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Operator
Good morning and welcome to United Continental Holdings' earnings conference call for the fourth 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 house for today's call, Julie Stewart, Managing Director of Investor Relations.
Please go ahead.
Julie Stewart - Managing Director, IR
Thank you, Brandon.
Good morning, everyone and welcome to United's fourth-quarter and full-year 2016 earnings conference call.
Yesterday, we issued our earnings release and separate investor updates.
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, the accompanying presentation and the remarks made during this conference call may contain forward-looking statements, which represent the Company's current expectations and/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; and Executive Vice President and Chief Financial Officer, Andrew Levy.
And now, I'd like to turn the call over to Oscar.
Oscar Munoz - CEO
Thank you, Julie and welcome to the United family.
Pleased to have you here and thank you all for joining us on our call this morning.
Our fourth-quarter financial and operating performance capped what we think is an outstanding year for our airline.
In 2016, we put into action our plan to become the best airline in the world and last year's results demonstrate we are well on our way to achieving that goal.
We plan to continue delivering on this commitment by investing in our employees, elevating our customer experience and driving strong and consistent returns for our shareholders.
If you turn to slide 4, let's review the year.
We reported pretax earnings of $4.5 billion with a pretax margin of 12.2%, both excluding special items.
For the year, we earned $8.65 per share, a 13% increase over 2015 adjusting for book taxes as a result of $2.6 billion of share repurchases in the year.
Before going into greater detail on the financial results, I want to review key accomplishments in the year, which was a year of transformation for us here at United.
Notably, we ratified new industry-leading labor agreements for all United employee groups, starting a new chapter in how we build a partnership between management and labor while driving higher employee engagement.
We also continue to build upon an industry-leading leadership team, a critical step forward in our progress as an agile and innovative leader in the industry.
We delivered significant improvements operationally, substantially increasing our reliability and customer satisfaction, as well as achieving the best on-time performance in our history and delivering the most zero cancelation days ever.
We opened several new international routes to key growing markets, introduced the new United Polaris service, the biggest product innovation for us in more than a decade and importantly, we outlined the future direction of our Company in our November Investor Day, laying out a longer-term plan for earnings growth through a number of strategic initiatives across the airline that we expect to generate significant improvements by the year 2020.
I couldn't go on without personally thanking all of our employees for their hard work and commitment in achieving these milestones.
More recently, I would like to extend my gratitude for the great work that was done during the busy holiday season.
And so with a shared purpose comes shared success and of course, with that success comes a shared benefit.
So I am pleased to announce that due to our strong financial performance, United employees will be able to share in the success as we pay out $628 million in profit-sharing for the year.
Above all, I believe we've begun to change the conversation about United from the question what's wrong to an optimistic what's next and that has been the most powerful change of all.
With that, let me turn it over to our President, Scott Kirby.
Scott Kirby - President
Thank you, Oscar.
I'd like to start by thanking our employees for their hard work over a busy holiday season.
In 2016, the United team delivered new all-time records for departure performance, arrival performance, completion factor and baggage handling.
Over the holidays, we also set new all-time records for essentially all of our operating metrics and the people of United played a critical role in connecting family and friends during the holidays.
In order to continue improving operational performance in 2017, our top focus will be on further improvements in completion factor and departure performance.
Turning to revenue, our consolidated PRASM declined 1.6% for the quarter.
We outperformed our guidance as we went through the quarter given stronger-than-expected business traffic in December.
If we are going to miss our guidance range, we certainly prefer to miss like this on the upside.
In our view, both the demand and the pricing environment got meaningfully better post-election and that strong demand trend, particularly for business travel, continued through the fourth quarter and on into the first quarter.
Looking forward, we anticipate first-quarter consolidated PRASM to be flat at the midpoint of our guidance range, marking the fourth straight quarter of second derivative improvement.
We saw strong within-quarter growth in the Atlantic, Latin and domestic regions.
The only region that didn't outperform our original expectations was the Pacific driven by significant capacity growth from both the industry and United.
During the first quarter, we are currently forecasting flat to up domestic unit revenue growth.
We expect the Atlantic and Pacific to have roughly similar year-over-year first-quarter PRASM as we saw in the fourth quarter.
We expect Latin PRASM to be up, but currently expected to be up slightly less than it what was in the fourth quarter based on the Easter shift and the fact that our Latin comps get a little harder in the first quarter than in the fourth quarter.
Turning to our 2017 capacity outlook, we expect our first-quarter capacity growth to be up 1% to 2% consistent with our full-year 2017 capacity guidance provided at Investor Day.
As shown on slide 9, we expect that growth to be biased towards higher domestic growth.
On slide 10, we have provided a brief update on some of our near-term commercial initiatives.
We are working on the network changes and expect to begin implementing changes in Chicago, Houston and Newark later this year.
We are excited to be rolling out Basic Economy later this quarter for travel beginning in the second quarter and our new Polaris product has been a hit with customers and we are excited and anxious to continue the Polaris rollout as quickly as we can.
And finally, we continue to work hard on the revenue management system.
In conclusion, it sure feels like the revenue environment turned the corner in the fourth quarter and assuming that continues, we are looking forward to positive PRASM for 2017.
With that, I will turn the call over to Andrew to go over the financial results.
Andrew Levy - EVP & CFO
Thanks, Scott.
Yesterday afternoon, we released our fourth-quarter and full-year 2016 earnings, as well as our first-quarter investor update.
I will discuss both our results and outlook today at a high level.
Please refer to those documents for additional detail.
Slide 12 shows a summary of our GAAP financials and slide 13 has non-GAAP or our economic results.
In the fourth quarter, we reported earnings per share of $1.78, up 8.5% year-over-year on a tax-adjusted basis.
For the full year, we earned $8.65 per share, which is a 13% increase year-over-year again on a tax-adjusted basis.
Excluding special items, we generated $4.5 billion of pretax income, basically flat compared with 2015 and a 12.2% margin, which was slightly higher than the 11.9% margin reported in 2015.
Slide 14 details our cost performance in the fourth quarter and full-year 2016.
While labor rate increases created upward cost pressure, we did a very good job managing the rest of our costs to a flat core CASM growth, which exceeded our initial internal expectations.
Turning to our 2017 cost outlook on slide 15, we expect our first-quarter nonfuel unit costs, excluding special items, profit-sharing and third-party expenses, to increase between 4.5% and 5.5% with 4 points of this growth due to the ratified labor agreements for 2016.
Our 2017 full-year guidance of 3.5% to 4.5% nonfuel unit cost growth is unchanged.
