聯合航空 (UAL) 2017 Q4 法說會逐字稿

Good afternoon.

Since we're an airline, we're going to go with T-0.

And if you're late, you're late.

Welcome.

This is my first event as the Head of IR at United, and I am excited to be the newest member of this team.

It's great to see a lot of familiar faces from my 16 years on the buy-side, and it'll be great to work with all of you from a different seat.

Our priority is to transparently communicate our goals, and we're going to work on doing more transparency.

You're going to see some of that tonight.

But also, we want to let you hold us accountable for our financial targets, and we're going to spend time focusing on that tonight as well.

I think at the end of the night, you're going to see tangible evidence of a shift in that communication, and I look forward to having that discussion with all of you.

Before we begin today's presentation, as safety is our highest priority, we like to provide a safety briefing.

In the event of an emergency, please exit out the stairwell directly behind you and down the stairs.

Once outside, proceed to the corner of Wall and Broad on the northeast side of the building, where we all -- where we will meet and do a roll call.

If you're CPR or first aid certified and willing to assist in an emergency, please identify yourself now.

An AED device is located in the coat room on this floor if needed.

In case of an earthquake, duck under a table or other stable object.

Clasp your hands and use them to cover and protect the back of your neck and head.

In case of fire, the closest fire extinguisher is located in the back of the room.

In addition to cell phones, there's a phone located in the back of the room as well.

Dial 9 for an outside line, then 911 in case of an emergency.

In an event of an active shooter, be prepared to run, hide, or if you're Scott Kirby, fight.

Thank you for your participation in this important matter.

So I'm not going to read this.

Information on the following slides do contain forward-looking statements.

In fact, that's the primary purpose of tonight.

With that said, I encourage all of you to read the legally required disclosure on the screen.

Joining us tonight are Chief Executive Officer, Oscar Munoz; President, Scott Kirby; Executive Vice President and Chief Commercial Officer, Andrew Nocella; and Executive Vice President and Chief Financial Officer, Andrew Levy.

With that, I'm going to hand it off to Oscar.

Thank you.

Thank you, sir.

And welcome, Mikey.

It's great to have him here, it's a great addition to the family.

And I think with the -- with Julie Stewart, who's moved over to be a -- my Chief of Staff, it's nice we have a buy-side and a sell-side perspective in the company.

I think that sort of underscores our focus on the importance of you as investors as well as our many other constituents.

We are doing something a little different today.

We're going to have our fourth quarter sort of call very briefly and then go into this thing we call an investor update.

It gives us a little more time to have more conversation and clarity about some of the things that we're doing, and I think as Mike said 2 or 3 times, transparency, accountability, all those wonderful words that get tossed around, I think, we're -- I think you're going to see lots of that and more than you've seen certainly from us and maybe some people in the industry.

Importantly, the E team is here, our executive team.

I urge all of you at the reception to get to know them a little better for those of you who don't know.

If you have problems with the Wi-Fi, in particular, [I know there's] Linda.

But there's actually a few of our young folks from both finance and commercial.

Anil, where's Anil Khorana?

Anil's back there.

There's Tom Doxey and Jonathan Ireland, which, I think, most of you kind of know.

And then from our commercial organization, there's Damien and Ankit.

I haven't seen Ankit.

Ankit, are you here?

He's stuck in traffic.

He's stuck in traffic as some of the people in the room.

So I'd urge if you can, get a chance to meet those -- those are our, I think, future leaders of our company to some degree.

But with that aside, let's talk a little bit about what we're trying to accomplish today.

Here's just a quick version of the idea.

I'm going to take the quarter ending and a little bit of a sense of where we finished in 2017 from a full year perspective.

Then, we're going to get into the meat of the matter, and I think as always, it'll be a terrific event for everyone.

More importantly, more importantly, we are highly confident of what we've been working on for the last few months, and that confidence is going to sort of morph itself into not only guidance for 2018.

But also, we're going to give advance EPS guidance into 2020.

And so that's something that you can look forward to over the course of time here.

The quarter, I'll be brief.

We came in better, both top line and cost, in -- close in pricing, was strong as much as the industry.

And so that was -- that had certainly helped for us.

And as you think about some of our regions, China came in strong.

Both November and December PRASM was positive.

That's a nice inflection point given the fact that we haven't had that for some time.

So we're excited about that.

We ran and continue to run a great operation, and that helps immensely with regards to our cost.

We know our cost issues.

We know we have structure -- structural issues we have to work through.

But I'll tell you, running better is running cheaper.

And again, our team continued -- Greg Hart is here.

His team continues to do a great job in that space.

And as I think past the quarter to the full year, I realize we all completely understand that at -- to some degree, 2017 was a bit of a transition year, not without its issues and consequences over the course of time in so many ways.

But I don't want to let that cloud what I think really from the foundational perspective is really important as we head into 2018 and beyond.

And so we did do some pretty good things despite some of the cost headwinds in fuel and some labor issues, labor costs that we had to deal with.

And so we've returned value to shareowners in a significant way within the course of the year and announced an even bigger program moving forward.

Our strategic initiatives, and you'll hear infinitely more about this today, had a good beginning, and they're already starting to bear fruit.

I think you're going get a master class from Scott Kirby with regards to what connectivity, what hub growth and structure means to us.

And then you'll see a very strong foundation about what our growth plans, what our CASM plans are about because I think on CASM, and again, fourth quarter was a great momentum builder, we believe that CASM-ex both from a relative and an absolute perspective, we finished fairly strong.

And that's a foundational thing that we're also going to give multi-year commitments on.

And Andrew Levy will talk about that significantly in his portion of that.

But if you'll allow me, just next couple of charts, I need to talk about our record-breaking operational performance over the course of the year.

This is -- fundamentally, when you think of customer service, customer engagement, customer involvement and stickiness, this is the primary basic foundational thing that we've been working on.

For all of you that have been following us, when I first arrived, it was about the people, the people who are about getting the business running well, and I think that infrastructure, that bedrock has been built.

What you're going to hear today is the real focus of how you take this network and really make it hum and create profits for you as investors in the company.

We had the best operational performance in United history.

That may sound trite because you guys have only been around together for a few years, but it's been significant.

And more importantly, D0, which is kind of one of our many key metrics, but that's the one, I think, probably we're most proud of because we operate in some pretty tough environments.

And we don't get a lot of credit for that.

We don't want to whine or complain, but it is important when you finish as strong as we have.

And in fact, we were some of the leaders in the industry.

And this doesn't happen without the people in our organization.

And so the kudos and the shout outs to them because they've done a significant job and not just in our own internal metrics, but if you think of external metrics, The Journal just published theirs.

I think what's key on this chart, if you see the progression, while fourth place is not our destination and we're not lauding the fact that, ooh, we're fourth, but look at the progression over the course of time.

And that's the important part because, just a few years ago, we didn't do the fundamental customer-centric thing that you need to do as an airline, is run a good one.

And so this is underpinning our strategy and the foundation that we're moving forward.

So as we turn to 2018, we need to continue that reliability aspect, but our 2018 focus is about improving United's margins.

And the bedrock, the foundation for that are the first 2 thing: strengthening our domestic network, again, we'll talk a lot about that today; and driving efficiency and productivity.

You'll hear more about -- from both Scott and from Andrew Levy.

Those are foundational.

It is -- we have a lot of confidence, but more importantly, despite what you may hear and think, the alignment and the focus between our management team and how we're [going about this] is we are so focused on this.

It's just neat to see, which gives us the confidence again.

When you think about the continuity of profits and margins and sustainable over the long run, it's key.

Important to note because of the profit margins, because of how we've been running, we are not going to stop investing in our business.

Our people, the training, the model that you have to provide for them, so how to react in certain circumstances and how to run a great airline, we continue that training.

The product is always a never-ending sort of level of investment that we have to constantly balance and then technology.

And I think, at a future time, Linda and her team, we're going to blow you away with some of our digital innovation that we're building as we speak today.

And that may be speaking a little out of school, but we are very excited about some of the more strategic things in digital because we're always going to be the company we are.

We've been around for a long time.

We have an infrastructure.

We have people that have been around with us for a long time.

But how do we transform everything?

I think the space is through the digital channels.

And I think we've got a lot of great ideas and already a lot of things in action.

So with that, again, the -- it's about margins this year and forward, and I think what we're going to tell you is sustainable.

And so I'll be back at the end to sort of recap, but with that, Mr. Kirby.

Thank you, Oscar, and thank you all for coming down here in person to join us, and thanks to everyone that is listening on the Internet.

