year 2016 non-fuel CASM to increase between 2.75% and 3.25%, with 2.3 percentage points of this increase due to the new labor agreements. However, in 2017, the year-over-year effect of these agreements is only expected to be between 1.5 and 2 percentage points. As provided in yesterday's investor update, we currently expect our fourth-quarter pre-tax margin, excluding special items, to be between 5% and 7%.

Turning to slide 16 and capital allocation, let me start by saying that we believe a healthy balance sheet and adequate liquidity is critical. We ended the quarter with $6.2 billion of unrestricted liquidity, including our $1.35 billion revolver, which remains untapped. Adjusted CapEx, including aircraft, non-aircraft, and aircraft purchase deposits, was roughly $680 million in the third quarter.

In the fourth quarter, we plan to take delivery of eight new mainline aircraft, which contributes to CapEx of between $935 million and $955 million. We have already secured financing for these deliveries through last month's EETC transaction. For the full year, we expect approximately $3.2 billion in capital expenditures.

We also contributed $240 million to our pension plans this quarter, bringing our year-to-date contributions to $400 million. We do not plan any additional contributions this year.

With respect to the share repurchase, we returned $255 million to shareholders, purchasing 5.2 million shares during the quarter. That brings the total amount of cash returned to shareholders to $2.4 billion year-to-date. And since the inception of our share repurchase program in 2014, we spent $4 billion to repurchase roughly 20% of shares outstanding. We currently have $2 billion remaining under our repurchase authority.

At our upcoming Investor Day, we will talk in detail about our plans for the capital structure of the business, including our views on liquidity, CapEx, debt, pension funding, and shareholder returns. We will continue to be focused on finding ways to invest efficiently in our business.

This quarter, we added our second used A319 to our fleet, and plan to take a total of 11 of these aircraft by the end of 2017. In addition, we are reviewing our long-term CapEx needs, including the fleet, and we will give you a more in-depth update next month.

Returning excess cash to shareholders will continue to be an important part of the United capital allocation strategy, and we plan to provide you the context for our plans going forward.

In closing, this was a very good quarter for United, and I'm excited about many good quarters to come. I look forward to speaking to each of you again in the next few weeks as we lay out our strategic plan for the Company.

I'll turn it back over to Oscar now.

Great. Thanks, Andrew. As you've heard from the team, there's a lot of energy about the future, and we do have a great day planned for you on November 15. In addition to what Scott and Julia and Andrew have suggested with regards to the outline of that agenda, we're also going to have Linda Jojo and Greg Hart discuss improvements in both our IT systems and operations broadly, so that you can better understand the great work being done in those areas to make United more efficient and nimble.

Also understand the importance of establishing goals by which you, as shareowners, can hold us accountable in order to ensure the execution of plans. We will use the Investor Day to provide financial metrics and targets by which we are managing our business so that you can also track our progress as we execute upon these plans.

Let me close again by thanking our customers for flying United, as we're focused every day on continuing to find opportunities to improve your travel experience. I thank you for your business and look forward to seeing you on a flight soon.

With that, let me turn it over the call 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.

Brandon, please describe the procedure to ask a question.

(Operator Instructions). Mike Linenberg, Deutsche Bank.

If I could do two quick ones here: Andrew, you mentioned 2017 CASM, ex-fuel, up 1.5% to 2% as a result of the recent labor deals. Presumably, that doesn't include any sort of match on your pilot deal, since the Delta deal is still out there; it's tentative. But does that include the technician piece, the mechanic deal, assuming that goes through? Or would that be in addition to that?

A couple things, just to clarify. I want to make sure that my comments were communicated as I intended them to be, which is that we expect the effect of the existing labor agreements -- the new ones that does not include the technicians; it does not include any [snap up] on the pilots -- we expect the effect of that next year to be between 1.5% and 2%. And so that is not a CASM forecast; that is just the increase associated with the existing agreements. So, I think, hopefully, I answered all your questions with that.