We expect core cost growth to be less than 1% in 2017 by meeting the cost-savings targets as highlighted at our Investor Day.
Based on guidance we have provided for costs and revenues in the first quarter of 2017, we expect our pretax margin, excluding special items, to be between 0.5% and 2.5%.
Please note our first quarter is historically our weakest quarter of the year, which is due to the structure of our route network.
In addition, this year's first quarter is even tougher as it will be a high watermark in terms of non-fuel unit cost growth due to the timing of labor rate increases and the pressure we are seeing from materially higher fuel costs.
Turning to slide 16, we ended 2016 with $5.8 billion of unrestricted cash, including our $1.35 billion revolver, which remains untapped.
As of the end of the year, our gross debt balance, including capitalized operating leases, was $16.5 billion, about $600 million less than at the end of 2015.
In 2016, we generated $5.5 billion of operating cash flow and $2.2 billion of free cash flow.
Maintaining a strong balance sheet remains a top strategic priority.
During 2016, we invested $2.6 billion to repurchase 50 million shares at an average price of approximately $52 per share.
In the fourth quarter, we invested $156 million repurchasing our shares at an average of $59 per share.
Since the beginning of our share repurchase program in 2014, we've invested over $4 billion, purchasing approximately 80 million shares, which has reduced our outstanding shares by approximately 20%.
We currently have just over $1.8 billion remaining of repurchase authority and we remain committed to returning excess cash to our shareholders.
With respect to CapEx, we are reiterating our 2017 guidance for capital expenditures of between $4.2 billion and $4.4 billion with approximately $1.1 billion from non-aircraft CapEx.
Please note our aircraft CapEx is elevated this year as we have 15 widebody deliveries scheduled.
We have secured financing for all but a few mainline aircraft deliveries in 2017 through the two EETC transactions we concluded last year and are currently exploring options to finance the 24 Embraer 175 aircraft, which we will deliver during this year.
Regarding our fleet, we maintain flexibility and are further exploring both our widebody and narrowbody fleets and order book plans.
Last week, we announced our plans to move up by one year the retirement of our 747 fleet.
This decision was mostly driven by our desire to simplify our operations where possible and enhance fleet and operational reliability.
We will now retire all 20 remaining 747s by year-end, but there is no change to capacity or CapEx as a result of the earlier retirement timeline.
Our 14 new 777-300ERs, two of which we accepted in December of 2016 and the remaining, which will come in in the first half of 2017, will essentially backfill the 747 capacity and routes.
As we refine our fleet needs and explore how best to achieve them, we are actively seeking opportunities in the used aircraft market.
Our fleet review is a work in progress and we will update you later this you when we have something to share.
In conclusion, 2016 was a very good year for United as seen in our financial metrics.
Moving to 2017, we have challenges in the resetting of our labor agreements, as well as higher fuel costs.
However, as we believe we have great opportunities as outlined at our Investor Day and look forward to beginning to execute on those plans.
I will now turn it back to Oscar for closing remarks.
Oscar Munoz - CEO
Thank you, Andrew.
Let me just close by saying we are excited about 2017.
We have the strategy and certainly the structure in place to deliver on all our commitments to not only employees and customers, but to you as investors as well.
So with that, let's turn it over to Julie and we will get to Q&A.
Julie Stewart - Managing Director, IR
Thank you, Oscar.
First, we will take questions from the analyst community, then we will take questions from the media, but please limit yourself to one question and if needed one follow-up question.
Brandon, please describe the procedure to ask a question.
Operator
Thank you, Julie.
(Operator Instructions).
Hunter Keay, Wolfe Research.
Hunter Keay - Analyst
Good morning.
Thank you.
Scott, is the share system giving you the tools that you need to execute the vision for United in both the immediate term and the long term?
And is it a permanent solution for United or is an RFP for a new PSS inevitable at some point in the next one to three years?
Scott Kirby - President
Shares is a good fundamental foundation and architecture.
We can make it a lot better for our people by putting a better front end on it, but it is our reservation system.
It is not limiting anything we do from a revenue perspective or anything like that; it's just sometimes a little clunkier to use for our people than perhaps we can make it.
We have a number of systems where our IT team, now that they are through the integration work, is hard at work on actually making the interfaces easier for people to use, but you shouldn't expect us to be changing shares and it's not a limiting factor for us at all.
Hunter Keay - Analyst
Great.
Thank you.
And then also for you, Scott, as you forge ahead with a top-to-bottom review of how things are done at United, how are you thinking about -- again, this is a near-term and long-term question -- about the business relationship that you guys have with your GDS providers?
And the specific question is do you envision a scenario at some point in the next couple of years where you continue to disaggregate your services and maybe push towards a partial content agreement with at least one major GDS provider?
Is that something that you would really highly value in the medium term as something you think you can get?
Thanks.
Scott Kirby - President
I'm not 100% sure how the situation will evolve.
There is the potential for GDSes to be partners.
That has to be a balanced relationship if they are going to be partners.
It historically hasn't been what I would describe as a partnership; it's been a lot more one way.
We do have more and more customers coming directly to us, but we recognize that there are some things that some of our customers like to use the GDS for.
In an ideal world, we'd get to a balanced relationship where the GDSes were fairly compensated for what they add, but that it was fairly compensated and that customers actually had the choice of whether to go direct or whether to use the GDS.
I think it's also incredibly important, one of the big things that we are going to be pushing on in the near term is to get adequate disclosure to our customers when they buy through a GDS.
So we are going to be rolling out Basic Economy later this quarter and starting travel in the second quarter.
To me, the most important thing that we are going to need to do on that is communicate to our customers and I assure you, on united.com, we are going to have very clear communications about what the rules and restrictions are.
I think it's going to be really hard to go through and buy on united.com and not know exactly what the rules and restrictions are.
We want all of our other entities that sell United tickets to do the same thing and we want customers to know for sure what they are buying and the GDSes can play an important role in that.
Hasn't historically been the top of their investment list, but we need them to do that and if we can create a relationship where they are effectively communicating that and we have a cost structure that is fair and balanced, I think we can continue to evolve on the path that we are on, but I would add to that with those caveats.
Oscar Munoz - CEO
I would just add on that, over the course of the year, this conversation has been going on with many of the partners in our distribution process with regards to how we want to move forward together with the emphasis on together and with the end customer in mind as well.
And so you will see some evolution and changes going forward, but again all with an open amicable conversational sort of tone as we move forward in our partnership.
Hunter Keay - Analyst
That's great.
