聯合航空 (UAL) 2017 Q3 法說會逐字稿

Good morning, and welcome to United Continental Holdings Earnings Conference Call for the Third Quarter 2017.

My name is Brandon, and I'll be your conference facilitator for 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, Julie Stewart, Managing Director of Investor Relations.

Please go ahead, Julie.

Thank you, Brandon.

Good morning, everyone, and welcome to United Third Quarter 2017 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 3 of these documents are available on our website at ir.united.com.

Information in yesterday's release and investor update, the accompanying presentation and 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 earnings 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 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 Financial Officer, Andrew Levy.

In addition, we have Executive Vice President and Chief Operations Officer, Greg Hart; and Executive Vice President and Chief Commercial Officer, Andrew Nocella, in the room to assist with Q&A.

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

Thank you, Julie.

Good morning, everyone.

Thank you as always for joining us.

Yesterday, we reported pretax earnings of $1 billion with a pretax margin of 10.4% excluding special charges, as you can see on Slide 4.

Our earnings per share was $2.22 excluding those special charges.

In the third quarter, we repurchased $556 million of stock at an average price of $67 per share, bringing our year-to-date repurchases to about $1.3 billion.

Andrew Levy will provide a little more details of the financial results here shortly.

I think in the quarter, we certainly faced a number of challenges, including a series of historic storms and natural disasters coinciding with the usual busy summer travel season.

I have to shout out for our employers because they all impressively overcame these challenges, delivering record setting operational performance.

And not only did our employees manage to keep our operations moving through these 3 devastating storms, they really helped manage together to help one another and be part of one of the largest relief and recovery efforts in United history.

So I want to thank all of them for demonstrating the level of energy and team work and morale that embody the shared purpose that we have at United.

As you know, a big driver of this new spirit at United is what we termed an energized culture and really increased employee engagement around all areas, but evidenced specifically by this year's operational performance, which has been just simply outstanding.

This can also be seen on how our employees are prioritizing and elevating the customer experience, and I want to highlight a few of those on Slide 5 that are gaining traction.

We continue to improve our mobile tools, such as the in the moment care, that app that allows our employees to more quickly and effectively solve customer interruptions, such as the ones faced this quarter from the severe weather.

Also, to proactively address travel disruptions, we put together a team dedicated to providing creative solutions to ensure customers reach their final destinations.

They're available to all stations worldwide, 24/7, 365 days of the year.

Now evidence of progress on our customer service can be seen in the dramatic decline in the third quarter of our involuntary denied boardings, or IDBs, which are down 92% over last year.

And we also have a remarkable 28 days this quarter with 0 IDBs.

And for context, prior to this year, United didn't have a single day with 0 IDBs.

Now if you look at the business more broadly, we do feel good about what we're accomplishing at United, but we also know that we have a long journey and a lot of hard work ahead of us to realize our potential.

The third quarter was a challenging environment, probably due to macro events such as the storms I mentioned as well as things like geopolitical tensions causing softer demand on Guam.

But we've also made the strategic decision to compete aggressively with ultra low-cost carriers, which is essential to the long-term health of our business.

And so today, while earlier we promised the investment community an update on our 2016 Investor Day initiatives -- Scott will do that in a moment.

At a high level, our Investor Day initiatives are on track with the exception of segmentation, where incremental contribution was temporarily offset by broad competitive issues.

And also, new issues have emerged in this year, and our goal is to produce meaningful absolute and relative margin improvement.

That is something that remains steadfast on our focus.

And as we continue on this journey, it's critical for us in trying to properly prepare for and mitigate the headwinds that we cannot control, which are often many; correct for the ones we can control; and we have to be able to distinguish between both of those.

And so we know we can control how we implement our initiatives, like Basic Economy.

We know we can control how we control our new revenue management system.

And we certainly have control over the pricing that we're doing right now with ULCC.

And that is what we're doing.

In addition, we are taking a very, very rigorous approach to reviewing our costs as we look forward to 2018 and beyond in our timing process.

So that's the general update of the quarter.

With that, I'll turn it over to Scott for some more details.

Thank you, Oscar, and thanks, everyone, for joining today.

I'm going to take a slightly different approach this quarter.

We'll start by providing the traditional brief revenue update and spend some time talking about how the business has evolved since November of last year.

Turning to the revenue environment.

Our PRASM was 3.7 points lower year-over-year, and this included about 1 point of storm impact.

Domestic unit revenues were weaker than our initial expectations due to the storms, more aggressive ULCC pricing in our hub markets and temporary share loss during our initial Basic Economy rollout.

PRASM performance in Mid-Atlantic and Latin regions was in line with our expectations.

The Pacific was a lot weaker than we initially expected and declined more than 10% due to softer demand in China, Hong Kong and Guam.

And while Guam is only around 1.5% of our ASMs, demand in Guam has seen a very sharp decline, and we're scaling back service between Guam and the markets in Asia.

Looking forward, we anticipate fourth quarter PRASM to be down 1% to 3%.

We expect October and November to be close to flat, which obviously implies a large forecasted PRASM decline for December.

For what it's worth and I've seen in some of the analyst reports that doesn't imply that December will be down exactly minus 6. I'd say close to flat in October and November but doesn't mean it is exactly 0, and the midpoint of our guidance is minus 2. There's a lot of rounding in all of those numbers.

However, our forecast for December really is driven by the calendar and the fact that the Christmas outbound starts a lot later this year.

A lot of schools, including my own kid, don't get out until December 22.

So that means 2 things.

First, the offpeak period between Thanksgiving and Christmas, which is the lowest RASM period of the year is extended by a week.

And second, much of the holiday return is pushed into January.

So a lot of uncertainty around our December forecast, but our forecasted PRASM decline really isn't about anything systemic.

It's just the vagaries of the calendar.