Yes, that's a perfect clarification. And then just to Julia, you alluded to the rollout of, call it, your entry-level fares, or at least alluded to talking about it at the Investor Day. I think the plan was for it to be rolled out sometime this month. Why the delay? And when do we think that that will actually come into effect?

Hey, Michael, thanks for the question. We're looking forward to bringing it in later this year. We're going to talk more about that at Investor Day. With Scott and I coming in, we wanted to take another look at everything that we're offering within that product segment and make sure that it's exactly the way we want it to be, and that we also roll it out really well to the front line. So we're just taking an extra beat on that, and we will talk more about it at Investor Day.

Great, thank you.

Julie Yates, Credit Suisse.

A question on domestic RASM. So, your peer noted that on a combined basis, domestic RASM for the November to January time period should be flattish, trying to normalize for some of that holiday shift. Do you agree with this assessment? And if not, what are you seeing that would suggest otherwise?

I'm not sure I would get all the way to flattish. We do see continued improvement in the domestic environment. I think it's also right to look at it at November through January to account for all the calendar shifts. I'm not sure we get to flattish, but it's certainly trending in that direction.

I think we started actually -- actually, if you look where we were in the third quarter compared to our competitor, we start from a better position so I suspect we will get to positive domestic PRASM before they do. I think we also have more opportunity and more levers that are probably United-specific, but we are certainly trending in that direction.

And whether it's going to get there in November to January or shortly thereafter, it's hard to say for certain at this point. But we're trending in that direction, and we feel pretty good about the domestic environment; it certainly feels better than it has in a couple years. Now, acknowledge that's an easy comparison because it hasn't felt very good for the past couple of years, but it feels better than it has in quite some time.

Thanks, Scott. And then, Andrew, just one quick one for you. Is there any color -- and I understand you haven't given ASM and you might want to reserve this for Investor Day -- but is there any color you can offer on how we should think about the core CASM, ex-growth, for 2017?

We'll get into that in a little more detail in a month, Julie. But we expect, at this point in time, that it's going to be consistent with the performance that United has delivered in the past few years. I think United has done a very good job controlling that, its cost structure, the core CASM. And I would expect that to be similar as we look forward, but we will give you more a specific number in Investor Day in about a month from now.

Okay.

Julie, this is Oscar. I just want to jump into Andrew's comment. Core CASM is an area that we'll continue -- despite the history, we will continue to focus in that strong -- and we have several initiatives that we're thinking through. But we've a lot of moving parts and we'll provide a little bit more color, again, at this infamous now Investor Day. So thanks, Julie.

Okay, great. And Andrew, one last one. Are there any offsets from the recent contracts that have been ratified in terms of profit-sharing changes or greater productivity?

There are some offsets, certainly on the profit-sharing. And I think that each agreement stands on its own, and I don't think we're ready to go into individual detail of each one.

But as one example, with the flight attendant deal today it's 15% profit-sharing. And it's going to drop down to -- I think it's a tiered approach, which would be from 10 to 20, depending on the level of profitability. That's one example.

But we'd have to look at each one on its own merits to go through the puts and takes. But look, for the most part, we're going to see an increase in labor expense that is not completely offset by either profit-sharing or productivity. So we're going to have to find ways to drive revenue and reduce expense to continue to grow our margins.

Understood. Thanks, guys.

Darryl Genovesi, UBS.

Scott, you called out some one-time PRASM drivers in your prepared remarks. But one thing that I didn't see in there was the impact of the service disruptions away from you during Q3. Could you all characterize that, or was it just not meaningful enough to include in there?

I don't think it was meaningful at all. If you go look at our data on a day-to-day basis, you certainly can't find where it happened, so I don't think it was meaningful.

Okay. Thanks for that. And then with regard to China, you guys called out some -- the outlook for the capacity situation to improve as we approach the caps on a bilateral.