As Oscar said, today, we're going to do something that is atypical at least for our earnings calls.

And well, Oscar talked a little bit about the earnings.

Everything from here going forward is talking about the future.

And fundamentally, we're here today, one of the biggest messages that we want to talk about is the rationale for what we need to do to make the United network strong.

And many of you have known me for a long time, and you know that I'm passionate about airline route networks because it is the foundation that everything else is built upon.

And so today, we're going to talk about where we're going for the next several years, and we're going to go all the way out through 2020 and tell you where we're going.

But more importantly, we're going to tell you why we're doing what we think is the right thing to do for United Airlines.

So to start, as I said, the network is the foundation of everything that we do.

And for as long as I've been around the airline business, people have talked about the potential that exists at United Airlines and been frustrated with, when are we going to realize that potential?

And today, we're going to hopefully talk about what really that means and what in the United Airlines route network doesn't realize the potential, what are the great things about it, but what are the things that aren't yet realizing the potential and how we can return United Airlines to profitable growth and how we can close the margin gap, frankly, through the right kind of growth and through strengthening the weaknesses that we have in our network.

But to start, we have to leverage our strengths.

One of the great things that we have at United Airlines is the best international gateways of anyone in the world.

Our hubs on the coast do far better, and I'm going to show you some data, do far better than our competitors.

And that is a huge competitive advantage.

These are crown jewels for United Airlines.

We also have the best alliance to participate in, at least the alliance with the most potential, and a geographic position of our mid-continent hubs, Chicago, Denver and Houston, is ideal.

They're big cities that are growing, vibrant cities, and they are ideally positioned from a geography perspective to be really efficient hubs that complement each other and serve the entire country.

But those 3 hubs have some uniquely United opportunities, and that's what I'm going to spend at least the majority of the day talking about.

And we need to grow and strengthen our domestic hubs, and we'll talk about why before I jump to those conclusions.

But more scale, more connectivity is what we have to drive at these hubs.

And you're going to hear me use the word connectivity over and over and over again today.

A hub and spoke airline is really a manufacturing company, and it is about manufacturing connections.

The more connections you can drive at a hub, the higher profits you drive at that hub, the more options you have for customers to flow through that hub.

And it's exponential.

You add 1 flight into a hub that has 80 connections, you don't just add one market like a point-to-point carrier would be doing.

You add 80 new markets.

And that strengthens the whole network, and it makes the other 80 flights stronger at that one hub.

And so the key to everything that we're going to -- that I'm going to be talking about for most of the rest of the presentation is about driving higher connectivity and why that matters to a hub and spoke airline.

But I'm going to start by at least taking a minute to talk about the uniquely United strength, and I talked about our strong international gateways.

We have hubs in the 5 largest cities.

What's remarkable, actually, is that the 7 United Airlines hubs account for 80% of the premium demand in the United States.

International premium demand is coming from the 7 United Airlines hubs.

This is a huge asset.

And by the way, the profitability for all of us in the airline business flying internationally is really predicated on the premium demand.

The more premium demand you have, the more defensible that is, the higher profit margins to drive.

This is really a huge strength for United Airlines.

We're also a member in the best alliance, at least the alliance with the most potential.

This goes back to connectivity.

We fly into partner hubs that have phenomenal connectivity on the other side.

If you just think about United and Lufthansa, not just Lufthansa but United and Lufthansa, when we fly from Chicago to Frankfurt or United -- or Lufthansa flies from Frankfurt into Chicago, our alliance is not about carrying people between Chicago and Frankfurt.

Yes, we do that.

But our alliance is about adding a whole bunch of behind connecting points on the other side of Frankfurt that we can carry people to destinations we would never fly to.

Likewise for Lufthansa.

So they can get people to Kansas City and St.

Louis and Omaha, places they're never going to fly to on their own.

And that's what drives value in an alliance.

And our connecting partner, Lufthansa, has clearly got the best connecting hubs in Europe.

Our partners in Asia, particularly Air China and ANA, have great connectivity there.

And we're building a great partnership -- set of partnerships in Latin America to really try to make a run for the money at competing with American Airlines and Latam.

But we are in the alliance that has the most potential.

I'm not going to talk a lot about this today, but there's a lot of things we have to do to actually realize this potential.

But we are working on -- with our partners, and we expect to continue to have this get better and better.

Oops, skipped ahead, yes.

What's also important, though, is the geography of our hubs, the size and geography of our hubs.

And as I talk about hubs, and I'm sure many have questions about things like natural share, the answer to those kinds of questions is going to come back to geography in many cases.

And our hubs are well positioned geographically to serve the entire country.

You start with Chicago.

Not only is it the third largest market in the country, a great local market, but its geographical position is well positioned to serve the entire Northeast connecting to the Midwest to the West Coast.

It is well positioned to serve the entire northern tier of the country in addition to being a large market in and of itself.

Denver is situated in the middle of the country.

It's probably the best position of any hub geographically to serve the entire country, to serve transcontinental flows.

And it gives us unique access to the Mountain West, to small cities on the West Coast to the Midwest to get people west.

It has a unique element that no other hub at any airline can serve.

It's the best position geographically of any hub, and at the same time, it's a big and growing market with the tech -- kinds of tech investments that you see going on there, tech companies moving there.

It's a growing vibrant local market, but it's also well positioned to serve a unique set of markets that only Denver can serve as efficiently as it does.

And finally, Houston is a wonderful southern tier hub that can connect people across the whole southern tier United States but is also very well positioned geographically to serve all of Latin America.

Whether you're coming from the northeast or the West Coast, funneling through Houston is a really efficient routing to get you down to South America, to get you into Latin America.

It is extremely well positioned, and it's a big local market for Latin markets.

So we have these 3 great hubs that are not only great in and of their own right, have potential in and of their own rights, but they also complement each other.

Unlike some of our competitors, our hubs really are complementary.

We got a northern hub, central hub and a southern tier hub.

It's rare that we're overflying our hubs and competing with each other.

These are 3 hubs that can complementary serve each other.

But the opportunity at United is to make these 3 hubs stronger.

And they're not as strong as our competitors.

They don't have the same profit margins as our competitors' hubs have today.

There's 4 things that I'm going to talk about.

One is hub scale.

This is just how big you are.

And this matters for the obvious reason that if you're a frequent flyer, you want to be as big as you can possibly be.

By the way, it also matters for things like credit card programs because if we're not as big as our competitors in all the other cities around the country and you're a frequent flyer and you're deciding which credit card to get, you're going to get the frequent flyer program that -- for the airline that has the biggest service, the most service.

And as we'll talk about, as we go through this today, if we're #3 in all those small cities, we're going to be behind on things like the credit card.

So it's not just the obvious things.

It's all the ancillary businesses that matter as well.

Connectivity, this is the key, and connectivity drives everything else that I'm going to talk about.

It drives scale.

It drives revenue quality.

It drives asset efficiency.

If we can drive higher connectivity, if we can manufacture more connections, that is the magic elixir that makes hubs successful.

And we'll talk in detail about what that means.

Revenue quality.

As United was shrinking, United was pulling out of high-yield small cities, and that was really damaging to United Airlines and our relative revenue performance and CASM performance.

And finally, asset efficiency.

We have structurally created an airline as United was shrinking that we made ourselves high cost.

And Andrew Levy will talk more about this.

I'll introduce the concept.

But in short, we don't utilize our assets as well as our competitors.

And we have a lot of time through the year or days of the week, where we just put our assets on the ground and don't do anything with them, but we still have the same cost.

And that is the structural cost issue that exists at United.

The good news is that one is imminently fixable.

But to start, I want to go back to this concept of our -- the crown jewels, the international gateways versus the mid-continent hubs.

And so this just shows 2 hub types.

So we've just compared our international gateways, which are phenomenal.

All 4 of them are really -- do very well.

And we have great data.

You all know we have great data to compare our hub profitability to others.

And we are pretty accurate at estimating each other's profitability by hub.

Our international gateways are about 7 points more profit -- have higher profit margin, about 7 points higher than our competitors, and that is because they're in those big premium international markets, places like San Francisco and Newark are just crown jewels for United Airlines.

And so I'm not going to talk about this today because we're going to talk about the opportunity.

But we will -- that's the reason we will always defend every single point of market share in these crown jewel hubs because we can't let the domestic base get eroded and still support the international flying that we do out of these hubs.

But the real opportunity at United Airlines to close the margin gap, to improve absolute and relative earnings is about our mid-continent hubs.

And Chicago, Denver and Houston, despite being big markets, despite being well positioned geographically, have profit margins that are about 10 points lower than our competitors' mid-continent hubs.