Now I'll take a step back and look at 2017, which has been an eventful year for United.

We started the year focused on several key areas: Improving the operations, which includes improving the culture for our employees and customers; rebuilding our network in a profit-maximizing way; and executing our Investor Day initiatives as we work towards our goal of improving absolute and relative margins.

Turning to Slide 9. Our operations team continues to do truly a phenomenal job.

This quarter was a great example.

And despite experiencing some devastating storms, our team and all of the employees of United were able to rally together to keep the operation moving and deliver top-tier operational performance.

As challenging as the recovery efforts were, we continue to set new company records in the operation.

We managed to set the best-ever third quarter consolidated departures within 0, with the month of September having the best-ever month in consolidated D0.

We also set a record for the best-ever Star D0, which are the first flights to depart at the beginning of the day, and they set the stage for success throughout the day.

Following second quarter's industry-leading departure performance, third quarter D0 was second best in the industry among our peers.

This type of operational performance is really outstanding, particularly given the 4-day closure at our Houston hub.

We had the lowest rate of consolidated airport operations and flight operations delays ever.

These records show how committed we are to making United a best-in-class airline and how resilient our operations become.

A big driver of our operational improvement is energized culture and increased employee engagement that Oscar talked about earlier.

Our operational performance is evidence that our employees are prioritizing, elevating the customer experience.

On the network, we put some key faces -- some new faces in key leadership positions and are really just getting started on our network improvement.

Consistent with what we outlined at Investor Day, our top priority in network is to strengthen our hub.

We started earlier this summer by improving the competitiveness of our product and schedule.

In October, so later this month, we'll re-bank Houston hub.

And in 2018, we expect to re-bank Chicago and Denver.

Lastly, on Investor Day, all our initiatives are generally performing as expected, with the exception of segmentation due to temporary competitive headwinds from the Basic Economy rollout.

Our Basic Economy rollout went well operationally; but from a revenue perspective, started out rocky.

Now that it's competing with similar products from our large competitors, we're hopeful segmentation will start to contribute as we originally thought it would.

We're in the early stages of our revenue management improvements, and we're encouraged by the initial results.

We continue to optimize our yield management posture.

And our new system, which is called Gemini, it's rolling out as planned.

Initial results in test markets are encouraging, showing large improvements in forecast accuracy and a 1% projected improvement in RASM.

Internally, we have a lot of work left to do on the yield management system, but I'm really proud of the team.

I look forward to Gemini's full deployment in 2018.

Despite the momentum of these initiatives, as you can see on our results, there have been offsets.

Higher cost on labor and fuel, combined with revenue headwinds in the second half of the year, more than offset the value of our initiatives in 2017.

Some of those headwinds we've talked about include ULCC pricing, which is a strategic decision that we know is the right long-term decision for United as well as exogenous events like the unprecedented series of storms, softer demand in China, Hong Kong and tensions around Guam.

In summary, we feel really good about things in our control.

Many of our initiatives are long tail, and we're headed in the right direction.

As Andrew will mention shortly, we're also taking a very hard look at our cost base, which is an important driver of our ability to improve margins going forward.

Turning around the operations, driving culture change, improving our network and product and improving the customer experience are all things that are important to our ability to build a great airline.

While there have been some bumps in the road in 2017, we're on a path to achieve our financial goals, and we'll work to navigate through unforeseen challenges along the way.

I'll turn it over to Andrew now for financial results.

Thanks, Scott.

Yesterday afternoon, we released our third quarter 2017 earnings and our fourth quarter investor update.

I'll discuss both our results and outlook at a high level and please refer to those documents for additional detail.

Slide 12 is a summary of our GAAP financials and Slide 13 shows our non-GAAP results.

We reported earnings per share of $2.22 excluding special charges and pretax income of $1 billion, which represented a 10.4% pretax margin excluding special charges.

Turning to Slide 15, nonfuel unit costs increased 2.6% on a year-over-year basis, which is at the better end of our September 6 updated guidance, mostly due to the timing of certain maintenance events that will appear in the fourth quarter.

We expect fourth quarter nonfuel CASM ex to be higher year-over-year by 2.5% to 3.5%, which brings projected full year 2017 nonfuel CASM ex to the high end of our prior guidance of between 2.5% to 3.5%.

There are 4 principal drivers that changed since we issued that bridge.

First is Harvey, where we continue to incur many costs including some additional costs -- extraordinary costs despite lost ASMs.

Second is in our maintenance operation, where we experienced more higher-cost maintenance visits than we had forecast earlier this year.

Third is higher depreciation and amortization expense, which is mostly driven by changes made to our depreciable life assumptions for our fleet to ensure consistency across sub-fleets and changes to salvage (inaudible).

It is also higher because we continue to purchase aircraft off-lease, which has driven higher D&A expense with a future offset in rent savings.

Lastly, we had additional expense associated with new regional flying that started in September.

While this additional 50-seat flying comes with additional ASM expense, it does enable us to execute our strategy of increasing [cash and carry flying] into smaller cities from places like Chicago.

We understand how critical cost control is to 2018, and the team is doing a ton of work to identify opportunities to improve cost performance as part of the budgeting process.

These range from flying in the network in more cost-efficient ways to reevaluating why we spend money in certain areas that have always been that way.

At the same time, we know there are some headwinds in 2018.

While we don't have the same pressures from new labor contracts that we had in 2016 and 2017, we do face some headwinds such as a higher mix of 50-seat flying, rising medical and dental costs, higher pension expense and rising airport rates and charges, all of which we are working to overcome.

Turning to Slide 16.

We ended the third quarter with $6.3 billion of unrestricted liquidity, which includes our $2 billion untapped revolver.

We are comfortably in excess of our stated liquidity target range of $5 billion to $6 billion, and our balance sheet remains strong.