Can you just help us understand how you are thinking about the timing of the potential RASM improvement across the Pacific? It looks like the fourth quarter doesn't look great. But as you look out into early next year, how do you think the changes in bilateral impact the capacity growth rate over time?

And then looking a little further out with the new airport being constructed in Beijing, if there's a strong possibility that that bilateral gets amended to include more capacity on both sides. Thank you.

So if you look at our third- and fourth-quarter PRASM forecast for the Pacific, all things considered, I think that's actually a quite strong performance. Particularly for us, where in the fourth quarter we're starting the second San Francisco to Shanghai, so we'll have, for United at least, a fair amount of capacity growth. So for that environment, I think we're actually doing pretty well. There is [light] capacity growth out of China, in particular; but as you point out, the bilaterals are almost capped. And so that's going to slow down dramatically in 2017 and beyond.

The opposite is happening in Japan, where capacity is starting to be reduced, and we see strong performance in Japan. And so across the board, we feel pretty good about the trans-Pacific environment.

Looking further out, once the new airport opens, it takes a long time to change bilaterals, and there's more than just changing route authority. The complication with flying to China is even [if we had] the route authorities, being able to get slots at commercially viable times has been really difficult. And so I expect that will be part of the next set of negotiations. And so that's difficult. Again, it's difficult. I suspect it will take quite a bit of time to get resolved.

Okay. Thanks very much.

Helane Becker, Cowen and Company.

Just two questions. One, can you say if there was any improvement -- if any of your domestic markets showed a positive RASM during the third quarter? And I think Delta commented that they saw about 33% in their markets, and I'm just wondering what that number was for you.

Yes, it was actually 43% of our markets had positive year-over-year PRASM domestically. Look, that's an interesting statistic. I only know it because someone asked on the Delta call, or they said it, and so we checked. But what's, I think, more important is the momentum that that has for the domestic environment. And this could turn out to be wrong, but there's lots of little things that are going on with pricing and with a lot of carriers going through and cleaning up pricing in the domestic environments that make us feel pretty constructive about that entity in particular.

Okay. So I can take away from that that you think it's relatively sustainable, even with -- calendar shifts aside?

Yes. You have to adjust for the calendar shifts. But adjusting for that, I think that the momentum in the domestic -- well, overall system and the domestic is going to continue to improve on a year-over-year basis, and the results are going to get better.

Great. And then just a question for you, Oscar. In June, there was an investor call, and there was a whole bunch of revenue and cost initiatives that were presented to us. Should we ignore those, or set it -- maybe not ignore is the right word -- but maybe set aside those in favor of upcoming initiatives that will be discussed at Investor Day? Or how should we think about that June call?

Got you. So my view -- and I'll have Julia and Scott share theirs, as well, since they are deeply involved in the past work -- I think it's safe to say that the existing work will be not only continued but built upon and gain some incremental value. But I'll let the folks in the middle of it talk.

Julia?

Yes, I think as we look, we're going to talk a little bit more on Investor Day. But I think we see upside from what we've seen from the numbers that we're reconciling against versus some of the new ideas and initiatives that we started talking about. There may be some re-bucketing that exists, Helane; but besides that, I think we see only [that it's] upside, so it's great news.

Scott?

Nothing else.

Thanks, guys.

Hunter Keay, Wolfe Research.

Scott, one of the things I think you did at American well was you reduced forecast error in the revenue management tool, over the last year or two particularly. So, how is forecast error within UAL's RM tool suite? Where do you want to get it? And do you think you have the IT in place to improve it?

Thanks, Hunter. I think that there is a lot of opportunity there. We're going to actually spend a fair bit of time at Investor Day talking about this, but I'll give you a little bit of preview. I like using one example from the summer.

In July, as United was seeing stronger demand, and bookings were coming in strong at the domestic entity, tried to goose the demand and increase the amount of demand. And so we took a set of markets and didn't do anything; we took another set of markets and increased the local demand by 100% in the forecast; another set of markets, and increased in both the local and the flow demand by 20%.