Another way of showing it and this is one.

You look at both American and Delta.

They're at the same spot on this chart.

This chart on the Y axis has domestic seat share, and on the X axis has percent connecting revenue.

And probably, the more important thing is actually that percent connecting revenue.

As you grow a hub, as you drive higher connectivity, you make it more defensible and you make it higher profit margins.

I mean, look at some of the hubs that are on this list.

A lot -- some of them are in big cities, but mostly they're in cities that are smaller than where the United Airlines hubs are.

And they have very similar profit margins.

And really, there's a very high correlation between connectivity of a hub and profit margins.

And by the way, those 2 bubbles, all 5 of those hubs are very tightly packed in terms of what their profit margins are because they have similar high levels of connectivity.

They're at a similar point on this chart.

And this -- if you just remember one thing from today about the United network, I would say it's probably this, because this is what drives the profitability of a hub.

It's true around the world, and it's what drives it at United.

And for what it's worth, everything we're going to talk about today, we're not trying to reinvent the wheel here.

This is not -- we're not treading a new path.

In fact, this is a well-worn playbook that myself and one other person at least in here have done at a number of other hubs at different airlines.

And driving higher connectivity at a hub is just math.

I mean, we can talk about all the risks and things, but it's just math.

When you drive higher connectivity at a hub, you're going to drive outperformance and incremental revenue through the hub.

But scale, scale is the first thing that we talked about, is the real issue at our hubs.

And scale is the issue for the obvious reasons that I said.

But also, I want to tell you another reason it's an issue.

So in the last 5 years, we cumulatively shrank by 8% in our hubs.

You can see that our 2 competitors were growing in this hub -- in their hubs.

Remember, these are growing, vibrant markets, Denver, Chicago, Houston, growing, vibrant markets.

So what do you think happens when we're shrinking, but the total market is growing?

Well, our competitors grow faster.

There is an absolute correlation between these 2 things -- inverse correlation between these 2 things.

When we shrink in a growing market, someone is going to come in and meet that demand.

And that's exactly what happened in the United Airlines market.

Unfortunately, it's even worse because a lot of that demand was met with low-cost and ultra low-cost carriers who backfilled us when we were exiting and shrinking in those markets.

And many of the people in this room have written research reports over the years about the best forecaster of PRASM going forward, the best forecast of profitability.

And the best forecaster of relative stock price performance is this chart.

And this chart happens because of the left side of the chart.

When we shrink, our competitors grow faster, and that matters to us.

It also matters because our customers want a great network, particularly our premium customers who want to get to as many destinations as they can with as much frequency as they can.

And our depth is well below -- this is the number of flights that we have per day in each market.

Our depth is below our competitors' at these hubs.

Our breadth, meaning the number of markets that we serve, is below our competitors' at our hub.

And importantly, our connectivity is significantly below where our competitors are.

If you're American Airlines and you can carry more than twice -- if you have more than twice as many connecting itineraries, on every flight that you're flying into those hubs, they're massively more profitable because they have that higher connectivity.

And this is the biggest thing we're going to change.

And it's not just about growth.

Some of it is about growth, but it's not just about growth.

We'll talk about re-banking hubs.

Again, the whole idea of re-banking hubs is not new territory.

It's territory that at least some of us have been down before, and it's a well-worn playbook that we've used in the past.

Connectivity.

I keep harping on connectivity, and I got another example here.

And this is the re-banking.

So in Houston, we've gone from a 10-bank structure to an 8-bank structure.

And what that means is we didn't add any flights.

But we -- just keeping the number of flights the same, we concentrated them into bigger peaks.

And I just took one example here.

Our Las Vegas flight now has 21% more connections.

This is the magic of making a hub work because we now have 10 new destinations.

And either, on peak demand days, we can yield up and we can spill off of some of the lower-fare traffic.

And on off-peak days, we can run higher load factors.

We've accessed a whole new pool of demand without even changing anything about the number of flights that we have, a whole new set of demand that's available.

And this isn't, of course, just one flight.

You multiply this across all 500 flights in a hub, and all 500 flights are getting another 10 or so connections, significant change in the profitability of the hub.

This is the key for United going forward.

We have to fix this, and we have to make this better if we want our margins in these mid-continent hubs to close the gap to our competitors.

You can see, by the time we get to the end of the year -- this isn't on day 1. This isn't for the full year.

By the time we get to the end of this year, the combination of some growth but also a lot of restructuring that we're doing at our 3 mid-continent hubs is going to drive 21% higher connectivity in Houston and 15% higher connectivity in Chicago and Denver.

This really is a big deal to the profitability of United not just this year and next year, but for the long term and particularly as we continue to grow this.

Revenue quality also matters.

To orient you to this slide, we've divided the country into large, medium and small markets and shown you the yield and show you how many passengers we have, what percentage of our passengers come from these and what percentage of our competitors' passengers come here.

What you can see is that we are a lot smaller in the small markets.

We have fewer percentage -- we have 26% of our passengers coming in small markets, and our competitors have 30%.

Conversely, we are largest.

40% of our revenue is coming in large markets, which have the lowest yield.

This wasn't true 15 or 20 years ago when Chicago to LaGuardia would have been an example of a really high-yield market.

But in a world with lots of low-cost carriers, it's not a high-yield market anymore.

Rochester to LaGuardia is a high-yield market, but Chicago to LaGuardia is no longer a high-yield market.

And we are disproportionately exposed to large low-yield markets, and we did that to ourselves in the past 6 or 7 years.

This did not look like this in times past.

And what happened at United as United was shrinking and frankly shrinking because they're getting pressure from rooms like this to shrink, and as United was shrinking, what United did was took the regional jets out of markets like Rochester, Minnesota and put them into markets like Newark, Atlanta and DFW to Chicago.

And that caused 3 damaging effects at United Airlines.

First, we lost that high-yield traffic from Rochester that used to support the whole network.

Second, we put regional jets into competition with American and Delta where they were flying [mainline] equipment.

And we lost customers who used to fly us and now we pushed them to our competitors because they didn't like the product.

And third, we had employees who were screaming at us, "This is stupid.

Why are you doing this?" And we alienated them.

And they were right.

They were right that we shouldn't have been doing that.

And so we had 3 bad effects that happened as we took regional jets out of the kinds of markets they should fly, the small cities with high yields and put them in competitive large markets.

And this is something that we can fix and address.

When we talk about natural share, I'll come back to a lot of examples like this probably during the Q&A, but this is really one of the key elements for driving higher revenues at United.

It's getting us back exposed to our fair share of these markets that we pulled out of over the last 5 or 6 years.

And then finally, the fourth element that I had in talking about the network is really a point on asset efficiency.

And Andrew Levy is going to talk a lot more about CASM, and I won't steal his punchlines because they're great and the numbers are really good.

But a lot of the reason that United structurally has higher cost than our competitors is a whole bunch of stuff around asset efficiency.

And I've just picked one chart to put on here.

And what this is, is it graphs our monthly service compared to our largest month.

So August is our peak flying month.

And so how much do we fly in other months compared to August?

And what you can see is, again, as United was coming under pressure to shrink, United shrank in a way that maximized RASM.

Our RASM is lower in January than it is in July and August.

And if you just want to maximize RASM, shrink in January, shrink in February, and that's what happened at United.

You can see in January, for example, we went from 88% of average -- or 88% of August down to 78%, 10 point decline in January.

And that's good for RASM, but it's terrible for CASM because we have exactly the same number of dates in January as we have in August.

We have exactly the same number of airplanes.

And we have almost exactly the same number of employees.

We try to mitigate this with voluntary leaves of absence and things, but this is a job for people.

You can't get 22% of your workforce to say I don't want to come to work for the month of January.

And so we -- our fixed cost structure is basically the same in January as it is in August, but we're producing 22% fewer ASMs.

Another way to think about this, another example, because we've started this already, we started this in the fourth quarter, we added back service from Dulles to São Paulo on Tuesday and Wednesdays.

When Brazil cratered, we canceled Tuesdays and Wednesdays.

We flew it 5 days a week, canceled Tuesdays and Wednesdays.

We knew adding it back on Tuesday and Wednesday was going to be lower RASM.

And in fact, it came in actually a little better than our forecast, but it came in with RASM -- it was 17% below average.

So our RASM was lower because we put Dulles-São Paulo on Tuesdays and Wednesdays.

But the CASM on that flight was even conservatively estimated over 40% lower because the airplane was free; the gates were free; the slots were free.

We had all of those fixed assets.