During the quarter, we raised $400 million of unsecured debt at an interest rate of 4.25%.

We also contributed $160 million to our pension plan, and that brings us to our expected contribution of $400 million for full year 2017.

Turning to Slide 17.

During the quarter, we repurchased $556 million of our shares at an average price of just over $67, bringing our year-to-date repurchases through the third quarter of 2017 to $1.3 billion.

Cumulatively, since we began repurchasing shares in the third quarter of 2014, we have invested $5.4 billion to buy back our stock, retiring 26% of our shares outstanding.

As of the end of the quarter, we have $553 million remaining of repurchase authority.

For 2017, we continue to expect adjusted capital expenditures to be between $4.6 billion and $4.8 billion.

As we announced in early September, during the quarter, we finalized negotiations for our A350 order.

We are pleased to have reached a great outcome for United-Airbus annual [orders].

There are 3 key changes.

First, on timing, we have deferred deliveries by 4 years to begin in late 2022 and that will continue through 2027.

Second, we will take the A350-900 instead of the larger A350-1000 variant.

Third, we added 10 aircraft for a total order size of 45 aircraft.

The delivery timing, model type and order size are all a better fit for our future widebody fleet needs and allow these aircraft to be used for either growth or as a potential replacement for 777-200ER aircraft as this sub-fleet will begin to approach retirement age around the same time we start taking delivery of the A350s.

Finally, during the quarter, we finalized agreements to take 2 additional A320 in 2017 sourced from used market.

Slide 18 has a summary of our current guidance, including fourth quarter's projected fuel price range using the October 12 curve.

The range provided for capacity, revenue and costs imply a fourth quarter pretax margin between 3% and 5%.

Looking forward, cost control is an integral component of our path to margin improvement.

And as I mentioned earlier, we're in the middle of our 2018 budgeting process and taking a very rigorous approach to stem future cost inflation.

With that, I'll turn it back to Oscar.

Thank you.

I just want to thank once again to our employees, our customers and certainly our investors.

I think as Scott mentioned, there have been some bumps in the road 2017, but we are on a path to achieve our financial goals and we will work hard to navigate through any unforeseen challenges that come along the way.

But at the end of day, we're excited about our path forward and just try to reward all of you along the way.

So with that, let me turn it over to Julie, and we'll be happy to take your questions.

Thank you, Oscar.

First, we will take questions from the analyst community.

Then we will take questions from the media.

(Operator Instructions) Brandon, please describe the procedure to ask a question.

(Operator Instructions) And from Buckingham, we have Dan McKenzie.

Scott, I guess, the first question, really, is for you.

There's a lot of noise in the revenue trends for the third and fourth quarter, which makes it a little hard to think about core underlying revenue trends.

And so if we just go back and strip out acts of Mother Nature and other idiosyncratic stuff, how are you thinking about the true core steady-state revenue trends sequentially?

Are they getting better, worse or going sideways?

Yes.

It is -- I agree, Dan, it's really hard to strip out, so much have happened in the third quarter this year, stuff that's happening in the fourth quarter this year and stuff that happened last year in H1.

So I think that the core trends are largely the same.

The third quarter wasn't as bad as it appeared is mostly what that means.

And as we go into the fourth quarter, it's more representative of what the real demand trend is.

The one thing that I think is improving, at least for United in particular, is we had, in late July, a huge change in the pricing philosophy at one of our ultra low-cost carrier competitors.

That was a big shock to the system, where walk-up fares wound up going down over the course of a week or 2 by 80% or 90%.

And that takes a little time to adjust to.

While fares remain at those levels, we are better at managing in that environment, I think, today and will be in the fourth quarter than we were before.

But if you sort through all the bad stuff that happened, I think that the fourth quarter is a little bit better than the third quarter even on core underlying trends, mostly due to the changes we've made in being able to manage better in a pricing environment that's remained consistent with ULCC.

And there's also less industry capacity in the fourth quarter than there was in the third quarter, particularly as Southwest is growing less.

I see.

And I guess, if I can go back to the ultra low-cost carrier pricing just for a second.

I know at the time of our last earnings call, that was impacting 3% of revenue.

And I think that, that stepped up and impacted a bigger percent in the quarter.

How has that progressed?

Is it still affecting a larger portion of the revenue base than it was at the time of our last earnings call?

Or how is that as we think about that heading into 2018?

Yes, it is.

At the last United earnings call, we didn't -- I don't think we talked about, Spirit at least, at all and really didn't think much of it.

And -- but of course, the day after their earnings call, fares were down dramatically and it continued to go down dramatically.

And so it did spread.

It's kind of been constant, I would say, for the last 6 to 8 weeks where fares got down -- there's fares -- walk-up fares as low as $10, and that $10 including the online convenience fee or whatever they call those fees, which are lower than I've ever seen and including the time that we were engaged in stuff like this at my prior employer.

And -- but they haven't gone up, but they haven't gone down.

You won't see it down to $10 at the walk-up fare.

There's not much room to go down, particularly when that fare started at $170 2 months ago.

So really not much changed.

There is a higher percentage of markets that are involved in the really low fares.

The percentage has been about 17% of our revenues that comes from markets where ULCCs fly, but the amount that is exposed to this kind of pricing -- that's just the domestic system by the way.

But the amount that's exposed to this pricing is obviously less than that.

It's not 100% right now.

From Macquarie Capital, we have Susan Donofrio.

I just wanted to follow up on Dan's question, and that is you talked a little bit about better managing against the LCC pricing.

I'm just wondering, is that because you're getting more comfortable with some of your new pricing levers, so as far as fine-tuning Basic Economy and also your new yield management system?

I mean, how can we kind of think about that?

Because I'm looking at markets and it definitely looks like you're not as widespread with respect to some of the pricing initiatives.

Yes.

There's a whole bunch of things, Susan, that are going on.