Those are massive, massive changes in demand, and you would expect that to lead to massive changes in output. And at the end of the experiment, those three sets of entities, those three different experimental groups, were 0.2% different in outcomes.

What that tells you is -- and what that really is is we have a big, complicated system. We don't even have a process to measure forecast versus actual because it's so big and complicated. And the team does a fantastic job of managing on the back end, but we're hand managing a lot of markets on the back end. And as great as people are, you can't do that as well as a robust system with thousands and millions of data points can do.

Even things like this year, coming into Christmas, the demand patterns are dramatically different with Christmas on a Sunday instead of Christmas on a Friday. And we don't have any history that goes back to a time when Christmas was last on a Sunday, so we're trying to hand manage that.

All of that -- the team is doing a great job of managing that in that environment, but it is a significant opportunity. It's going to require a lot of work. It's not going to happen overnight. It is going to require some changes in the system. Our fundamental architecture, the system that we're built on, can handle it. There are no issues there. We just are going to have to do the work to build on top of that (inaudible) management.

But it will take time, and we will talk more about this at Investor Day. But I think it is a significant opportunity that's unique to United Airlines.

Yes, I'll just add -- if I can just add real quickly. Over the years, people have characterized the United network in very broad and positive terms, but yet we've never been able to realize the full potential of that. I think you just heard another example of what are the things that have been missing to really take it to [that]. So again, the level of energy and excitement in our Company is based upon -- predicated on the fact that we have some very, very, very good people on this now. And you're going to see great output over time, as Scott says. Thanks.

Yes, that's a -- I look forward to hearing more about this at the Analyst Day. And that's actually a good segue into my next question. When you guys actually -- you split the VP of Network role into two roles recently. You are going to have one person overseeing the domestic network and one person overseeing the international network.

So, to me, that says that you feel like one of those two is particularly underperforming. So, is that a fair characterization? And if so, which do you think is underperforming more, relative to where it should be: domestic or international?

I think we have a very strong international network. I think we have for many years. I think there's more that we can be doing on that side, for sure. On the domestic side I would [size] coming in, I think we thought there was a lot of opportunity there, and I think that's only been confirmed from the inside now. So Scott and I are working together with the team to understand the full potential of the domestic network, and I think we see significant upside there.

Yes, and I would just say you are reading a little much into it about the org structure, as people are -- anything like that. But we have the best international network, certainly, of any US carrier that goes -- that's -- no one would argue that. But we do not have the same kind of margins domestically or have the same kind of success domestically as American or Delta do. And we can get there.

It's another area that I think we have more upside than the others because there's a whole bunch of stuff -- it's in the management; it's in the sales; it's in the way the schedule is built. It's all kinds of stuff with the Company that have been very focused on international. But without losing any of that, I think we can improve the results in the domestic network.

Thanks a lot. That's helpful.

Dan McKenzie, Buckingham Research.

I know you are saving a lot for the Investor Day, but I'm wondering if you can share just more broadly the growth plans for 2017, and how that would break out domestically versus internationally.

Dan, we'd love to share more, but we don't actually -- just don't have it done yet. As Julia alluded to earlier, we got new people here taking a new look at some of the things. And we'll be ready to give you more detail at Investor Day, but I apologize; we just aren't ready to do it today.

Okay, understood. And then secondly here, a number of experts are ratcheting down their economic outlook for the UK next year, so just a couple of questions here. I'm just wondering if you can remind us what percent of United's revenue is tied to the UK? And then secondly, how the capacity reductions across the Atlantic are being targeted specifically?

I don't actually know what our percentage -- across the Atlantic. I'm kind of glad that I'm now at an airline that doesn't have essentially a hub there, where I was before (laughter). But it's obviously much smaller.

And on the specifics on the capacity reductions, again, that's work that's ongoing right now for 2017. So we'll have to wait. Somebody just told me it's 4.7% of revenues.