Helpful.
Thanks a lot, guys.
Operator
Michael Linenberg, Deutsche Bank.
Michael Linenberg - Analyst
Good morning, everyone.
Scott, you called out the Easter impact I think when you were talking about LatAm PRASM.
What is it across the system?
What is the impact on a network basis?
How should we think about that, the way Easter falls this year?
Scott Kirby - President
I think we'd say the Easter impact is probably -- for the quarter -- about 30 basis points negative.
My guess is it's going to be 40 basis points positive for the second quarter, something like that.
Having Easter fall in April hurts the first-quarter revenue a little bit, but helps the second-quarter more.
The impact is bigger -- that impact is a bigger shift for Latin than for the other entities; domestic is also reasonably big, but it's not a huge issue either way.
Michael Linenberg - Analyst
Okay, very good.
And then just with respect to the moves in FX, what was that impact on the Pacific in the fourth quarter?
Do you have that?
And how does that potentially change in the March quarter because we've seen a lot of Pacific currencies go the wrong way where I feel like some of the Latin currencies have gone the right way over the last four or five months?
Scott Kirby - President
So I don't have a perfect -- a really good number for you here, but I think it was about a 1.5 point negative impact in the fourth quarter.
And I don't have a number for what the first quarter would be, but obviously the stronger dollar is going to be a negative and that has been bigger in the Pacific than other regions.
Michael Linenberg - Analyst
Okay.
Very good.
Thank you.
Operator
Brandon Oglenski, Barclays.
Brandon Oglenski - Analyst
Good morning, everyone.
Thanks for taking my question.
I guess this is for Oscar or Scott.
Can you just give us an idea of line of sight on margin improvement because I think the volatility is obviously hurting investor views of airline stocks right now?
So obviously with fuel down the last couple of years, you've had very high margins.
We know the resets in the labor contracts, but can you talk about your expectations for the interactions on some of these operational improvements and revenue and commercial improvements in the system and when you think you can get back to those levels of profitability?
Oscar Munoz - CEO
I will just kick it off real quickly and probably hand it over to Andrew to just quickly recap and remind what we talked about at our Investor Day, that we have more than several initiatives with regards to our margin improvement and the aspiration again to be leading in that space by the year 2020.
Andrew, maybe you can just remind him of a couple of the items that we are working on.
Andrew Levy - EVP & CFO
Yes, I think you mentioned a couple specific items, including operational integrity and the benefits thereof and I think that everything is, as Oscar mentioned -- we are pushing down the path that we outlined at Investor Day and we are making progress and doing what we said we would do.
Obviously, a lot of these are longer leadtime items and we are at the very beginning stages of beginning to execute on them and we expect to see a lot of positives that come from that.
Oscar Munoz - CEO
Yes, the broader conversation that will ensue I think as we have discussed as a team is someone like me coming from the outside with regards to PRASM and CASM and the focus on that at various times.
I have to say the last time I checked businesses run on, at the end of the day, margins.
That's something we are really focused on, so hopefully that gives you a little clarity, or at least [support] and that's kind of our focus on improving margin.
Operator
Savi Syth, Raymond James.
Savi Syth - Analyst
Good morning.
Just on the Pacific, another question.
I understand that FX is an unknown headwind, but was wondering what your expectations are for the performance in that entity as we go through this year, when we might see some of those supply issues moderate and maybe might get to positive PRASM there.
Scott Kirby - President
So you are right; I think the supply issues are bigger than the currency issues.
And supply gets a little bit better in the first quarter as compared to the fourth quarter and then second quarter gets better again and we expect the third and fourth quarters to get better.
So the first half of the year is going to have a lot of supply pressure, but the bilaterals, the amount of flying available, at least from Beijing and Shanghai to the US from China, is -- and the China bilateral is done, is filled by the time we get to the first half of the year.
So our expectation is that things will start to improve all else equal in the second half.
I don't know for sure when we will turn to positive PRASM, but certainly the second derivative should be positive just from a supply perspective moving forward.
Savi Syth - Analyst
Okay, thanks.
That's helpful.
And along those same lines, on the Atlantic side, I know much has been said about ULCCs, but it seems like, and maybe one of your partners, Air Canada, is adding a lot of or has a lot of goals for the Transatlantic and wanting to be a connecting hub and is adding a lot of capacity.
Is that an issue and at what point do you need to respond to that?
Scott Kirby - President
I think I am going to not be able to answer that question very directly because we compete across the board.
We need to be competitive with everyone.
Sometimes those airlines need to be competitive with their partners.
Sometimes they are not.
And we are sensitive to anyone that is a competitive threat issue for us and we will be aggressive about competing with all of them, but I can't talk specifically about anything we are planning to do with regard to Air Canada.
Savi Syth - Analyst
All right.
Got it.
Well, thank you.
Operator
David Vernon, Bernstein.
David Vernon - Analyst
Good morning and thanks for taking the question.
Andrew, I guess, I was wondering if you could provide a little commentary around where you are expecting free cash flow to end up this year relative to the $2.2 billion last year and how much of the buyback you think you can get done in 2017.
Andrew Levy - EVP & CFO
Well, we provided you a CapEx estimate for this year, but we are not going to provide you with a full-year earnings target.
So I'm not sure I can really answer that question.
As far as repurchase of shares, as I mentioned, we are committed to returning excess cash to shareholders.
We are certainly not going to telegraph how we are going to do that as far as the pace, or the price, or anything of that nature, but we do remain committed to returning excess cash to shareholders.
We have $1.8 billion of authority remaining and we expect to execute all that.
I don't know if it will all be in 2017 or not.
I think it just depends on a variety of factors.
David Vernon - Analyst
Would you be willing to supplement some of the free cash from operations with a little more leverage or are you comfortable with where the balance sheet is right now?
Andrew Levy - EVP & CFO
We are very comfortable with where the balance sheet is in general.
I wouldn't close the door out on being opportunistic in the debt market.
We are always going to remain opportunistic but, no, we think that our balance sheet is very good.
It has improved a great deal.
We are very happy where it is and I wouldn't expect to see any significant changes to the composition of the capital structure.
David Vernon - Analyst
Okay.
Maybe just one last one on the retirement of the 747s.
Are you expecting any sort of meaningful cost tailwind from that as you close out that fleet type in 2018, or any sort of writedown that would follow that, or is it going to be more normal course and folded into normal cost inflation?
Andrew Levy - EVP & CFO
No, there is not going to be any incremental writedown expense at least -- very small perhaps, but, for the most part, we've already accelerated depreciation of that asset and so the change from this year to next year is pretty immaterial.