One, Basic Economy is a great tool.

And we've been experimenting with the difference in prices between Basic Economy and Standard Economy.

The yields -- it's not really the new yield management system yet but will be and we've got some really cool stuff going on that we are experimenting with that we'll roll into the new yield management system that can be particularly targeted in these markets.

One of the big things that changed is -- for us, in this environment is actually the impact on flow traffic.

And so as the fares go down like this, we're selling a lot more local demand on some of these flights.

And what happens is we wind up spilling off connecting revenues.

And that takes a little time to adjust to.

What we do essentially is we're going to be selling more seats in the local market, will continue and that maintains that competitive posture in the head-to-head local competitive market.

But we can change our yield management posture on the connecting flows because essentially we have now fewer seats to sell in some of those connecting flows.

And so there is improvement in the local market, but the connecting markets are places we can improve as well.

And we just have -- we have far more data today than we would have had a few years ago to help us manage this.

And we also have, as you mentioned, the tools, Basic Economy, that's a real help.

That -- in the very short term, when things -- when fares go down by 90% over the course of 2 weeks, that takes a little time to adjust to, but we're getting a lot more adjusted as we go forward.

From JPMorgan, we have Jamie Baker.

Scott, a question in the hypothetical.

If you were given the chance to renegotiate one contract from scratch, but you were given a choice between the current Chase credit card agreement and the existing alliance contract with Air Canada and Lufthansa, which would you pick?

I'm just thinking longer term, which of these 2, unless you think there's a third more material option, might afford the greatest amount of potential margin upside, that sort of thing.

Yes, you're trying to box me in.

So I'll say there's opportunities on both.

In the dollar value, the larger opportunity -- and it is not necessarily a renegotiation, but the larger opportunity is absolutely with our credit card partner, Chase.

And we are working on that.

This is my and Andrew Nocella's third and fourth time through one of these, as is also the people on the Chase side, not their first time going through something like this with a partner.

We've had great success in the past getting some win-win situations with our banking partners, and I believe and hope that we will get there with Chase.

On both sides, we are saying all the right things.

We're big organizations that don't move -- both big organizations that don't move overnight.

That's been true everywhere else that I've been as well.

And I think that we will get to ultimately a much better results.

It is -- certainly, it's a great partnership, but it is a disadvantage for us as we sit here today compared to our competitors, and one that has a lot of opportunity.

We also have opportunity on the alliance front.

And it's not so much about renegotiating the JVs.

It's about realizing the potential of the JVs.

And in that front, all of our partners are engaged and anxious, and we're making real progress both in South America and across the Atlantic in particular.

We, today, are getting better results in those geographies than we otherwise would, even though we haven't done a new deal just because we're working much closer together and we're [full stop and in line] and feel good on both of those fronts that we're going to have improvements.

But the credit card deal was obviously bigger.

Got it.

And a second question.

On the topic of "natural share," is it possible to quantify the progress that you've made or that you expect to make by, I don't know, call it, summer of next year?

Are you going to be halfway there, 10%, 90%?

And also, does re-banking help contribute to natural share in your model?

Or is achieving natural share strictly an exercise in growth?

Obviously, I'm trying to back in to when your capacity might moderate back to something closer to the industry average?

So I'm not going to give you an answer today on what the ultimate end game on capacity is, but re-banking does help with natural share.

When we talk about things -- when we talk about natural share, it means not just our share in our hubs, it actually, frankly, means more our share in all of the nonhub cities around the country, so at Des Moines or wherever.

And winning your share in Des Moines is not about carrying people from Des Moines to Chicago, it's about carrying people from Des Moines to the world.

And when we have a less efficient hub structure in Chicago, when we fly those people to Des Moines and we miss 10 or 15 connecting markets, then we lose out on share in a place like Des Moines that would just be natural if we had a hub structure that worked better.

So some of what we are doing to regain -- a huge part of what we're doing to regain natural share is re-banking the hubs and driving higher levels of connectivity, which will increase your share in a market like Des Moines without having to increase capacity.

From Stifel, we have Joseph DeNardi.

So Scott, the 4Q guidance implies full year operating margin of about 9.5% if you adjust for the weather in 3Q.

By my math, about 3.5 points of that is from selling miles to Chase.

So why shouldn't I be worried that at 3% GDP and $50 oil that core airline business is only earning 6% EBIT margin?

Does that type of return require a different strategy than what you're pursuing right now?

Well, one, you can't divorce those 2 things from each other.

The...

Well, to be fair, Scott, (inaudible) last quarter when you said that you have about 1.5 margin gap versus American because of your deal.

Well, I'd say you can't divorce those 2 things from each other because one of the disadvantages that we have and that Chase has is that if you're living in Des Moines, Iowa and you're picking a credit card and we are the #3 player in Des Moines, Iowa, you're more likely to pick 1 of the other 2. And that is not incumbent just on Chase to fix, but on us to help address.

So part of winning back natural shares is not just about the core airline business, it's also about improving the credit card business.

And I think of those 2 as fundamentally tied together.

It is true that a big part of our earnings -- and I'm not agreeing necessarily with your numbers, but a big part of our earnings is coming -- comes from selling miles.

But that's just -- that is a core part of the business, and you can't, say, strip that out and then what your growth will be at the [airline].

But that said, we do think that there's opportunity to improve that part of the business, and it's one of the big areas that we're focused on.

We can't do it unilateral.

There's some things that we can do unilateral, but we're working with all our partners.

But Chase is by far the biggest and working with them to get results that will look more like to what our competitors.

And I think both of us agree -- I actually know.

Both United Airlines and Chase believe that we can do that and that we can get into a world where we can -- that's good for Chase and good for United Airlines that generates that kind of results, and we're marching towards that.

It will not happen overnight, but we are moving in that direction and I think we will eventually get there.

Okay.