And people is even another area that was probably not even adequately represented in our CASM number because that crew that flew down on Monday, instead of coming home, now has to stay till Thursday.

We have to get them hotels.

A lot of times, we have to pay them guarantee pay because they don't get enough hours, and they stay over in São Paulo.

They don't want to be there.

They wind up staying over in São Paulo for several days.

We get them hotels.

We pay them guarantee.

And then the crew that would have taken the airplane back on Thursday also has to stay over because it's created a chain of events that you got to wait for each crew to bring the airplane home, and you just never catch up.

And so this kind of behavior, if all you want to do is maximize RASM, man, this is the way to do it.

But if you want to maximize profitability, it's damaging because the CASM impact is so much bigger than the RASM impact.

So going forward, we're going to measure ourselves on these 4 metrics from the network perspective.

We've got a whole bunch of more metrics, but hub scale, so one way to think about that is the amount of spokes where we're ranked #1 or 2. Again, this matters -- I've alluded to the credit card a couple of times.

This matters not just for the obvious of winning customers.

But if you're in Kansas City and there's no hub there and you're picking -- you're a frequent flyer and you're picking who to fly, you're going to probably pick the airline that's #1 in that city because they can get you to most places.

When you live in Kansas City, you almost always have to make a connection anywhere that you're going.

And if you're going to have to make a connection anyway, you can connect in Dallas or Houston or Chicago or Minneapolis, and you're going to connect in a -- with the carrier that has the highest service.

And that matters to our pass-through revenue, but it also matters to all of our ancillary revenues.

Connectivity, this is, again, the #1 issue.

The #1 thing for us to drive is higher connectivity across the network.

And it's not just about growth.

It's also about structure, and this is something we absolutely can do.

And again, it's just math.

This is really hard to debate that it works because it's just math as you exponentially increase the connectivity of a hub when you grow it.

Revenue share in small city markets, I talked about that.

We'll continue to access more of those as we move forward.

And then, of course, asset efficiency, and Andrew Levy is going to talk more about what that means for our CASM, and particularly, he's going to get to what that means for our near-term EPS guidance in 2018 but also an EPS guide for 2020 as well.

And all of that is going to lead to improvement in our pre-tax margins, both absolute and relative.

And this is a different way of talking about it than we did a year ago.

But this is the issue.

The network is the issue.

And if you want to understand an airline and understand what their profit potential is for the long term, you have to understand the network.

That's why I've spent a lot of time on this today because this is what's going to get United -- make United great again.

This is what is going to drive margins at United Airlines in both an absolute and a relative sense.

But that then gets us to the bottom line, which is our growth rate.

And we are planning to grow this year as we start to repair some of this and as we focus on our mid-continent hubs.

We are planning to grow 4% to 6%, and we expect to grow at similar rates in 2019 and '20.

I also, while I'm on this slide, want to make a personal commentary.

I've known many of you at least for 15, 20 or more years.

And I think my reputation with you is, one, I've been probably the most hawkish person in the industry in terms of pushing for -- aggressively pushing for and driving consolidation because I knew what kind of value that would create.

Also had a history, I think, of being a capacity hawk and cutting unprofitable flying.

And I absolutely have done that in the past and would do that if we had unprofitable flying at United Airlines today.

In fact, it's not something I'm proud of, but if it was the right thing to do financially, I've been at airlines where we've closed a number of hubs, but we have a different hand of cards to play at United.

If I had the same hand of cards to play as I've had at other airlines, where we had unprofitable operations that we needed to shrink, that's what we would have done.

But we have a different hand of cards to play at United.

The opportunity at United is not about shrinking.

The opportunity at United is about growing back to where United, frankly, should have been had it not went to negative 8% growth across the last several years.

And restoring the positions, we're building back that chart that I showed earlier, moving United Airlines from the lower left and up into the right and driving higher connectivity.

And share in those 3 mid-continent hubs is the key to making United's profit margins higher.

And that's why we're doing this.

We're doing this because that's what works, and we know that's what works.

Again, those 3 hubs, it's really about math, and that's why we're here today to talk to you about that.

And with that, I'll introduce Andrew.

So I've focused just on the network.

There also are a lot of great things going on in the network -- or at the company that aren't just about the network, so commercial initiatives that are going to drive higher revenues compared to what they otherwise would have been.

And I'm going to turn it over to Andrew to spend some time talking about all of those.

(inaudible), Scott.

Here I am.

So Scott said the network is the -- really center of where we started this from, but we know all the commercial [hub] activities that surround network need to be working in harmony for the network to achieve this potential.

And in particular, we know that our customer initiatives need to be ongoing as well, and we have a lot of customer initiatives coming through the pipeline.

So today, we're not really going to focus on those things, but I want to make it clear that those are ongoing and at the perfect point in time, we'll discuss them.

Today, I really want to focus on the revenue management and price scenario and customer segmentation.

That is an important area of focus for the company, and a lot is going on, on that front.

So in particular, Gemini.

Gemini is our new revenue management system.

We just turned it on, and I want to talk about what it means to United Airlines and why it's so important.

First of all, the very first chart on the left here is the forecast by us.

So ORION, which is a system that United's used for decades at this point, a couple of decades, just constantly under forecasts demand.

And that's, you can see, the negative bar here under ORION.

So what that meant is that we are constantly expecting the demand for our flights to be low, so our inventory access was open, and we accepted lower-yield passengers more often than we should.

Our analysts did the best job they could with a complicated network of trying to boost the ORION forecast artificially to account for this, but across thousands of flights per day, 330 days per year, that was just not the way to manage the system.

And so we had to move to a new revenue management system, and Gemini is our new one.

And you can see it slightly over forecasts our demand.

We're so happy to be there.

So we no longer have this guessing game of how many passengers are really going to show up for the flight.

The forecast is dramatically more accurate today than it's ever been.

So our analysts don't have to artificially alter the forecast, and they can rely on Gemini to produce a quality forecast, so we know who's going to show up for the flight.

And what does this mean?

Well, on the right side of this chart is what happened to yield and PRASM in the test markets we did in the fourth quarter.

So we ran a really good test.

We went on and off.

So we ran both systems against the same flights every other day, and it had amazing results.

Our yields were up 2.2%.

Our load factor was down a little bit, and we do -- our RASMs are 1.2% higher.

So obviously, we're very excited about that.

We now have Gemini working across the entire system.

And so it's [spool] and into the process.

And by the second quarter of this year, it'll be fully functional.

And third and fourth quarter, I think we'll see the best results from it.

And this is something we'll work on over time to make even better.

The amazing thing about these numbers is we do have the analysts to account for things like Halloween and other things to make our forecasts better.

Those Gemini numbers up there are completely untouched.

That is just the system running with the mathematical formulas that are in there.

So we're pretty bullish about Gemini and what it's going to do for United Airlines as we enter particularly the second half of the year but even as we enter part of the second quarter.

So Gemini is a major development at United Airlines and one we're very excited about.

All right.

So the next thing I want to talk about is segmentation, and this is something that we wholeheartedly believe in.

And a few days ago, we announced United Premium Plus, which is going to be our new class of service between coach and business class.

This will allow customers that want to buy up to a better experience, which includes more food and more legroom and more comfort to do so.

Obviously, many of our competitors have done this.

They're out there flying around the globe.

We worked with our alliance partners, ANA and Lufthansa, so we really understand how this works.

How many people are going to buy up from coach?

How many people are going to buy down from business class?

And we also think this is going to be a big home run for United Airlines.

It will take about 3 years to fully roll out across our international system.

There's a lot of aircraft to convert.

But in 3 years' time, we'll have this product out there, and I think it's going to be a great home run.

And again, it further shows how we're thinking about segmenting our revenue and segmenting the customers with each turn.

On Basic Economy, come a long way since last summer.

We've altered it a little bit in terms of how we put it in the bottom 5 fare classes versus going always up the ladder.

But needless to say, we think it's been much more effective as we've made these changes.

In 2018, we plan to expand it.

We just, in fact, launched Denver to Hawaii.

We hopefully will be launching to more international markets with Basic Economy.

And most importantly, we're going to give our Basic Economy customers another choice.

Whereas, today, you're unable to select your seat assignment in advance.

When you book your ticket, you have to wait until you check in.

We'll be turning on technology shortly that allows you to assign yourself a seat for a small fee in advance.

So you can pay that fee upfront or you can choose to wait till check in to get your seat for free.

It'll be assigned at check-in.

But it's obviously an opportunity for our customers that are buying a basic fare to be able to select a seat, are -- and it's an opportunity for United Airlines on the ancillary revenue front.