Okay. Thank you.

Jamie Baker, JPMorgan.

This first one I'll just throw out there to whomever would like to take it. When stand-alone United incurred significant labor cost escalation back in 1999, it isn't clear that any return on that investment was ever achieved.

So here we are, whatever, 17 years later, labor costs are once again rising at a material rate. Is there anything different about the industry today that gives you the confidence that your owners actually witness a return on these recent investments?

Jamie, it's Oscar. Let me start, and then I think I'll let Scott finish, given that he has a lot deeper, broader, long-term experience here. I understand the history of this. It's been told to me repeatedly as we finished our labor contracts. And I completely reject the notion that you can't have efficiency and productivity while also having customer service. I've said that constantly.

And to that end, in order to get that customer service and that productivity, we have to invest in these folks. And so, our voice are very core to our product and the customer experience. These costs -- the labor costs are market-based and costly, to your point.

Where the difference we are counting on is that over time this collaborative relationship we are building with our labor workforce, we can drive productivity. In fact, we're in this together. And some will call that naive. Some will call that -- that history doesn't prove that. But I think we're already seeing little green shoots, as we say, around that. But that's been my focus.

Now I have experts that are going to help us do that; so, Scott, would you add something to that?

Sure. I agree with everything Oscar said, and we are a service business. And how our people make the airline run successfully every day, how they interact with our customers is the most important thing that we do.

One of the things that I'm proud of, as having been a part of in the industry, is getting to the point where we can start giving back to our people and we can do great things for our people in contracts, after the 15 years that they have been through in the post-9/11 era of furloughs and concessions and losing (multiple speakers). And so, it's a rewarding to be able to actually give these kinds of raises and economic benefits back to people after all that they have endured.

I do think the industry is different today. And I think it's important to not only do great things for our people, but for our customers and our shareholders. All those things happen to go together. I think 1999 is probably not the best example of time to use, because we all know what happened in 2001, and that really triggered all the negative things that happened for airline employees over the next 15 years.

We're past that, and we are moving forward. I think we can do the kinds of things that we've done with these contracts for our people, which is fantastic, and still get to a world where we have margins that are higher than they are today and do great things for our shareholders as well.

We'll talk some more about some of those targets at Investor Day, but we're looking forward to that. But we're all genuinely happy for our people that we can offer them these kinds of pay raises and contracts.

Great. I appreciate it. And Scott, a follow-up, and this touches on Helane's question before. If you were to rank order the catalysts that are driving domestic RASM improvement, how would that look? Is it tighter aggregate supply followed by better fare fencing, followed by increases to base fares?

Or is it cessation of advantage fares, revisions to AP requirements, that sort of thing? We all know what the various levers are. And I'm not asking you to name names; I'm just wondering at the industry level what's really driving the improvement.

So, I may not break it down exactly the way you described it, but what -- I'll take a step back and say what's happened really started with deregulation and came to a head a few years ago -- that the way we fence the product, sell the product, differentiate the product changed.

And it used to be that we could use fare fences, Saturday night stays, to segment the product between business travelers and leisure travelers, and we can't anymore. And the growth of low-cost carriers has forever changed that part of the business.

We are getting better at -- even in that world -- at figuring out the segmentation, and we're doing more on segmentation here certainly at United. But I think across the industry we're getting better at that.

Capacity is still growing faster than demand. But we're making a real improvements in our pricing and yield management strategies that are helping counteract some of that. And then as Julia mentioned, and will talk more about on Investor Day, product segmentation is the huge leap forward. I think it is a new structural change that we're going to go through here at United. It will be good for our customers. It will allow us to offer low fares to people that care fully about getting the lowest price. And it will allow us to offer a better product to customers who care about other aspects of the product.