Andrew, it looks like you guys recently made some changes to MileagePlus award valuation.

You increased the price on some saver awards, added a fee to cancel.

It seems like those decisions benefit the airline business because the miles flow through at a better rate, but they effectively devalue the currency for consumers.

So how far can you push that before people stop signing up for the card?

And why shouldn't I be worried that, unless your disclosures improve and the transparency gets better, the marketing company won't continue to subsidize the airline?

Well, we have made some changes as we've gone through a dynamic type of pricing environment, but we've been really careful on how we do that to make sure that our customers still see the great value.

And I don't think that's changed.

There were a few price points that went up.

There's now many price points that are actually lower as they reflect the true availability on particular flights.

So I don't think what we did over the last 2 weeks is going to change the dynamics at all.

From Deutsche Bank, we have Michael Linenberg.

Just, I guess, 2 quick ones here.

Andrew, you talked about pension expense being a headwind in 2018.

How does the expense in '18 -- at this point, how does that compare to '17?

And then how does that expense compare to what your anticipated contribution will be in '18?

Do you have a sense on that?

Yes.

Mike, it's about $70 million of inflation that we're expecting at this point in time.

Some of that is based on a forecasted discount rate, which we can only forecast at this point, our actuaries can only forecast.

That will get kind of locked down at the end of the year.

So at the moment, a little over half of that is due to a forecasted lower discount rates applied and the balance would be lower mortality and expenses associated with that.

And then just the contribution, I guess, it was, what, $400 million this year?

For next year, what should we expect?

Mike, historically, we're kind of hesitant to give anything on 2018 just yet, but we certainly talked before about $400 million a year.

And at this point, I don't see any reason to expect that, that number will be much different next year.

It will depend on a number of factors, but I think it's safe to assume it will be similar to what we did this year.

Okay, great.

And then just to Scott, the PRASM forecast for the fourth quarter, how much of it is FX?

Is there an FX boost in there that we should see?

It's pretty small.

About 1/4 -- about 25 basis points of tailwind in that.

From Wolfe Research, we have Hunter Keay.

I think I have 2 questions for Oscar.

Oscar, if we put aside any relative comparisons to your competitors, for your margins to go up next year with current fuel, your RASM has to be something like 40 or 50 basis points better than your CASM ex fuel.

So I'm asking you now, will that happen?

And if you want to put that -- answer a different question, would you say United is a RASM or a CASM story in 2018?

And I would encourage you not to say both.

Well, I appreciate the encouragement, Hunter.

I think we're a margin company as we have been for, I think, focused on that for quite some time.

I think this is a good opportunity for us to just discuss the broad advancements that we've made as a company with a strategy and a management team and a focus that I think is -- holds for a very bright future.

I think the interim periods are difficult to discuss because we're making investments.

We are -- I think the way I've said it earlier is that we dug ourselves historically in a little bit of a competitive hole as a company.

And in order to get ourselves out of it, we have to do something a little bit extraordinary than others.

And so that's where we're focused on.

We're focused on doing that, but at the same time, from a long-term perspective, on margin capability.

So as we head into 2018, one of the reasons we're not talking too much about it is that we are deep, deep at work with regard to that.

How do we get the kind of growth that has good margins?

And how do we get into the bowels of our cost structure and ensure that we make that?

So it is about the net margin number.

And so it's a difficult period for us as we work through all this information.

The team has only been in place really for a year, and we're just getting our mojo working.

And again, I think Scott said it in regards to -- our initiatives are long tail.

And what you see vis-à-vis our competitors is that they've been together as a team and with their focus and their initiatives for quite some time, and they're beginning to see the benefits of that.

We just have a little bit more work to do, and we'll continue to ask for a little bit more patience.

But there is no change with regards to where we think our relative and absolute margin improvement need to be to compete in this industry.

Okay.

All right.

But I think people are really trying to buy into the story because they believe there's a CASM story here, at least -- I was at least.

And the excess capacity growth has not translated into better CASM ex despite the fact that your ops are better.

Higher completion factor drove a lot of the CASM B -- or the [ASM B].

And yes, there's the onetime items in 4Q, I get that.

But how can we have any confidence in the 2018 CASM ex story, particularly given the headwind that you guys went out of your way to lay out on this call.

So how -- can you at least maybe bracket in, like a high end of CASM ex for us so we have some sense how to think about you guys next year?

Not -- Hunter, not today.

And trust me, this is not a "we're not telling you because we don't want to." We are, as Andrew Levy talked about, deep in the middle of this stuff.

In fact, I just saw the thick book that was on Scott's desk that I went through briefly yesterday.

We are taking a very different approach that Andrew Levy has taken us through with regard to some of this.

And again, we need to ensure that we go through the detail before we are -- before we can tell you anything at this point.

So -- but I'll keep working through this.

I just a need a little more time.

We've always been about proof, not promise.

And so right now we've done a little bit more promising, and the proof will come as we get more into the details of this.

From Cowen and Company, we have Helane Becker.

So here's my 2 questions.

One is, I think, relatively easy question.

When you think about, Scott, the ultra low-cost carriers that you're competing against, are you just talking about domestic?

Or are you including international in there?

So that if you look at like Newark-Athens as an example, I think Emirates is in there and they would be considered a low fare airline, maybe not low cost.

So can you parse out what the impact of something like that would be on your business?

So we have the same approach to all competitors, low cost or not.

Emirates is a unique example.

We feel really good about our ability to compete with ultra low-cost carriers domestically or with the -- ex Air Berlin or Norwegian or anyone like that, that has a -- that is not subsidized by their government.

Emirates is a completely different story because they are subsidized by their government.

And we can compete and I think we can compete effectively and win against any one, but we can't compete against the governments.

And so our approach to competition is the same everywhere we fly, but you brought up a unique example of a subsidized carrier.