As far as tailwinds, look, I think that modern equipment is far more efficient and that's part of the reason we are making the decision we are making is not only for efficiency, but also the operational reliability, which has an effect on both revenue and cost that should be positive by retiring those aircraft and replacing them with modern equipment.
So I think you are right that that's probably a 2018 benefit that we will see as we continue to fly these aircraft through the third quarter into the fourth quarter this year.
David Vernon - Analyst
Excellent.
Thanks a lot for the time, guys.
Oscar Munoz - CEO
Before we go to the next one, I just want to provide some additional color I guess with regards to part of David's question with regards to forecast or guidance.
At United, we are focused on transparency.
Guidance in itself will take many forms and it will serve a purpose for us.
Bear with us as we come together on the things that we think are important for you to understand and know about us.
We will provide those.
In the areas that we don't think are as critical, we will not provide that guidance, just from a standpoint of I think, as Andrew said, we want to be opportunistic in certain things like repurchases, but also we want to make sure that we are running the best possible business at all times for the value of shareowners and sometimes guidance gets in the way of that.
So you know the story.
Again, transparency is our objective and focus.
You are not always going to get the specific guidance that you want.
So just a broad statement.
Operator
Joe DeNardi, Stifel.
Joe DeNardi - Analyst
Thanks.
Oscar, to that point, I guess -- and maybe this is a question for Scott or Andrew -- just looking at your Investor Day slides, you've got MileagePlus adding about $650 million in EBIT cumulatively by 2018 and that compares to 2015.
I would imagine that out of all the initiatives there is probably the most visibility into the credit card.
My question is can you tell us what the starting EBIT number was for 2015.
How much did MileagePlus contribute to EBIT in 2015?
Scott Kirby - President
No, we aren't going to disclose that.
Oscar Munoz - CEO
That one is just a no, for obvious reasons.
Joe DeNardi - Analyst
Can I ask I guess what are the obvious reasons?
If you've got this segment of the business that's enormously profitable and you are trying to convince investors that the airline is different and the earnings and cash flow are more sustainable, why not help us understand the aspect of the business that is vastly different now than it was 10 years ago?
Andrew Levy - EVP & CFO
That is something that we are certainly -- something I have been talking about since I joined the Company.
MileagePlus is incredibly powerful, very valuable.
We are not at this point in time ready to disclose the types of information that you are looking for.
Doesn't mean we may not get there, but we are not going to get there today on this call.
We do agree it's a really important part of our business and we share your view that it is perhaps underappreciated by investors.
So agree in general with your thesis and we will see as we move ahead as to how we want to approach that.
Joe DeNardi - Analyst
Great.
Thank you.
Operator
Kevin Crissey, Citigroup.
Kevin Crissey - Analyst
Good morning, everybody.
Looking at your core unit costs, excluding newly ratified agreements, which is a quasi-new metric, if we look at the things that your costs exclude -- so it excludes fuel, labor deals, third-party business, profit-sharing and special charges -- it doesn't leave that much left.
So if I look at like ownership costs, whether it be rent or depreciation, landing fees, maintenance, distribution and the big category of other, what would you say of that core group of expenses, what is the natural inflation rate and you've guided to what your unit inflation rate is here and what is it that you are doing in those line items to have that core inflation rate be lower than it would be if it were just naturally inflating because I think of like depreciation not having a particularly high inflation rate; aircraft rent maybe less so; landing fees out of your control?
What is in your control within that core unit cost, excluding newly ratified agreements?
Thanks.
Andrew Levy - EVP & CFO
Yes, to comment on the cost ex this, that and the other, keep in mind the third party is a very small number.
Profit-sharing we like to strip out and show it just because it can move fairly materially, so we like to try to highlight that.
This year, we are trying to isolate the labor cost agreements, or the labor agreements and the costs associated with it just because it is a pretty significant cost driver for the year.
So as far as all the remaining cost attributes, I don't think I can give you a natural rate of inflation in total.
I just haven't thought of it that way.
We are going after every single line item that we believe where we can become more efficient, whether it's maintenance, whether it's station operations.
You are right, landing fees we don't control, but to some extent as you upguage, typically that drives a positive effect in terms of profitability, although maybe a little higher [landed weight].
Certainly airport facilities cost we are trying to find ways we can be more efficient.
Distribution, same thing.
Scott touched on that earlier.
So there are a lot of opportunities there that we are going after.
Overall, if you exclude the items noted, we are expecting CASM growth in 2017 to be effectively flat, which we are very confident in being able to achieve that and we expect to hopefully continue down that path in the future years as well.
I think we talked about that a little bit at Investor Day.
Kevin Crissey - Analyst
Thank you very much.
Operator
Dan McKenzie, Buckingham Research.
Dan McKenzie - Analyst
Thanks, guys.
Andrew, circling back on the balance sheet, could you update us on the principle debt that comes due this year?
Based on the last data point I have, it seems leverage should increase somewhat this year, but just setting this year aside, how should we think about that leverage, the gross leverage trajectory over the coming one to three years?
Andrew Levy - EVP & CFO
Dan, we are trying to identify the actual principle repayment amount for this year.
Pardon me -- about $850 million, yes.
About $850 million.
You are right, by the way, though.
We do expect that it probably will increase this year as we take all these aircraft that are coming due.
Much of the purchase price, greater than half, is going to be financed with debt that will go on the balance sheet and we have a few debt instruments that will be coming due over the balance of the next few years secured -- an unsecured line, excuse me, actually two unsecureds and a term loan, but those are not due for another either 2018 or 2019.
So you are directionally right though that we will be adding a little bit of leverage just tied to aircraft deliveries and the financing of those assets.
Dan McKenzie - Analyst
I see.
And then from the investor update, it looks like United is going to continue to retire the 50-seat RJs here and that's a continuing theme.
Any perspective you can give us on the pace or rate of these 50-seat RJs as we get past 2017?
It seems like the fleet restructuring part of the story, the densification, is an important part of the story here.
I'm just wondering if you can give us a little bit more perspective on how we should think about that.
Andrew Levy - EVP & CFO
Dan, I will start and maybe Scott can add onto it.
Just to clarify, we do not intend to retire the 50-seat fleet.
We are decreasing the number of 50-seaters, but we believe the 50-seater has a long-term place in our network.
As we look at our fleet plan, I talked about narrowbodies and widebodies.
The regional aircraft is part of that equation as well.
We are looking at what is the optimal number of 50-seaters.