And so we're excited about that. But really this has been -- [an] industry as a journey that how do we -- changes in how we segment our product for our various customers. And we're just, I think, mostly getting better at that. Right now, it's pricing and yield management stuff that we're doing, et cetera; and product segmentation is going to kick off in earnest next year.

But those are long-tailed observations. The sense that I get is that, kind of mid-August, something really started to take place, something incremental occurred. Is that understanding of mine simply flawed? Which is fine; you've never hesitated in telling me in the past when I've been wrong.

Look, they are not all long-tailed. When I talk about changing to yield management and pricing, those are pretty short-tailed.

Okay.

And those are things that we've gotten better at in the last two years. Sort of mid-August, there was a time frame that there were some changes going on in the pricing environment, which I'm not going to talk about in detail (multiple speakers) that did happen, that I think are contributing to near -- well, it feels like an inflection point in domestic revenues. There probably was an inflection point in mid-August, as some of the pricing environment started to change at a number of airlines across the country.

Perfect. Okay. Thanks very much, everybody. See you in November.

Rajeev Lalwani, Morgan Stanley.

Scott, I know you talked a little bit about the various international markets. But maybe just taking a step back, can you just talk about international broadly, and whether or not you think overall, as we look into maybe next year, there is a path to yields being stable? Or do you think international would maybe offset some of the opportunity that you've talked about on the domestic side?

We'd have to go through it region by region, so I'll start with the best, the Latin America -- Latin America is going to be positive on both yield and RASM in the fourth quarter, so we feel really good about that market. Again, the Pacific, I think the capacity story is going to get better as we go through 2017. So while I don't have a specific forecast, if I just had to make my best guess today, we will get to a positive yield across the Pacific at some point in 2017.

And across the Atlantic, it's still going to be a struggle. It kind of depends on what happens with capacity in that entity. Lots of uncertainty still around Brexit and what's going to happen there. So I think that we will get positive in two of the three entities, and the third one is really a question mark based on what happens with capacity.

Thanks. And Andrew, just a quick question for you. Towards the end of your prepared remarks, you made a statement about I think [viewing] CapEx across commitments, et cetera. Can you just talk about what some of the range of opportunities ahead are, and maybe some of the things we can look for?

Yes, sorry, I thought you were headed to the guidance. You're talking about more broadly, right?

Right.

Yes, I think some of the -- well, look, everything is an opportunity if -- and we're going to look at everything; everything that hasn't been, let's call it, committed. Clearly we have plans; we've made commitments.

But as an example, on the fleet side, there is a window of opportunity to be able to make changes. Once you get within, let's call it, a year of delivery, then you are kind of stuck. But we're certainly looking at fleet plan. We're looking at looking at a lot of our CapEx projects that we're making, or that we plan to make, think about making. And are just reviewing it from top to bottom to see if we like what we've got coming down the pipe, and we'll make changes wherever we think it's appropriate.

I think one example would be mix of new and used aircraft. We have already started bringing in some used A319s that were acquired at attractive rates. We're going to continue to keep an eye out for high-quality used aircraft to blend into the mix of the fleet here.

So, wherever we will find those types of opportunities to reduce capital intensity, we're going to try to take advantage of that. Nothing specific to talk about at the moment. We will talk to you again on November 15. And if there's changes to be made, we'll discuss it at that time.

Thank you, guys.

Duane Pfennigwerth, Evercore ISI.

Scott, a few years ago, you said 87% of your customers at American flew less than one time a year and represented about half of your revenue, or about -- the flip side of that, making up half of your revenue. So can you say, do those statistics look materially different at United? Have you had a chance to study that customer base?

So, somebody showed me the number, and I've looked at it a little different; but it's 85% here, and it is close to half the revenue.

Thanks. And then just to stay with you, Scott -- sorry to the others and look forward to spending more time with you in November. With respect to your regional aircraft strategy, you had a captive regional at American. Just with respect to your early impressions, is it fair to say that United has not been as proactive as it could have been from a regional aircraft strategy?