So we're excited about that.

All right.

So if you turn to 2018, we look at RASM and where we think things are lining up, we just wanted to give you a perspective on things.

First of all, as we grow, and Scott just showed you the growth rate, we know we're growing a little bit faster than our primary competitors.

So that will create a headwind.

So we have some headwinds, and we have some tailwinds as we enter 2018.

So in terms of headwinds, that growth rate we expect will cause 0.5 point off the RASM.

And Andrew Levy will be up next, and he'll kind of explain how the CASM and RASM will work and why that makes sense.

And we also see OA competitive growth.

So Scott showed you what's been happening in our hubs over the last few years and, in fact, definitely happened in 2017, where capacity growth in United Airlines' hubs was at twice the rate that our competitors saw.

So we expect that headwind to continue into 2017 between 0.5 point and a full point on RASM.

We don't know the exact number.

We can't see all the ways through 2018 at this point, but it's definitely a headwind.

The good news is, is we have a host of initiatives.

And since I joined United Airlines, I just have to tell you, like every day, I come in and I find yet a new opportunity.

And it's just a question of getting all of those ideas ordered, prioritized and in the pipeline, so we can actually deliver on them.

And here's just a few things we're working on.

Obviously, the schedule's already changed dramatically.

What we have loaded in terms of the RJ developments into smaller cities to have this high-yield exposure, key to what Scott talked about earlier.

Gemini revenue management is already turned on and is working across the entire United Airlines system.

We've re-banked the Houston hub late last year; Chicago in just a few weeks' time and, hopefully, Denver later this year after we get through the summer peak and then segmentation.

Beyond that, the list is really long, and there's all kinds of things not only that are tech-y on the digital front but also for our customers that we think ultimately drive more and more value.

So I have to say I'm really excited about all these opportunities.

Some of them come online immediately like Gemini, and some of them take a little bit longer to achieve like the Polaris business class seat.

But we're well on our way, and we defined all of those items.

And we're excited to be able to deliver on them, and we think that's going to create a lot of value in the future.

So with that, I am going to hand it off to Mr. Andrew Levy, my partner, and he will talk about our finances.

Thanks, Andrew.

Good afternoon.

So now you've heard Scott talk about the network strategies and what are the things that we think are important to do to improve profitability at United in the short term and in the long term.

Andrew's talked a lot about specific commercial opportunities and initiatives that are going to help us in terms of revenue.

I'm going to talk about CASM mostly.

Now we are, first and foremost, it's a margin story.

So when people ask us what kind of story are you, well, it's margin.

Margin is what matters, and that's our primary focus.

But we have a terrific CASM story.

And many of you here have known me for a long time.

You know my background, my history.

I've been in the low-cost side of the business for most of my career, and those are companies where you have to compete on costs.

And so I'm very passionate about that.

That's my experience pre-United.

But we have a great CASM story here as well.

We have, as Scott mentioned, a very high fixed cost base.

We have all these assets, a lot of people.

And as we talked about on the seasonality side, we don't use it very often.

We're going to be able to address that going forward, and that's what's going to drive a lot of our opportunities.

And I'll talk about that in a little bit more.

Now we're also going to give you as we've previewed, an annual 2018 earnings per share guide, and we're also going to give you a target for 2020.

We like earnings per share because it is really easy to calculate.

It's really easy to hold us accountable.

So we're going to talk about that.

And I'm not going to spend a lot of time talking about the balance sheet, but the balance sheet is the foundation of everything that we've talked about and that we're going to talk about that enables us to do all this.

We have a terrific balance sheet.

We have ample liquidity, low debt levels.

We're very, very comfortable.

So we won't talk much about the balance sheet today because I don't think that, that's really an issue going forward.

We have a great -- it's a great strength of the company, so we're going to make sure it stays that way.

So let me walk you through this slide first before I get into some of the details.

On your left, you will see our CASM for 2017 and our forecast for 2018.

We're going to be flat to down 1% in 2018.

And you can see on the top right, we have some headwinds and some tailwinds, which I'll talk a little bit about.

As I mentioned, we have a terrific CASM story.

That being said, there are a lot of headwinds this year that we're going to overcome.

Now the first one and the probably the most important to just highlight is the regional flying.

As Scott talked about how we're going to fix the network, we're going to add a lot of regional flying this year, and that is going to be a CASM tailwind -- or excuse me, CASM headwind.

There's no way around that.

These are expensive airplanes to operate.

And so if you just look at it in terms of CASM, they do drive CASM expense.

However, we're not doing this to optimize CASM.

We're driving -- we're flying more regional jets because that's what it's going to take to fix our network to go into some of these smaller cities and drive higher levels of profitability.

We have 31 more aircraft this year that are going to be flying in our regional fleet.

About 0.5 point of CASM.

Now we're making a lot of investments in technology, and that's very deliberate.

That is to be able to better take care of our customers, give our employees the tools they need to better be able to take care of our customers.

It's going to drive operational efficiency and therefore, lower cost on the back-end as well.

And we're making a lot of investments in infrastructure, disaster recovery, things of that nature that are foundational and really critical that we do.

We have other costs as well, which are more annual in nature, labor, even though we don't have any new contracts in place in 2018.

You have annual wage escalation.

That continues going forward.

Airports seem to only go one direction.

We have a lot of airports that we're seeing a lot of price or cost pressure.

We expect that'll continue.

Different airports, perhaps different years, and of course, many, many other costs that we need to overcome.

Now next year and beyond, we have a lot of tailwinds also.

We're going to get a lot in the way of asset utilization, whether they be gates, aircraft or our employees getting -- just becoming more productive.

And I'll talk about that in just a minute.

We also have an opportunity because we've done such a good job with our operation, and that's due to a lot of hard work, effort, energy and focus that we have each and every day.

But at the same time, we've also put in a little bit of reliability buffers to help us get to where we are now.

We're going to start to pull some of that back, which is going to be helpful in terms of costs.

Aircraft financing.

We historically had a lot of operating leases, which are very expensive.

As those aircraft are coming off of lease, many times, we're buying them and putting them on our balance sheet because we intend to operate them until they're going to be scrapped at the end of their life.

We'll talk a little bit more about that.

And as I mentioned, not only is this a 2018 story where we expect to be flat to minus 1%, but we expect to do the same thing in 2019 and 2020.

And that includes any labor deals, which we have a pilot deal that's coming due on the 1st of January, January 1 of '19, excuse me.

We expect this will be the best among our peers, and we're very committed to making sure that this happens.

So productivity is the single biggest lever we have in these next few years.

We have very high fixed costs, and we have a very seasonal schedule.

So we've kind of added to it.

Not only do we start out with high cost, but the way that we operate, we don't put a lot of ASMs or as many ASMs as we can.

We're going to try to reverse that.

Scott talked a lot about that.

Let me show you what we have here on the chart.

As you can see on the left, left to right, you see productivity, ASMs per FTE, full-time equivalent employee, aircraft utilization, departures per day.

We're showing (inaudible) departures per day, which I think is more relevant.

You're talking about seats.

And then gate utilization, which is up dramatically, 7% next year.

As Scott mentioned, just going back to that São Paulo example, the marginal cost of incremental flights during those periods of time is extremely, extremely low, and we have a lot of opportunities to do that.

We're going to do some of that in 2018.

We expect that to accelerate in terms of the meaningfulness of terms of our overall capacity, growth rates in 2019 and 2020.

And we're very excited about the ability to better use our assets and become more efficient and drive a better CASM story going forward.

So capital expenditures.

On the left-hand side, you'll see where we came out in 2017, $4.7 billion as we had guided.

And we also talked to you about this in the third quarter, was that we thought we'd be at about $1 billion less in 2018.

So we're -- we are renewing our commitment to you on that.

That being said, we continue to grow the business.

We're investing in fleet.

We're also, by the way, becoming more capital efficient, not just through productivity, but also because we're going to continue to bring on used aircraft in 2 different ways.

First is buying aircraft off-lease where the opportunity presents itself.

Last year, we bought 46 aircraft off-lease.

This year, we have about 60 that are coming off-lease.

We probably won't buy all 60.

It'll depend on the economics of each transaction, but that's a very efficient way to add to the fleet or to keep airplanes in the fleet instead of buying new airplanes.

It's much less capital, very efficient.

And the best used airplanes out there are the ones we've been operating since birth.

So I expect that'll continue.

So we'll continue to move aircraft out of the balance sheet, off of operating lease as those opportunities present themselves.

We're also adding used airplanes.

You've heard me talk about that a long time.