We know the optimal number of 70/76-seaters is maxing out our scope clause limitations, which we talked about at Investor Day and we are also in the process of getting out of the smaller regional jet 37-seaters, some of which are leaving this year and some of which I believe are leaving next year.
So more to come on that on fleet as we continue our evaluation of the network and the fleet that we need in order to optimize our profitability and we will update you as soon as we have more to share.
Scott Kirby - President
That's good, yes.
Dan McKenzie - Analyst
Okay.
Thanks, guys.
Operator
Darryl Genovesi, UBS.
Darryl Genovesi - Analyst
Thanks for the time.
Oscar, in the middle of last year, you had announced the start of a comprehensive hub-and-spoke review.
Should we think of that as, for all intents and purposes, now being done and incorporated into Scott's message from the Investor Day, or is that something that is still ongoing?
Oscar Munoz - CEO
I think there was an initial thrust to get a lot of the facts and data and a general sense of direction.
I think the new team has been working with that as a base and I think while it never is actually culminating because we are always in a dynamic world, I think Scott's latest version of it is probably the more specific focus we are taking right now.
Darryl Genovesi - Analyst
Okay.
So I guess if I could call it a conclusion the conclusion would be that the current up-structure is -- it already is optimal based on everything you know today?
Scott Kirby - President
Yes.
I suspect you are trying to ask are we going to close a hub and the answer is no.
Darryl Genovesi - Analyst
Okay.
And then I guess just a quick one for Andrew.
Would you provide the year-end pension deficit and also the NOL balance?
Andrew Levy - EVP & CFO
Yes.
The NOL balance at year-end 2016 was approximately $4.3 billion and the pension unfunded amount at the end of 2016 was approximately $1.8 billion.
Darryl Genovesi - Analyst
Great.
Thanks very much, guys.
Operator
Rajeev Lalwani, Morgan Stanley.
Rajeev Lalwani - Analyst
Thanks for the time.
Scott, a couple of quick ones for you.
One, just on Basic Economy being rolled out here in the coming months for you and the folks over at American.
How impactful could something like that be to the environment?
Scott Kirby - President
Well, I will go back to our Investor Day commentary, which we think segmentation this year is going to be worth $250 million and we pegged it at $550 million for next year and growing to $1 billion by 2020.
My personal view is that those numbers are conservative, that we are going to do better than that, but that remains our official forecast.
Nothing has happened to cause us to change that in any way.
Rajeev Lalwani - Analyst
Okay.
And then that $250 million or so, that's mostly just Basic Economy this year, or is some of the other stuff coming into play?
Scott Kirby - President
Correct.
That's all Basic Economy this year.
Rajeev Lalwani - Analyst
It is?
Great.
Scott, you've historically done a very, I guess, honest job of providing your view on positive PRASM and so on.
Seems like we are there today.
Do you think it is sustainable as you look forward?
Can you continue to get better and what are some of the biggest risk items that you are keeping an eye on to make sure that that path remains?
Scott Kirby - President
Look, it feels like we are on a really good path.
It felt to me like there was an inflection point after the election for business demand.
Business demand really got stronger virtually across the board.
You combine that with a world where fuel prices are going up and I think a lot of airlines then start raising fares, so the pricing environment is improving at the same time.
I expect that that is going to continue.
There's lots of unknown risks that are out there.
We will see what happens with the economy and with confidence post-transition, post-inauguration and transition.
We certainly feel good today and our outlook is really based on the world continuing to look much like it does today and assuming that happens, I think we are going to be at positive PRASM either this quarter or certainly next quarter.
Things will be better in the second quarter on a year-over-year basis and then get again in the third quarter I think better.
Fourth-quarter comps are a little harder, but we are pretty optimistic about the year as we look out and as Basic Economy rolls in, it will start to even overcome I think some of those comp issues.
Where the comps get harder by the fourth quarter, the Basic Economy will be a countervailing balance to that.
So sitting here today, I think each quarter is going to continue to get better.
We will see second derivative improvement throughout the year.
Rajeev Lalwani - Analyst
Very helpful as always.
Thank you, Scott.
Operator
Jamie Baker, JPMorgan.
Jamie Baker - Analyst
Good morning, everybody.
Scott, in the fourth quarter, you outperformed Delta RASM in each of your operating divisions, but based on the first-quarter guide, you expect that trend to reverse despite having easier comps in Q1 relative to Q4.
So what's driving that reversal and is it possible that both airlines can be correct with their guides, or do you view them as fundamentally at odds with one another?
Scott Kirby - President
Yes, so, first, I would disagree with the statement that we are expecting to do worse than Delta in the next quarter, though I recognize our two guidance points are there, which gets to another point.
In this industry and on calls like this, we spend a lot of time focused on our forecast of guidance and the 2 point PRASM ranges that all of us get -- I bet if you go back and look at history, I bet we miss it 40% of the time.
The reason is because we don't have good visibility into the balance of the quarter and I will just give you a little bit of perspective on it.
In the fourth quarter, when we were on our earnings call, our booked RASM for December was down something like 18% to 19%.
So we were 18% to 19% behind and we were forecasting that we were going to end the month down 4%.
That's calendar -- day/week adjusted by the way, so it doesn't tie to other people's calendar numbers.
We actually ended the month down about 1.5%.
That was a big swing, but when you are down 19% at the time of the earnings call and you are guessing down 4% and you say will I actually be down 1.5% or will I be down 7.5%, that's hard to know and we have poor visibility.
In the fourth quarter, we were assuming that December was going to be the weakest -- weaker than October at least and it turned out to be better.
Delta said on their earnings call for the fourth quarter that they were assuming December was going to be the best, which was different and we turned out to have -- Delta turned out in the fourth quarter to be right on the trajectory and we wound up outperforming them.
My guess is the same will hold true this quarter.
Our current forecast is that January is the best month and that March is the weakest month.
March, by the way, is booked 15% behind on PRASM right now.
The good news is yield is booked ahead and we are behind on load factor and we are expecting to make that up and get back to close to flat, but there is a lot of room left to go between here and there.
So my guess is that the real answer to your question is we are not very good at forecasting because the data is more variable than we would all like to believe.
I would add one other point, that is you hit on it by going by region.
It's interesting to look mathematically at the results for us in the fourth quarter versus Delta where we beat them on the domestic RASM by 1.5 points, in the Atlantic by 3.1, in the Pacific by 3 and in Latin America by 2.1 points, but overall only by 1.1 points.
That's a little frustrating and it really speaks to the fact that just our geography is different.