That is unfair competition.

But is it -- aren't China Eastern and China Southern subsidized as well?

Because all your...

I don't know -- it's really not to the same extent and certainly they're not doing -- they're not allowed to do things like fly from Newark to Athens.

From UBS, we have Darryl Genovesi.

Scott, when you rolled out Basic Economy, you would have been forced to choose some spread between how you price Basic Economy and how you price your regular economy product.

I would imagine that early on that spread is somewhat of a guess.

And as you -- and you gained more experience with this.

I mean, I guess, would you expect to be revenue managing that spread over time?

And could you envision a scenario where it's much different than it is today?

Yes is the short answer.

We're already doing that in a number of markets.

So we do think that there's an opportunity there, and we're experimenting with it as we sit here today.

Okay.

And then, I guess, on some of your longer-term initiatives.

I think you said the only one that was behind was the segmentation initiative.

I guess, if I look at the chart that you showed in November, I think you showed about an incremental $1.4 billion from this initiative kicking in next year.

Should we be thinking of that number as still largely representative of your view of how these initiatives will sort of play out altogether in total?

Well, we're trying to get away from being quite that prescriptive.

But we do think that we are largely on track with the exception of segmentation, that we're largely on track for those initiatives.

It's also important, I think, to point out that the Investor Day initiatives -- well, we thought we went out of our way to say these are not -- that these are versus what would have happened had we not done them.

So -- but they were not absolute increases compared to the prior year numbers.

A lot of people have interpreted that a different way.

And what that means is that there are other things that could be headwinds or things that could be tailwinds.

This year, we have more headwinds, things like Asia.

I'm hopeful that Asia next year will actually flip to being a tailwind because those kinds of geography-driven issues ebb and flow around the world.

But we do believe that we are, basically with the exception of segmentation, on track for everything that we've talked about.

And timing may be a little earlier or a little later on different ones.

We have some of that this year, although they largely balance out with the exception of segmentation.

But we think that we're on track for these initiatives.

Okay.

I think that's an interesting perspective about what you just said about people sort of taking these to mean -- it will be something absolute versus something incremental, what you otherwise would have done because if I look at the 2018 consensus earnings before tax number, it's about $3.1 billion, which is actually below the $3.2 billion that you have in this presentation from initiatives, which it would imply that the Street thinks that you would be breakeven or even at -- operating at a modest loss without these initiatives.

Yes.

I mean, you've got a bunch of numbers that are kind of apples and oranges that we neither endorse nor don't endorse so I'm not sure how you did the analysis, but I'm not sure I'd agree with the conclusion because I'm not sure I agree with all the input numbers.

From Citi, we have Kevin Crissey.

I'm going to follow up on Darryl's because that was essentially the question I was going to go with.

If we're not going to use those specific numbers -- and I understood.

I think we try to understand at the time that those numbers were relative to what you would have otherwise done.

And I think Darryl's point is fair that given the results and being on track mostly, it implies that the company was going to have some tough times were it not for these initiatives.

What I'm hoping to do is maybe give you guys an opportunity to tell us, reframe this in a different way.

Coming and saying "we're on track for these initiatives but don't mind these numbers" doesn't feel right.

It feels like you need to like reset expectations, whether it'd be not giving specific numbers for individual initiatives or somehow saying, hey, resetting a bar here for these initiatives because I don't think those numbers mean very much to anyone anymore.

They seem very optimistic, and there must have been some significant headwinds that we were unaware of.

So maybe I'm hoping for you to give us an opportunity to come up with a more specific reason.

How are these initiatives going to play out?

I don't know.

You got the gist of my question, I guess.

I'm not sure I actually do understand the question.

But I mean, it sounds like you wanted us to give you a new set of numbers that you believe.

Well, yes.

Numbers -- I mean, those numbers were -- it was 1 point -- Darryl is right, it's like $1.4 billion between 2017 and 2018 and we'll back out segmentation entirely and call it $1 billion.

I don't know what $1 billion headwind year-over-year should be there that we shouldn't be able to tack those on.

So if you are on track with these initiatives, why aren't we adding $1 billion?

And I don't think that's the right number.

So therefore, these numbers are not terribly useful.

So what I'm looking for is kind of more useful numbers.

Okay.

Look, we're not going to read through the Investor Day numbers on this call today.

As I look through and as I think through what the Investor Day initiatives are, the network initiatives, we feel good about we're going to redo Houston banking -- a lot of this is about the re-banking structures we're doing in Houston on October 29.

Chicago and Denver are going to be a little later than we originally planned just as we work through all the operational stuff on that.

The fleeting is going be a little bit different next year because we just had change in the fleet plans with 50-seaters.

MileagePlus should go up.

We had a hit this year from MileagePlus.

It was related to the old deal.

We're repaying back essentially what's a loan.

It's like a classified loan, I guess, but it was essentially a loan.

We're paying back miles at lower rates, that was pretty straightforward, should happen.

I talked about the revenue management stuff at my opening commentary.

We feel pretty good about that.

We've got it delivered, and there's a lot of water that still has to go under the bridge on that.

We feel good about that one.

And we're doing a lot of work on the cost side.

And I think that we'll do well there.

Headwinds remain of that overall macro environment that applies to everyone, the ULCC environment.

Andrew talked about some of the cost headwinds.

We don't know for sure the specific we'll do next year.

But we kind of walk through each one of those.

I'm not sure the exact -- I don't have any exact number to update on today.

But on those initiatives, we feel pretty good about delivering on those initiatives.

And Kevin, this is Oscar.

I think you've raised a great point, and I understand -- we understand it completely.

And I think the conundrum is how do we give you a sense of the results of these long-tailed initiatives and provide you a little bit better transparency.

And so it's a good point.

It is what we are in the middle of today trying to understand -- not trying to understand, but better understand these issues and how they play out given all the things that have changed since we've given those things.