I love used airplanes as many of you know.

24 scheduled airplanes this year, 2018.

Three of them are actually widebodies.

We recently signed a deal to bring on 3 767-300ER airplanes.

There will be many more used aircraft to talk about as time goes on and as we continue to take advantage of the spot market.

Non-aircraft CapEx is going to continue to rise this year.

Actually, it was kind of flat, but we expect it to rise in '18, '19 and '20.

And that's as we continue to invest in our product with Polaris, clubs, the customer experience, our people, technology, tools that enable them to do a better job for our customers and at the same time, investing in infrastructure, whether it's bag systems, gates.

But also, in many cases, it's just deferred CapEx that -- just CapEx that didn't -- wasn't spent back when times were much tougher and we didn't have the balance sheet strength.

So we're still digging out of that hole.

That'll take us a long time.

But there's a lot of capital that we will continue to spend in those areas, which we think are very, very important.

Oh, by the way, one other comment.

In 2019 and 2020, we expect that will be lower -- or excuse me, that will be higher than 2018, but lower than 2017.

2017 will still represent the high watermark we expect at this time.

So there's a lot going on in this chart.

Let me first start out by saying that we all, I think, are enjoying a great market.

There's no signs of weakness out there.

The whole world is booming, which is exactly when we need to be, probably vigilant and make sure we know how to manage through the eventual downturn, which will come at some point in time.

As you can see here, I'm showing you year-end 2017 mainline aircraft in our fleet and then where we expect to be by the end of 2020 and where we could be by the end of 2020, if we are going to utilize the levers that we've created for ourselves to manage our fleet plan.

We have a lot of flexibility.

We've talked about that repeatedly, about the flexibility we have with our order book and our fleet.

We think that is one of the most important things that we have to manage through tougher times, apart from a terrific balance sheet, which I already touched on.

But we can manage our fleet, this is critically important.

And the other thing that we can do to manage our fleet is continue to bring on lower-cost airplanes.

And again, you've seen me do that before.

It's very effective, gives you a lot more flexibility in the case of a downturn, and we think that's critically important as we go forward.

So here's the punchline.

2018 guidance, we're giving you an annual number as we've already previewed.

Scott talked to you about capacity, 4% to 6%.

CASM-ex, minus 1% to flat, we are all incredibly committed to delivering on that.

We expect an earnings per share range of $6.50 to $7.50 (sic) [$8.50], and we touched on CapEx just a minute ago.

We like earnings per share, we think that's what matters most to us as shareholders.

We think it matters most to you as shareholders as a metric, if you're going to pick one.

And so, that is -- with our efforts to try to become more accountable, more transparent, that's why we're doing this today.

And lastly, this slide basically speaks for itself.

This is a range for 2020.

This is what everything we talked about gets us in 2020.

We're very, very confident in the long-term strategy that we've outlined for you today.

We have a great CASM story, as I've tried to give you a little bit of information on today.

Well, I'm sure we'll talk a lot more of that in Q&A.

Very committed to making that happen.

And I think importantly, we're showing at these numbers, a 25% compound annual growth rate in terms of earnings per share by 2020.

So with that, I will turn it back over to Oscar to finish up.

Just so we're clear, the number is $8.50 on the chart on the far range of EPS is the correct number.

And I also want to reiterate, because it wasn't maybe clear on the chart, that our CASM guide does include labor deals.

And I do believe that from a transparency and a forward thought aspect, I don't know that anyone in the industry has ever sort of done that.

And that's the level of cost management that we're going to be going after.

So with that, let me just bring it home before we get into Q&A of -- when I took this job, some of you in this room, a lot of people in the business talked about United being sort of the unsolvable puzzle.

There were assets and resources and a global footprint that had great promise, but nobody had ever been able to figure out how to actually put that together.

And so one of the first tasks we dug out is how do we create a team around that with the smartest capable minds to take advantage of that, and that's what we've created.

And despite everything you hear and see and sometimes read, we've got a plan that we're very, very confident about.

You heard that strengthening our hub is critical, not just to our growth and competitiveness, but to profitability.

I think that's an important aspect of what we're doing, the numbers we've chosen, the things that we've done are about maximizing profitability.

And again, as Andrew Nocella talked about, driving revenue on all aspects of our business.

But you heard him specifically say that every day he shows up to work, there's even more opportunities.

So the opportunity set from my perspective, as I talk to the team specifically, we talk about the great sort of confidence of things to be touched ahead.

And for the unsolvable puzzle piece, when you think about the Mid-Continent and the gap aspect of there, that's where the opportunity lies and that's [where] the growth that we're doing is going to be focused on.

High-cost business, efficiency and productivity, all of that continues to be, I think Andrew just laid that out very well.

And so, ladies and gentlemen, that's our plan, that's what we're headed out to do.

There'll be lots of questions and concerns about different numbers, but that is the fundamental of our plan and our confidence level is high as the numbers we've [reached].

To provide you some sense of our comfort and our confidence, we are giving you what we think is a greater level of accountability and transparency with EPS numbers that we're providing.

More importantly, we're making the big strong pivot to the strategy, not only doing what's right for the business, for our customers and for our employees, but also driving our sustainably higher profits and margins.

So with that, we're going to stop.

I'm going to ask the team up here and we will take your questions for the next time period.

I think Julie's going to -- Julie and Mike are going to bring mics around.

Maybe to Mike, maybe not.

It's Andrew Davis from T. Rowe.

Scott, as you try to build regional CASM in your hubs, is there a risk to the traffic that you are going to gain from better regional feed comes in at a lower yield than it's coming at now maybe for some of your competitors?

And the reason I ask is because American just announced some additional expansion of regional feed.

There's a lot of geographic overlap between you guys and I'm just kind of concerned that is the next frontier of competition that prevents you guys from hitting some of the targets you hit today.

Yes, and I'll actually answer that, Andrew, in a more -- in a broader perspective, as well, because a lot of the questions we get are: what's the competitive response to this going to be?

And I think it's a perfect way to frame this and think about it.

The growth potential for United Airlines just like for our 2 competitors is really about the geography of our hubs.

And what happened at United is we had years where we were shrinking while our competitors were kind of growing 2% or 3% a year and I expect they'll continue growing kind of 2%, 3% with GDP.

What we're doing is frankly, catching up to some of what we went negative on for years before.

But it's a great example, the recent American Airlines announcement.

I'll take the Northwest Florida airport, one I know that you like to go to.

And American Airlines just announced service to the Northwest Florida airport.

It's a really good market for United Airlines, and we fly from Houston to the Northwest Florida airport.

But it's a market that is almost all connecting traffic.

Our largest O&D from Northwest Florida is flying to Denver, and that's 4 passengers a day.

Our second-largest is Los Angeles, and that's 2 passengers a day.

And the reality is when American starts flying to Charlotte, which is well positioned to serve Northwest Florida and to Dallas, which is also well positioned to serve the Northwest Florida airport, American is going to get some share from us.

They're going to -- some of those 2 passengers a day that fly to L.A. are going to now connect through Chicago -- or through Charlotte or connect through Dallas.

And we are going to lose that share and there's nothing we can do about it.

What are we going to do?

Fly a nonstop flight from Northwest Florida to L.A. to try to protect 2 passengers a day and try to protect our market share in there?

It is just about hub geography.

And I think Northwest Florida is probably an exception to what I'm about to say because it's still actually a growing market.

But at the end of the day, if it wasn't a growing market, we would wind up adjusting capacity because our demand would go down.

And so I don't think the yields are really going to change in these markets because if you're in a place, now to take the United example, like Rochester, Minnesota.

People that live -- frequent flyers that live and travel in Rochester are basically connecting everywhere they go.

And they can connect in Minneapolis on Delta's hub, they can connect in Chicago on American's hub, and it used to just be the 2 of them, and they probably had about 50-50 market share.

And now, United is in the market and it's going to settle at 1/3, 1/3, 1/3 and the capacity is going to adjust to whatever the demand levels are.

And that when I talk about natural share, that's what it means.

It's geography, it's not some design to go take on a competitor or have an aggressive response because we have a hub in Chicago where we can connect people to hundreds of destinations.

And if you live in Rochester, we're well positioned geographically to serve that market.

Just like in Northwest Florida, American is well positioned to serve that hub and they're going to win market share from us, but we will wind up with kind of our natural share of -- based on the geography of our hub.

And the reason United Airlines has more growth opportunities than our competitors is because we not only haven't been growing with GDP for the last 6 or 7 years, we were shrinking at the same time our competitors were growing in those markets.

It's Hunter Keay at Wolfe Research.