We have less exposure to Latin America, more to the Pacific.
That trend is going to continue in the first quarter and probably into the second quarter.
The good news is I think that starts to reverse in the third and fourth quarters and the Pacific hopefully will start to outperform.
We will be overlapping Latin America.
But our core performance -- in the fourth quarter, we were, in each region, between 1.5 and 3 points better and hopefully we will produce similar results in the first quarter, but we will see.
Jamie Baker - Analyst
Excellent.
I appreciate that.
I sense that I may have hit a nerve with that, but the response is very [disclosive] and very useful.
The second question on margins and maybe this is for you Scott, maybe for Andrew, but, as you know, there was no relative improvement in the fourth quarter.
You are not guiding for any relative improvement to either Delta or the industry in the first quarter.
That's fine.
The Street actually has your margin gap to Delta getting about twice as bad in 2017.
So the question is is it still United's position that we should view 2017 as a transition year?
You should be excused from margin mediocrity, or does your plan envision any second-half relative margin strengthening?
Scott Kirby - President
Jamie, you are trying to rub nerves.
What I would say is, first, in 2016, you strip out fuel hedging, so you strip out the fact that Delta lost a bunch of money last year hedging fuel, which is probably the right way to look at it.
There was some margin gap closure.
It wasn't big.
It was 30 points last year.
It was 40 points from 2014 to 2015 versus American.
At least based on assuming fourth-quarter [hits] consensus, there would have been a 120 basis point improvement versus American 2015 over 2016 and an even bigger improvement 2014 over 2015.
So there was progress being made.
If you look at our first quarter, we have a headwind, at least relative to Delta, that our labor costs kick in right away so we are going to be up something like, I don't remember Andrew's exact number, but 350 basis points of CASM from labor and Delta is 125 or something.
Delta's big pay increase comes in April 1, so that is just a timing issue.
I very much believe that we are on a path to close the gap.
Everything we said at Investor Day I feel more confident today the more I know that we are going to do it.
It's not going to happen overnight.
Basic Economy is an example of one of those big things that's going to be a big step function increase for us when we roll it out and start having it flying in the second quarter.
Feel very strongly that we are on the path that we laid out and that this is a team that is going to deliver and by 2020, we are going to have the best margins of the big-three network carriers.
Feel really good about the path we are on despite what people might want to look at, the second or third derivative of margin changes based on forecast margins quarter to quarter.
Oscar Munoz - CEO
At the end of the day, while we appreciate being held accountable for our actions and our words, we constantly have said that that's proof, not promise and so we will keep delivering and inevitably everyone will agree, but with regards to the aspiration, it is clearly not one of mediocrity.
I think we have said that before and again, I will just echo Scott's words with regards to the strategy and structure we have in place to get that done.
So keep asking your questions, Jamie, and we will keep answering them.
More importantly, we are going to keep delivering to the point that we convince others to buy our facts and our proofs.
Jamie Baker - Analyst
Excellent.
Thank you both.
Appreciate it.
Operator
Jack Atkins, Stephens.
Jack Atkins - Analyst
Good morning.
Thank you for taking my questions.
First one here for Scott.
Scott, how should we think about the potential for you all to revise your capacity growth plans as you move through 2017 if we continue to see an acceleration in the unit revenue environment?
Asked another way, can you help us think about the PRASM or margin level that you all need to see before you start thinking about accelerating capacity growth versus moderating it?
Scott Kirby - President
Well, that's not really the way we think about it based on like system-level PRASM.
We do bottoms-up analysis and our capacity is not dictated from me, or from Oscar, or from anyone that's in the room here today to say our capacity is going to be X, Y, Z based on PRASM.
It's a bottoms-up forecast.
That's the right way to do it.
It, by the way, is not the way it's been done at United historically, but we are going to do bottoms-up and build and if there are opportunities then we will fly them and when there's places that it doesn't make sense, we will stop flying.
We will be disciplined about looking at the financials of each route individually and so really it's not going to be top-down-driven.
We probably right now have a little more uncertainty than we would normally have and that uncertainty can go both ways, plus or minus, just based on all the changes that we are making, the reviews that we have done, the hub structures that we are changing.
We are still working through a lot of the bottoms-up.
While we conceptually know the direction and the vision that we have for the future, the exact timing and when it's going to go and if it will work or not is yet to be determined and so we are going through a bottoms-up process market by market and hub by hub.
Jack Atkins - Analyst
Okay.
Thank you for that.
Last question here just to follow up, given the strength that we've seen in the US dollar post the election, fluctuations we've seen in foreign currencies, obviously, that has an impact on passenger revenue overall, but can you speak to the changes in demand patterns that you are seeing, if any, due to the fluctuations that we've seen in currency?
Scott Kirby - President
I haven't looked at it enough to tell you that we have seen anything of significance where I think you are implying for example reselling more point of origin in the US instead of point of origin foreign countries.
If we are, it is not data that I have seen, so no conclusion from us.
Jack Atkins - Analyst
Okay.
Thank you.
Operator
Helane Becker, Cowen and Company.
Unidentified Participant
It's actually Connor in for Helane.
So business yields, obviously, outperformed your expectations in the fourth quarter, but I just wanted to talk a little bit about the demand side.
What is your expectation for corporate travel growth in the first quarter and what was it in the fourth quarter?
Scott Kirby - President
We don't have specific expectations for corporate growth that we try to forecast, or if we do, no one has ever told me about it.
It's been positive.
We saw -- post-election we've seen positive business demand, positive business growth.
First half of the year has started strong.
We've had so far in January RASM has been up every single day except for two.
One of those two was January 1, which was down something like 20% because it was Sunday versus the Sunday last year, very different and then we had one other day that was down 1.3%.
That's indicative of strong business demand and close-in demand, but I don't have a specific forecast for what corporate demand is going to do.
It's strong right now.
Oscar Munoz - CEO
And you see the same data with regards to Business Roundtable and all those different surveys that are out there.
You have consumer index, which is positive and then you also have just business sentiment being higher.
So we are aware of that same issue, but, as Scott said, we are seeing some of it in our business as well.
Unidentified Participant
Okay, great.
Andrew, just on the fleet a little bit, I know you don't want to make a commitment until later in the year, but can you just talk a little bit about the widebody fleet?
So I know you are taking out the 20 747s this year.
Are there any big retirements that you expect in 2018?
The reason why I am asking is just because I'm trying to match up your order book with your expected retirements just so I can see if there is an actual potential deferral or whatever that you could possibly do later on.
Thanks.