If we look back over the last few quarters, regional capacity is down materially, and you are growing on the mainline. And I'm just wondering, is this optimal/ideal? Or has this been a function of supply constraints on the regional side?

Our constraints on the regional side at United are about the pilot contract and the scope. And it we are growing it, but we will be getting to the scope maximum. And I think it's fair to also say that one of the things we will likely do over time is use our regionals to fly in more of what you would think of as traditional regional markets and less in big markets.

So today we fly a lot of hub-to-hub -- between Dallas and Chicago, or between Denver and Dallas -- we fly regional jets. And that is something that is unique about United that will likely change. In hub-to-hub markets, we'll fly bigger airplanes and we'll use our regionals to go fly into places that are smaller cities, but that generate higher-yielding connecting revenues for the network. I do think it's an opportunity at United.

Can I add --? And this is Andrew, let me add --- Duane, there's been a plan in place for a while to reduce the number of 50-seaters for economic reasons. And so I think part of what you're seeing is just that plan continuing to play itself out as 50-seaters are reduced. So I don't know if it's fair to say that we've been less proactive. I think there is a plan. We're in the middle of reshaping the regional fleet, and that will continue as we move forward in the next several quarters.

That's really helpful. And then just wanted to touch on Brazil. One of your competitors noted a 30% RASM increase in the third quarter. The shape of their capacity is a little bit different than the shape of yours, but wonder if you could comment what your RASM was up in Brazil. And specifically, how much of that was in August -- Olympic spike, versus a steady trend over the course of the quarter?

Well, not that I focus on trying to beat the guys in Atlanta -- I do, by the way -- but ours was up 31%. And a big chunk of that was the -- would've been the Olympics. I don't know the exact number here at United. But as we look out to the fourth quarter, at least, we expect yields to be up somewhere between 20% and 30%.

So, I think that's a real recovery. The Olympics gave it a kick start, but it also led -- maybe because of the Olympics, it led to some real pricing changes. The pricing environment to Brazil is far, far better than it was just a few months ago. And that happened sort of around the time that you are looking, so maybe that's what caused it, but it stuck. And so Brazil is much improved.

Thanks. And just to clarify, that 20% to 30% is off of the trough, or that is year-over-year?

That's year-over-year.

Thank you.

Andrew Didora, Bank of America.

A lot of my questions have been answered. But Andrew, just wanted to touch upon capital allocation a little bit. Obviously the buybacks slowed dramatically in 3Q, but you did reiterate your focus on capital returns in your prepared remarks.

When we look at 2017 you have higher labor costs, a new fuel curve, increasing your expenses; free cash flow takes a hit as CapEx steps up. So how do you balance this capital return strategy with much lower free cash flow next year? And do you feel comfortable with higher leverage from here? Or what is the leverage to keep this strategy going? Thanks.

At the moment, we're not considering adding leverage to the balance sheet. That being said, we are going to be reviewing it in more detail in the coming quarters with our Board, and we will look at that where we think it makes sense. But at the moment, we think having a very strong balance sheet is critical. We are very comfortable with our debt levels, at the moment, and our liquidity.

As you'd noted, we do have some issues that we need to get comfortable with as we look into 2017 -- higher labor expenses, a higher fuel curve are certainly the two important things.

And as such, I think that it's likely that the pace of any buyback is going to be probably a little more similar to what we've seen in the last quarter, certainly than what we saw on the first quarter, where we repurchased $1.5 billion of shares. So, stay tuned. I think we look at that as excess cash. And when we have excess cash, how do we return it to our shareholders?

And we'll take into account all of the drivers in the business as we look forward; and first and foremost, make sure that we maintain a very, very strong balance sheet, which we think is a huge competitive advantage that we care deeply about.

So I guess with the earnings inflection next year, would we expect additional debt paydown to keep occurring at United?