Appreciate the multiyear CASM guidance and you said it includes all labor deals going forward.

You're kind of up against the sort of max that you're allowed on your scope right now, Scott.

And I'm wondering how you can be so confident around that cost guide when you're probably going to need some give back in scope from your pilots to achieve some of this regional feed you're trying to do.

So how do you put a dollar amount on the amount that you're going to have to pay for likely scope relaxation?

Unless you reject the premise of the question that you don't need scope relaxation.

Yes.

Well, look, I'd start with, I completely understand why our employees and our pilots in particular are worried about scope, because they have seen us take, as I said in the presentation, take airplanes out of a place like Rochester to Chicago and put it in Newark-Atlanta, and they know that was stupid.

And they were right, we should not have done that.

But we're now doing it the right way, we're not just asking them to believe us.

We're making commitments, we're -- actions speak louder than words.

We're upgauging back-end markets where we should be upgauging and we are putting the regional jets in the right market.

But our plan is predicated on having a critical element, having that high yield flow come through our hubs.

And we shouldn't be flying regional jets in a market like Newark-Atlanta, but we're going to have to fly regional jets in places like Rochester, Minnesota or Elmira, New York or Columbia, Missouri.

We're going to have to fly regional just because that's the size of the market, and we can't grow the mainline if we don't have that high-yield flow coming through the hubs.

And so, there is a win-win.

The reality is we will grow the main -- the reason pilots want scope and don't want us growing is because they're worried about jobs, but we're going to create more pilot jobs by having the right kind of aircraft flying, having the right kind of regional jets flying.

We think it's to the next point.

In the past, we could fly 50-seaters and we've got a temporary surge in 50-seaters in 2018 because we don't have a choice today.

But in the long run, we can't be flying in a market like Rochester, Minnesota with a 50-seater if our 2 competitors are flying 2-class regional jets.

We will have an uncompetitive product.

Just like we had an uncompetitive product in Newark to Atlanta for the local market, we will have an uncompetitive product for Rochester to the world, and we won't stay in that market.

And that's bad for the mainline because if we can't feed that high-yield revenue into the hub, then we can't make it work, and I believe our pilots understand that.

Because they've been burned in the past, they're going to want some kind of commitment from us, but I think the deal winds up being we can -- we don't need more airplanes, but we can wind up turning 50-seaters into larger regional jets.

But we make some kind of commitment to them, whether it's a growth commitment or jobs or some kind of commitment that says we're not just asking you to trust us that we're going to do the right thing, but it's not about buying scope relief, it's about addressing the issue.

And the issue is about jobs for them and they've seen their jobs get outsourced.

And we do that.

That is a win-win-win for all of us because it's something we need to do anyway as we talked about extensively in the network deck.

And that's a win for our pilots and that's really what they want, the protection.

They're not trying to protect themselves against Rochester and Minnesota.

They're trying to protect themselves against us doing that in Dallas to Chicago, and we shouldn't be doing it in a market like Dallas to Chicago.

And so we are talking to them and I think we're going to wind up with a win-win-win that fits within our CASM guidance or we wouldn't have given that CASM guidance today.

Dan McKenzie from Buckingham Research.

Couple questions here, just one housecleaning.

I guess as you provide the EPS outlook for this year, does it factor in some potential upside that's tax reform-driven or is there some potential revenue upside beyond what you've guided?

And then if you could just address, I think investors are pretty shell-shocked from the pricing shock that occurred in 2017.

Obviously, the guide doesn't factor in and maybe you can't talk about pricing, but we've seen that -- maybe that's in the rearview mirror.

So, we do have in that guide, of course, tax reform, but we don't have anything explicit about that driving higher demand.

And you guys can back into what our PRASM number is, and I'm sure most of you have already done it.

Some of you maybe published research reports on it already as we talked -- which annoys me because then you weren't listening.

I'm kidding.

But we don't have anything explicit in there.

We also don't have anything explicit that there's going to be another pricing blow up, and I don't think there will be.

Frankly, well, I always bet the over, I think everyone knows that.

But with fuel at $2.11 a gallon, I think the chances of some bad pricing thing happening gets smaller.

They're not 0, but with fuel at $2.11 a gallon, which is what we've got embedded in those numbers, I think the chances of that are smaller and you can back into the numbers and recognize that our forecast, kind of at an industry level, is probably more conservative than some of you and I hope you're right, but we've put out a number that we feel really good about and that we think we have some ability to deal with -- with some ups and downs that might happen.

Obviously, not everything, there are things that could happen that cause us to miss, but that we have some play in there to deal with the inevitable something bad happens somewhere in the world.

We're not going to have a perfect year, we're going to have something, most years.

But we can also have some good things, but we don't have anything explicit kind of from tax reform built into the numbers yet.

Understood.

Follow-up question.

I'm wondering to what extent an upgauge strategy in '18 or in '19 or '20 plays into the [nonfuel] cost guide?

At some point, does it make sense for A319s to free up 75-seat RJs so that those 75-seat RJs then could go free up 50-seat RJs?

Are there a bunch -- are there any 50-seat RJs that come off in your capacity purchase agreements to give you that upgauging opportunity?

A couple of points, I guess.

First of all, the upgauging, which has been a steady upward pace over the last few years, it does pause this year.

It starts going up again in '19 and '20 based on our fleet plan.

We do have a lot of flexibility with our regional jet contracts, particularly the 50-seaters, so we do have the ability to -- we do have a lot of flexibility with that in the next couple of years, so I'd probably leave it at that as far as how that works.

But we do have that, so our hope is that we can replace 50-seaters with bigger regional jets or in some cases, it might be what you described, maybe a small narrowbody mainline airplane in its place.

So stay tuned.

I tried to go to you first, Mike.

No, I appreciate it.

Mike Linenberg with Deutsche Bank.

So the 4% to 6% out over the next few years, I mean, they're big numbers.

Can you talk through maybe some of the key underlying elements in those numbers?

Like, how much of it is better utilization or productivity?

Like Andrew, you talked about huge opportunities to improve asset efficiency.

How much of that is driving the increase in ASMs, as well as what percent are in and out of hubs?

Is maybe all that hub flying or are there -- are you looking to stand into focus cities, et cetera?

I'll go in a reverse order because that one's easy.

100% is in and out of hubs.

Our strategy is about strengthening our hubs, everything I talked about is better hubs and all of our growth is going to be in our hubs.

I don't have an exact number on the breakdown of how much is utilization, but you can get an idea.

And we have better numbers for 2018, we've done a more refined analysis.

You can get an idea from the chart that Andrew showed about efficiency, those are all asset efficiency in 2018.

Another way of looking at it is, I think, approximately 2 points of our growth is Hawaii, and that's still real growth, but it's a different kind of growth than just flying in domestic markets.

And by the way, our Hawaii growth is really a lot more focused on flying from our hubs like Denver to Hawaii than off the West Coast, which is more competitive.

We have grown there too as well and we both have a history of knowing how well those connecting hubs can work to funnel people.

Again, it's funneling people through the hub and -- but 2 points in 2018 are from that, a big chunk of our growth in 2018 is actually this temporary surge in regional jets, which doesn't last.

So there's every year, there'll be kind of those explanations, but you can get to pretty good numbers from looking at Andrew's chart on the utilization, both of aircraft and gates and employees to get a good mix that you'd look at this year and at least half is kind of that kind of utilization type of flying that's really efficient on the assets.

And even the step that's not explicitly in that category winds up fitting somewhat in that category just because we aren't adding gates anywhere in 2018.

And I suspect in '19 and '20, we'll have a picture that looks a lot similar -- in a lot of ways, similar to that with more gauge.

One of the things that's going to drive it in '19 and '20 is also gauge as well.

And then Scott, just to add onto that.

Some of the new routes that you are flying, some of these longer haul or ultra long-haul flights that you're adding where you have, because of your hubs, you're probably uniquely positioned of any U.S. carrier to fly, say, a Houston-Sydney or an L.A.-Singapore.

I get that Houston-Sydney obviously completes with Dallas-Sydney with Qantas and so for flow traffic, but it does seem like that, that's also driving a sizable chunk of ASM growth.

And again, there's nobody else really -- in some of those markets, they are very unique, you're the only game in town.

Yes, that's a really good point, and you're right.

I mean, Houston-Sydney, I don't know the exact percentage but it's probably a high single-digit percentage of our ASMs in 2018 from a single route.

I said it's an example of a great -- and it's an example of the power of a hub.

I mean, literally 85% of the people on Houston-Sydney are going to be connecting from other destinations.