So we need to package all that together, and that's what we're doing as we put together our plan.

But again, it's going to make sure we -- I understand your point completely and does the rest of the team, and thank you for that admonition.

Appreciate it.

And maybe it's for Scott.

Can you talk about -- I know you're probably not going to give specific capacity guidance for '18.

But how do you think about it and the need to -- how do you think about capacity growth for 2018 overall?

Look, we are still going through it, and it's driven by a view of what's going to maximize our margin performance, and every day we're trying to do that.

And so when we look at anything either additive or subtractive, it's about what the marginal RASM is going to be and what's the marginal capacity is going to be at.

From Raymond James, we have Savi Syth.

Scott, I might have missed this.

Did you talk about what you expect regional trends to be that's going to be embedded in the 4Q guidance?

We didn't talk about it.

But we -- essentially, there's some onetime things that happened last year that are going to cause our reporting results to differ slightly from what I'm going to say.

But the core performance is going to be that domestic and Atlantic get -- are our 2 best regions, we think, and do better.

Pacific will probably have the largest improvement despite the fact that Guam is terrible.

So core Pacific, we are at least forecasting is going to improve.

And Latin will continue to be strong.

But as it overlaps the recovery and the sharp improvements in RASM last year on a year-over-year basis, we expect it to be less strong.

Okay, got it.

That's helpful.

And Andrew, if I may quickly ask you, I know you realize -- you're focused on liquidity targets, but could you share your thinking on how you think about debt levels and the use of cash here?

Well, Savi, our view on the balance sheet is unchanged.

We have -- we certainly like to see a higher ratings of our debt, but we feel very comfortable where we are.

We have not decided to try to strive for investment grade.

We may decide one day that, that is something that's worth doing.

But at the moment, we're very comfortable with our debt levels.

We're able to raise capital at extremely attractive rates.

And we're very comfortable with where we are on the balance sheet, which is taking into account not just debt levels, but also the liquidity and the access to capital that we have.

From Bank of America, we have Andrew Didora.

Scott, there's obviously a lot of seasonality in your business with the pretax margins in 4Q and 1Q that can significantly below 2Q and 3Q, again much more so than some many other airlines out there.

Is there anything you're doing or can do to help mitigate this?

Is it something in terms of how you focus new capacity or maybe even the re-banking of the hubs, anything that you're doing in order to try to fix this seasonality?

Well, we are going to have higher seasonality than the others, driven by the fact that we are a more business-oriented airline and we have less exposure to Florida and the Caribbean, which the less exposure to Florida and the Caribbean means that our fourth and first quarters are relatively weaker.

There -- so our seasonality is going to be higher.

We are working on -- another thing that we do that's unique at United is our peaks are higher and our valleys are lower.

And should we change those 2 variable to help with cost, that drives higher CASM at United.

But it's easy to say that, and harder to go through all the analysis and some work to address it.

But I do think, over the coming years, you'll see us with less variability in our seasonal scheduling, which should be a cost benefit, but we're in the early stages of figuring that out.

But we will always have higher seasonality because we have lower exposure to Florida and the Caribbean.

Understood.

And look, I know in terms of 2018 CASM, you're not really prepared -- you're obviously not prepared to talk about that right now.

But just at Investor Day, you did speak about a 2018 to 2020 unit cost CAGR of sub-1% on just 1.5% capacity.

I would think you'd grow much faster than this in 2018.

But with the headwinds, Andrew, that you kind of outlined in your prepared remarks, do you think this CASM outlook that you provided last November is at risk right now?

So we're just not prepared to talk about 2018.

Look, there's a lot that's happened, a lot of changes that have happened since we provided that forecast over a year ago.

We're working through it right now.

And it's not as simple as you grow more CASM, X goes down.

I mean, on an Excel spreadsheet, it does.

But there's a lot of inputs.

Some of them have nothing to do with whether you grow faster or not.

I mentioned one of them, airport rates.

When airport rental rates go up, it doesn't matter how much you fly, you just pay more.

And there's a ton of other cost items, some of which do go down when you fly more -- if you fly more.

With aircraft utilization, it drives down your ownership cost on a PRASM basis.

There's a ton of inputs.

We're going through all of that, and we're just not ready to give detailed commentary on 2018 for costs.

We're in the middle of our budget process.

We're going at it in a very, very detailed way and trying to get to the best answer that we can get to that's going to maximize margin for United.

And we'll comment on that further when we're ready to.

Yes.

And this is Oscar, again.

Again, I just -- and I know this won't help matters much, but I know everybody's getting scared about the fact that we're not going to get these numbers because of some ominous reason.

I cannot fully express to you how much in the middle of things that we are.

We historically -- and I have a lot of talented people with a lot of experience in this industry who know the relationships and how they're supposed to work, and we also have a very, very large company with a lot of places that were digging into.

And so -- but let us do a little bit more of that work.

And when we come of it, we'll be able to sort of provide you some better information around what we're thinking.

From Barclays, we have Brandon Oglenski.

And look, I try not to be too critical on these things, but I've just heard a lot of conflicting comments today, so I do want to poise my question this way.

So Oscar, you've been in the transportation business for quite some time now.

You know a lot of the investors here probably more than a decade.

And you know that when you put out public statements about earnings improvement or efficiency targets, people are going to measure you against those.

And so when you put in your slides today that Investor Day initiatives are generally performing as expected, but then we hear on the call, well, we don't really want to focus on those numbers, you guys are drawing a focus there and then saying we shouldn't be focused on it.

So I guess, I just want to focus on your comments today.

You said on the call, "I'm focused on absolute and relative earnings performance." When I look at your absolute earnings are down more than your competitors.

Your relative margin gap is widening, not narrowing.