Well, we have -- I don't believe we have any opportunity to reduce our debt next year, other than just by simply making our payments. We have some unsecured that's due at I think in 2018 and 2019. We have a number of EETC transactions that pay down according to the initial schedule. So I think that, at the moment, we don't see any big opportunities to just reduce the debt levels, but we're very comfortable with where they are. But we certainly are going to be mindful to keep it conservative.

That doesn't mean that we won't look at more leverage. But as we sit here right now, getting our arms around the business and trying to come up with the game plan as we go forward, which we'll share a lot of that in a month from now, I don't expect any significant changes at least in the next quarter.

Perfect. That's it for me. Thank you.

Savi Syth, Raymond James.

Just a quick question on the business or the corporate side. Just wondering if you could provide color on just what volumes -- how they have been trending. And also in the oil and gas sector, I know the drag in 3Q was -- it was a bit lower than you had anticipated heading into the quarter, but I was wondering if that was just seeing the demand recover? Or that was just better capacity rationalization in Houston and other markets?

Savi, Julia here. In terms of domestic, actually the close-in corporate bookings have really been strengthening. And even as we look back to the third quarter, as we talked about before with the strength of our domestic routes going positive, we actually saw a really steady upward trajectory on sequential year-over-year PRASM for business, just specifically actually in the corporate. So hopefully that answers your first question. Energy on the second part.

Energy was down 14% in the quarter.

Okay. And I think it came in better than expected, right? I was just wondering if that was -- it just -- you saw a recovery in demand and just more spending, or if that was just a capacity rationalization?

Yes, it's pretty much in line with expectations, so not too much of an under/over on that one, Savi.

Okay, okay. Helpful. And if I may ask, just on the non-fuel costs, just curious -- in 2015 versus 2016, [before] CASM, was there anything in particular that drove the better performance in 2015 versus the performance in 2016? The capacity growth wasn't significantly different, so I was just curious as to the variance there.

Just to be clear, Savi, are you asking about the fourth-quarter projection?

No, full year; full year in 2015 versus 2016 -- that slide that you had there.

No, I think -- let's see; 2015, certainly we had a lot of the results from project quality, which drove a material decline in our cost structure we've been able to maintain in the business. But no, I don't think there's anything unique to 2015, if that's your question.

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

Jack Atkins, Stephens.

Just going back to the June investor presentation with the $1.1 billion value creation that you guys outlined for the second half of 2016, could you give us a progress report on how much of that has been captured? And are you maybe expecting some of that to push out into 2017, now that it seems like the team is maybe taking a second look at some of those buckets?

We'll probably be able to give you a better update on Investor Day. But as I look through the items, we are running better operations; that we know. That was $100 million or so in 2016. That's one of those that's hard to go back and identify that you actually got it or not, but we're definitely running a better operation. And whether we get it all in 2016 or some of that's going to come later -- we are winning back customers, we are winning back share of high-value customers, and that's something that we feel confident that we are going to get.

Another big chunk is the slimline and upgauge program, which I think we are on track with. The cost efficiency stuff, we are on track with. So, I think most -- and MileagePlus was another big one as well, so those are ones that we know that we've achieved. So I think we're largely on track with $1.1 billion.

Okay. Thank you, Scott. And then going back to your earlier comments on the international market, and then comparing that with what you were seeing domestically, as you look out to 2017 would you expect your consolidated PRASM to turn positive in the first half of next year? Is that the message that you guys are trying to send?

I'm not trying to send a specific timing on that message, mostly because I don't know it well enough. I didn't live the history here at United of last year. And you kind of -- at least I need to have lived that history to feel confident about the timing.

I feel confident that we're headed in that direction and we're going to continue to make improvement in every quarter. But I just can't today give you, with a high level of confidence, when I think we're going to cross the zero threshold.

Okay. Thanks again.

Thank you. We will now turn it back to our speakers for closing remarks.

Thank you, Brandon, and thank you all for joining the call today. Please contact 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. Thank you. You may now disconnect.