Andrew Levy - EVP & CFO
Well, I would first start out by saying that we would like to reach a decision on fleet as soon as we can, so we are not holding back until later in the year; we are just doing the hard work to make sure that we make the right decisions.
So as soon as our work is done, we will share it.
We, at this point in time, other than the 747 fleet, we do not have any retirement plans for the rest of the fleet.
That being said, obviously, those are some of the things that we are talking about as we review the fleet because we are looking to not only make decisions for the next couple years, but looking out many, many more years into the future.
So there will be more to share as time goes on and we have concluded our work, but other than the 747s, the rest of the fleet we expect to continue to operate.
You have information on the delivery stream that we have out there at the moment.
As we mentioned, anything that we can look at because it's far enough into the future is part of the review that we are conducting and so there may be changes, but we will see and we will let you know as soon as we do.
Unidentified Participant
Great.
Thanks, guys.
Operator
Duane Pfennigwerth, Evercore ISI.
Duane Pfennigwerth - Analyst
Thanks and congrats, Julie, on the move over.
All of the revenue questions so far this earnings season have been a little less insightful without you on the line.
I wanted to follow up on Jamie's question.
Just with respect to margins, and I think so much of the conversation is relative, but I guess I would take absolute.
What are you driving the business to begin to stabilize and expand margins again?
Is it fair that this is completely off the table every quarter of this year, or are you driving the business to expand margins this year?
Scott Kirby - President
On margin expansion, we all believe that we are going to be able to expand margins.
That doesn't mean it's going to be an exact trajectory of it's going to get 50 basis points better this quarter and 50 basis points next quarter.
There is a lot of volatility in that.
We think we are on a path to expand margins and with all the stuff we laid out at Investor Day, that's not just relative, but that's also in absolute.
In the first quarter of this year, we got a big headwind from the labor deals and from fuel prices, so it's going to go negative for us.
It's going to go negative for everyone in that quarter, but we think we are taking a much longer-term view about the margin trajectory and we think we are on a path that's going to get to sustainably higher margins, but it is not going to be an exact every single quarter it goes up because there is just too much volatility in the business in the short term.
Duane Pfennigwerth - Analyst
So margin expansion is off the table this year, in any quarter of this year, or that is too strong a statement?
Scott Kirby - President
That's too strong a statement.
Oscar Munoz - CEO
Way too strong a statement.
Andrew Levy - EVP & CFO
We've given you guidance for the first quarter and really nothing else.
We've given you full-year guidance, but the answer is we don't know.
We are certainly going to try to enhance margin.
That's our number one focus is to drive margin higher and we believe we can get there.
Duane Pfennigwerth - Analyst
And then, Scott, maybe just big picture, there's been some consolidation touching some carriers in SFO.
You've had some low-cost carrier access in Newark.
Can you quantify these headwinds or tailwinds in your revenue trends into what you can see so far?
Scott Kirby - President
I'm not going to quantify it, but I will say that we are going to compete aggressively on both of those fronts.
Duane Pfennigwerth - Analyst
Okay.
Then just lastly on Atlantic, it feels like you may be sandbagging most egregiously there.
I don't know how it can't get better with comps as weak as they are and with capacity coming down.
Is there anything that we might be missing in that perspective?
Thank you.
Scott Kirby - President
Well, I hope you are right.
Duane Pfennigwerth - Analyst
That's it?
Comps get about 600 basis points easier; your capacity growth decelerates, so how do we get to the same outcome for 1Q?
Scott Kirby - President
Look, I hope you are right.
I don't spend as much time trying to make sure that that -- trying to -- you spend more time trying to make sure that the forecast is as close as you can get so your model is right.
I spend a lot more time trying to maximize revenue and so I hope you are right.
Duane Pfennigwerth - Analyst
Thanks for taking the questions.
Operator
Thank you.
Ladies and gentlemen, this concludes the analyst and investor portion of our call today.
We will now take questions from the media.
(Operator Instructions).
Susan Carey, Wall Street Journal.
Susan Carey - Media
Good morning, everybody.
Scott, I want to come back to Basic Economy with you.
You talked about incremental revenue I believe of $250 million this year, $500 million in 2018 and [2021 bill].
Is this all from Basic Economy and can you tell us when the rollout is going to be domestic only?
Do you have plans for it to roll out internationally?
Lots of questions.
Scott Kirby - President
Yes, so our numbers are more -- in this year, it's mostly about Basic Economy, but moving forward it's also about having Premium Economy and it even includes things like once you've got more products, I think you'll have more customers buy actual paid first-class tickets because once they've got the option of Basic Economy, Main Cabin, Premium Economy, first-class, the first-class price now looks a whole lot closer to Premium Economy and so people today are looking at what is a [facility], a Basic Economy price versus first-class.
That differential is big, so there is a bunch involved in our number that's not just Basic Economy or even Basic Economy and Premium Economy.
As to rollout, we are going to start selling it later this quarter and the first travel will be in the second quarter, at some point in the second quarter.
So we are still working through all the final -- make sure everything is done; make sure it works right and -- but coming soon.
Susan Carey - Media
But is it going to be domestic only at the outset?
Scott Kirby - President
Sorry, Susan; I forgot that part.
At the very beginning, it's going to actually be only one station.
Susan Carey - Media
Which one?
Scott Kirby - President
It's Minneapolis.
We are going to roll it out in Minneapolis.
We have service to all of our hubs from there.
We have a great team there who have some history with us of rolling out new products and so we are going to roll it out there and just make sure everything works.
Then we will roll it out to the rest of the domestic system.
We expect to have it in the rest of the domestic system in the not-too-distant future and then we will roll it out to -- we also intend to roll it out to near-international, so places like the Caribbean, as an example and we will contemplate long-haul international after that.
We don't have a plan one way or another on that, but we expect it to get rolled out across the entire domestic and near-haul international system not too long after we launch it, assuming it is going well.
Susan Carey - Media
Thank you.
Operator
David Koenig, Associated Press.
David Koenig - Media
A follow-up on Basic Economy.
American just announced details of their Basic Economy offering, including a date for putting that fare on sale and they said this is an issue that you caught some flak over.
American says its flight attendants are not going to monitor whether those Basic Economy passengers put their personal item in the carry-on bin.
How is that going to work at United and what have you learned from the public reaction to your proposal so far, what you have said about it so far?
Scott Kirby - President
Well, that is absolutely true that we are not going to ask flight attendants to monitor.