And more importantly, for the investors on this call, the stock is now down, call it, 20% to 25% versus the market this year.

So from an investor perspective, what is it that happened this year that we didn't anticipate at the Investor Day last year?

We knew a lot of the labor costs are going to be here.

And what is going to incrementally drive positive change for your shareholders where we can start to address some of these absolute and relative gaps?

And can you commit to driving higher margins in 2018, barring some sort of change in the macro?

Brandon, again, the things that have changed, I think, we've noted and discussed, a. B, it's hard to prove to you how well some of our initiatives are working or have the fact that they are working, and the headwinds have been significant.

The inconsistencies that I think you're picking up are just a function of time and structure.

We are in the middle of a planning process.

It is a quarter that we just had and a quarter that follows, and we're really getting to the bottom of all these things.

So gosh, I wish I had more information to share with you at this point.

We are committed to the things that we've said, the absolute and relative margin growth.

It's just in this interim period, we are having some difficulties explaining this to you clearly.

And we get that.

Let us do a little bit more work.

And as we get better clarity on the things that we're doing, we will do what's required to make sure that we regain the trust.

But more importantly, beyond the communication and these quarterly updates, I think the execution of all these initiatives is something we have to continue to focus on.

And so I appreciate your concern and your pointed question and appreciate your sentiment, and we'll just move forward.

Well, if you don't mind, I just want to follow up because you did mention you're going to control what you can.

And in your opening comments, I think you mentioned revenue management, your rollout of the Economy Basic, managing the fare structure of ULCCs.

But notably absent from that note -- listen, I live in an Excel spreadsheet, right?

I don't run an airline.

I'm not trying to say I know better than you guys.

But at a simplistic level, we see domestic revenue growing, let's call it, 4% this year.

You guys chose to grow your capacity, let's call it, 5%.

From our perspective, say, that's going to be dilutive growth.

So why was not capacity part of that discussion of what you can control?

And is that something you're looking towards in '18 to maybe rethinking?

It's not.

We have dug ourselves in a hole from a competitive perspective, and the team that we've got in together here is about regaining that competitive advantage.

And we have that focus on margin.

But at the end of the day, we feel that the moves we've made in the marketplace are creating a more positive potential for revenue increases in the future.

And so it is a focus of ours and it's one that we're committed to.

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

We will now take questions from the media.

(Operator Instructions) From Bloomberg, we have Michael Sasso.

I'll open this up to whoever wants to take it.

I've been interested in the Polaris international cabin.

There's been a lot of blog posts in the last few weeks suggesting that you're delayed in your lounges, at least there was some delay early on with the seats.

It's been really hard from my perspective to kind of assess how it's doing.

I've not seen much guidance or input into whether it's helping you win over customers on these international routes.

Can you just talk about, one, how was it -- one, did you maybe announce this too early?

There's some sense that maybe people are confused, why can't they see it.

Should you have been a little bit more restrictive or whatever in how you went about announcing this?

And number two, just give us a sense how was it doing.

Is it winning over any customers?

Sure.

So this is Andrew Nocella.

The way I'd describe it is, first of all, whenever you change out a seat -- and Polaris -- there's many components to Polaris.

The seat is one of them.

For an airline the size of United, it takes a number of years.

So the airline announced the new seat and has launched it.

And by all of our measurements, where we're flying, it's doing very well.

We survey our customers all the time about the cabin and comfort, their overall experience.

And all those things are going really well onboard our 777-300.

And we just got our first 76-seat have been out there.

We'd like it to go much faster, and we're looking at ways to do that all the time.

But when there's hundreds of aircraft involved, it's just going to take a few years to roll out.

And we're well on our way at this point.

But we have to remember there's many other components to Polaris.

There's the new refined food offering.

There's new amenities, blankets.

And all those things are available on all United intercontinental flights and are being well received by our customers.

So we're well along the way.

We'd like to go faster, but the feedback we've gotten to date, I think, has been fantastic, about the seat we put on board and the changes we've made.

And you'll [look] more and more of it over time as we get more aircraft converted to include the seat as well as all the other Polaris experiences.

And then is there any -- how would we know how it's doing?

I mean, I guess, it wouldn't be broken -- I'm sure it would be broken out in the results or whatever.

But is there -- how could observers tell how it's doing financially and if it's helping you financially?

Yes.

We wouldn't release that type of initial data.

And you're talking about, at this point, a small number of flights across the global system.

It would be hard to even internally for United to estimate how 1 or 2 routes are doing relative to the overall system.

So that's something we wouldn't release.

But look, we survey our customers all the time and we're trying to understand what they like about the service.

And we've made incredible headway.

And our performance on those aircraft that have the Polaris seat as well as the overall Polaris experience is better than the experience on aircraft that don't.

So we know we're moving in the right direction.

From The Street, we have Ted Reed.

I'd like to ask Scott a couple of questions about the ultra low-cost carriers.

Mainly in the current quarter, are they doing anything different?

Or are you going to do stuff differently?

And also, I'd just like you to explain to me a little better the impact on connecting traffic.

So not much changed in the last 6 to 8 weeks in the ultra low-cost carriers, and I don't know if things will change going forward.

The impact on connecting traffic is -- if we're flying between Chicago and Fort Lauderdale and they're now lower fares, we carry more local traffic between Chicago and Fort Lauderdale.

That means we have fewer seats available to carry from Fort Lauderdale to Des Moines, actually, because we're more likely to be sold out in the local market because we sold more seats in the local market.

And so that's how we've changed our yield management posture with regard to connecting revenues, recognizing those.

Essentially, there are fewer seats available for connecting traffic than they were before.

And last thing, what are the hubs where they have the most impact?

Yes.

Probably the most flights in Chicago is #1 for us.

All right.

Thank you 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.

Thank you.

Ladies and gentlemen, this concludes today's conference.

You may now disconnect.