What we will do is collect the bags, the size of carry-on bags, like a rollerboard, we will collect those at the gate and if a customer does get to the gate, which we think we will be able to screen most customers and keep them from getting to -- in the lobby, we will be able to get the bag to the lobby -- but if a customer does get to the gate, they are going to be charged at the gate a bag fee plus a handling fee to have gate check for that bag and so they just won't be on the airplane, those bags, so there is nothing for the flight attendant to monitor.
Now I suppose a customer could put a personal item like a purse in the overhead, but -- and fine, but we are not going ask our flight attendants to attempt to monitor anything and we are going to leave our flight attendants to deliver the great customer service they do today and actually this makes their job better because a lot of times they are stuck trying to help move bags around when the cabin is full and that's a difficult part of their job and we are going to minimize that happening with Basic Economy.
David Koenig - Media
It sounds like you've slowed down the whole rollout here.
Is that because of the reaction when you first disclosed some of the details around your --?
Scott Kirby - President
We haven't slowed anything down at all.
We are making sure we get it right.
We have even as late as this week had more tests on making sure that we are communicating it clearly to customers when they purchase.
I said earlier on the call that to me is the most important thing that we are doing is making sure our communication to customers is crystal clear.
The second big thing that we are doing is making sure that our airport team has done an incredible job and had some really clever ways to make sure that we keep bags -- get bags all in the lobby, but to make sure that we are going to be able to implement this operationally and do so smoothly.
So no slowdown at all.
We are just making sure we get all the Is dotted and Ts crossed.
David Koenig - Media
Okay.
Thanks, Scott.
Operator
Michael Sasso, Bloomberg News.
Michael Sasso - Media
Could you just talk about -- I think you talked in the recent past about beefing up your offerings out of O'Hare, maybe adding some additional connecting locations to O'Hare, particularly from some smaller spoke cities and such.
Can you talk about your plans for that, what you've done, how expansive you expect that to be?
Scott Kirby - President
Well, we have already started adding some in places like new service to San Jose.
I'm not sure when our next schedule is going to get published, but when we have our summer schedule, we will expect to have a few more destinations and a few more frequencies, particularly in some of our competitive markets and that's something that I think is just every season and every schedule change, we are going to continue to be growing here in Chicago.
We are excited about the future here.
We think there's great opportunity for us and we are going to start implementing some of that this summer and it's just going to be a continuous process for several years.
Michael Sasso - Media
And just a follow-up, I think somebody mentioned that you are doing this partly in response to American and some growth that American has done in Chicago and will you seek to much American's growth, or the number of connections or whatnot they have in Chicago?
How does this relate to what American has done in Chicago?
Scott Kirby - President
Well, I don't know where you heard that from.
I don't think I said anything like that.
We think we have a great opportunity.
We have a better and larger hub here.
We do have a better product.
We have great people.
We have better reliability in Chicago than American Airlines and so we think that's a growth opportunity for us to go out and win here in Chicago and we are going to do that.
Operator
Edward Russell, FlightGlobal.
Edward Russell - Media
Thank you for taking my question.
There has been some discussions of management headcount reductions recently.
Could you provide some more detail on what functions are being reduced and how many employees are going to be leaving the Company?
Oscar Munoz - CEO
Over the course of the year, we've talked about the fact that our structure has to follow our strategy and post the work that we did at Investor Day, we've been reorganizing our folks specifically to align with our customer initiatives, with our margin initiatives.
We have created a Chief Customer Officer, for instance.
We have bifurcated and focused our financial organization to be more directly impacting both the commercial and operational side separately.
There's a host of things, but [enough to meet] that that have progressed.
In that process, we've also found some bureaucracy and some redundancy in certain areas and so while there has been some exits of a relatively small number, we've had equal or greater impact by a lot of promotions, a lot of job transfers and a lot of job specificity focused on the things that our strategy follows.
So as the overall numbers, there is no goal; there is no specific number to report.
We are just trying to again focus our great Company on the future.
Edward Russell - Media
Okay.
If I could ask one follow-up.
I've heard some discussion of say the fuel hedging team is going to be reduced or eliminated.
Can you talk about is that happening as you shift away from fuel hedging, or other departments that are going to be impacted?
Andrew Levy - EVP & CFO
So we are no longer hedging fuel.
We do have a very small number of folks that are involved in that and I believe they are going to be reassigned to other areas within the Company.
That was never a large number of folks in that group.
Oscar Munoz - CEO
Again, just one thing I neglected to say and I think it's a very important part of that.
In the organizational effectiveness initiative that we are going through, the front line, our front-line managers, our customer (inaudible) are not impacted in any way.
In fact, we anticipate hiring thousands of people as we do every year with regards to refreshening our front-of-line organization.
Edward Russell - Media
Got it.
Thank you.
Operator
Ted Reed, TheStreet.
Ted Reed - Media
Thank you.
I have two questions.
First, I was surprised that your margin in first quarter is in single digits.
Why is that?
Is there something structural at United or seasonal that keeps your margin that low in the first quarter?
Andrew Levy - EVP & CFO
Yes, we have less exposure to Florida and the Caribbean and so the first quarter is always the lowest quarter for United compared to Delta and American, but it is just about where our hubs are.
We don't have a hub in Atlanta or your hometown of Charlotte.
Ted Reed - Media
Okay.
Thank you.
Secondly, Scott, you talked about changes at San Francisco.
Is that because San Francisco is working so well that you don't need to change it, or is that one of the hubs you were saying on the investor call that the flights are too closely aligned with international and not with domestic?
Is that not true in San Francisco and in connection with that, do you still plan to continue the policy of increasing flights to interior China?
Scott Kirby - President
We've been pleased with the results of the interior China so far and so we are -- I am at least agnostic about whether we continue to grow there.
If it is working, we will and if it's not, we won't, so it all depends on the results.
I do think that there's opportunity for us in San Francisco.
We are a little more facility-constrained there and so figuring out how we can get more gates to grow and add capacity is one of the critical things that we have to do.
It's easier to talk about some of the other mid-continent connecting hubs as opposed to San Francisco where we've got constraints, but it's a fantastic market for us.
It's the best Asian gateway of any gateway in the US.
We have a great customer base there; we have a great team in San Francisco and we would like to find ways to get more gates and actually grow there.
Ted Reed - Media
All right.
Thank you, Scott.
Julie Stewart - Managing Director, IR
Thanks to all for joining the call today.
Please contact Media Relations if you have any further questions and we look forward to talking to you next quarter.
Operator
Thank you.
Ladies and gentlemen, this concludes today's conference.
Thank you for joining.
You may now disconnect.