And it's a phenomenal route because if you live on the East Coast, if you live in Oklahoma City or New Orleans, today, if you want to go to Australia, you basically have to fly to the West Coast and at least in one direction, spend the night, check into a hotel near L.A. or San Francisco and spend the night.

But if you're going through Houston, you can do day trips each direction.

And so, it is for the whole rest of the country, flying through a hub like Houston is most efficient way to get there.

And it's just an example of the power of a hub and utilizing the power of a hub, not just for the domestic network, which we focus on today, but even for great international opportunities.

Because we'd never fly that without the power of a hub behind it supporting that market.

Jamie Baker with JPMorgan.

So 2017 was supposed to be the transition year, margin contraction and various reasons that at sort of this time last year, you were talking about that.

The problem is the midpoint of the guide for 2018 implies another year of margin contraction.

But obviously, the ambitious 2020 guide speaks to the potential for margins to inflect.

So my question really is, when is the transition year transitioning to higher margins instead of lower margins?

And what are the most important drivers of that from tonight's presentation?

Because it's not really clear to me, the timing or the contribution.

I mean, you're guiding down again year-on-year, when and what really drives the inflection?

Give us some confidence there.

Well, I think the guidance is essentially flat next year, and that's with a $1.6 billion fuel headwind.

That's the difference in 2018, and we've got an embedded assumption of industry revenue and forecast [events].

Our numbers which I'm not going to tell you, but you can probably back into it and figure it out, and I think most of you have a more ambitious forecast, and I hope you're right.

And look, I think you can make the case that particularly with fuel at $2.11 a gallon, revenues will come in better.

But we are conscious of the fact that fuel prices are up $1.6 billion this year and are we going to be able to pass through 100% of that or not?

Because essentially, that's the math because we've got flat to slightly -- flat to down CASM.

So when fuel goes up $106 billion, we got to drive 106 -- $1.6 billion on the revenue side.

We've got to drive it all on the revenue side, and that's a pretty big hill to climb when you think about it from that perspective and that's how we get to the numbers.

Our margins, frankly, inflect and get better because the [fuel] curve is slightly backward dated and you're continuing to drive flat to down CASM with higher RASM, it's just -- it's math.

And we have created numbers that are probably more conservative than you have, or others will have numbers that we feel good about making a commitment to you, that we feel confident -- we're not 100%, we can never be 100% but that we believe we can hit even when we get thrown some curveballs going forward.

Kevin Crissey at Citi.

So Scott, how does the low-cost competition in your hubs affect your ability to drive the margins that maybe Delta sees in some of its hubs and maybe has less LCC competition in the hubs.

How does that affect you?

It matters.

The best way to be able -- well first, the best way to compete with a low-cost carrier is match their prices.

Half our revenue approximately comes from customers that are mostly shopping on price, and we cannot ignore half of our revenue and we can't let our low-cost carriers have price advantages in our hubs.

And no one chooses to fly on an ultra low-cost carrier, if they can get the same price on United Airlines, nobody, at least if they know what they're buying.

And so it's entirely within our control whether they succeed or fail in our hubs.

And our advantage that we have when we compete with them and the advantage that Delta has that's better than us is high connectivity.

Because if you can fill an airplane with 80% connecting revenues in a market, then they're left competing for 20% of the market and they cannot succeed in that environment.

But the higher your percentage of local revenue is, the more able they are to compete because they're just competing for local revenues in the market.

So we're going to be -- we'll continue to have an aggressive competitive posture, vis-à-vis ultra low-cost carriers, but the biggest strength we have is the connectivity of our hubs.

And the higher that connectivity is, the harder it is for them to succeed.

I mean, look at a place like Charlotte.

There's no low-cost carriers in Charlotte because it's so much connecting revenue that the local market is too small, just too small of a percentage for them to try to pick off even big markets.

And that's one of the benefits that we get as we grow connectivity in our hubs.

And if I could follow-up with a second one.

Andrew, this is for you.

Like, I try to come up with kind of rules of thumb, things that work in the industry from talking to airlines around the history.

And one of the things when you were at Allegiant was that you adjusted your schedule really aggressively seasonally and day of the week.

Why is it different -- the economics of that different at United than it is at, say, Allegiant?

Well, I think they're 2 completely different businesses.

I mean, just in every single respect.

The business side I was with, we built it to do exactly what it did, so we had a very high variable cost and very low fixed cost.

This is the exact opposite, we have very high fixed costs with not a lot of ability to vary them.

So it's just completely different economics and the only thing that matters is that your RASM exceeds your CASM.

So the marginal RASM needs to exceed your marginal CASM, which drives profits.

We think that the right thing to do here is what we've outlined today, and we expect that it will work, it will drive margin.

And it's just -- it's kind of night and day from what I've been involved in, in the past.

Ross Margolies from Stelliam Investment.

Just looking at the ASM growth and all the things that you've said, there's a lot of moving pieces here, but are -- should we assume that domestic ASM growth over the 3-year period will exceed international?

Or is there no assumption that we should be making in that at all?

That's our expectation, that domestic will be higher than international.

I would expect international to, over a long time horizon, sort of be growing with GDP, GDP-ish.

In any given year, it might go up or down because as Mike pointed out earlier, you had one route and it's a full point of growth.

So in any given year, it might be a little different but over -- if you smooth it out over time, it's probably going to look GDP-ish.

Savi Syth from Raymond James.

Just on the growth again, if I look at 2017, it looks like, if I look at your competitors, much of their growth was small mid-markets.

But if I look at United, the growth was kind of large, small, mid, pretty evenly.

As you look into 2018, '19 and '20, how is that growth mix?

Is that going to be similar in the next few years?

It will, and in fact, it will start this year as we have more regional jets coming.

It will be probably more biased towards small markets.

But what's really happening is we're displacing -- the reason it looked like that in 2017 is we're displacing regional jets in the big markets because today, we're flying regional jets in big markets and we're displacing them.

So it's a huge increase in percentage ASMs in a market like Newark to Atlanta or Dallas to Chicago, as you go back to the kind of airplane we had 6 or 7 years ago and you put the right airplane on it and that will continue.

But because we're taking more [shells] of regional jets, there will probably be a little -- there will be more -- a disproportionate amount that's moving into the small- and medium-sized markets as there's more shells available to do that kind of flying.

Got it.

Just a follow-up on the fixed cost question.

Is there any kind of discussion to kind of rethink how kind of the labor contracts are written where you can match it close to the reality today, which is that the U.S. is a mature market and to maybe have more kind of less of a treadmill or more even seasonal flexibility where your minimums are a lot lower in kind of the off-peaks and you can kind of have a higher kind of time spent in the off-peak?

Yes, I think the short answer is, yes, there is a desire to give ourselves more flexibility to manage through the seasonality in a way that's more cost-effective than what we're able to do today.

But you have to -- you do have to take the employee perspective into account, and these are people that live on their salaries.

And if there's -- we try to do it with things like voluntary leaves, and we can do a lot.

There's a lot of people that are willing to take voluntary leaves and willing to fly less in certain months because it's good for their life.

But you can't have the kind of 22% decline that we have.

We don't have that many people to do it, and we're not going to get contractual flexibility that we can just say to people, "Big change in your life in January compared to the rest of the year." It's going to have to be something that works for each of our unions before we (inaudible) to get it done.

Rajeev Lalwani with Morgan Stanley.

Oscar, a question for you.

A year or so, you came to investors and provided some healthy targets, but then things started to move around as it relates to capacity and some of the other goals.

How do you assure investors that, that doesn't happen this time around?

And then I have a follow-up for Andrew.

Thank you for asking me a question.

I was feeling lonely up here.

Accountability and transparency, we use those words constant.

I think the EPS targets are the best measure, as we've talked about.

We've gone through the absolute versus relative.

We did the Investor Day a year ago.

It was hard to track, a lot of the feedback we got from all of you that it was just difficult.

And so we thought the best way to do it is just to go to EPS and not only do it for the year, but for -- give you an outer target as well.

So that's how you can measure us, and that's how we measure ourselves.

That's what the guardrails are for us to make sure that all the decisions we make stay within that or above it, as you might think.

And then Andrew, can you just provide a walk of your old CASM guide to the new CASM guide and what impact does capacity have?

Trying to get sort of an underlying clean number as far as what's changed versus before on the 3-year look?

Yes, every time you say Andrew, I have to wait to hear what the question is to see which Andrew.

The short answer is I don't have a quick answer to give you.

I can tell you that the old CASM, I think you're referring to what we talked about at Investor Day, which was not -- I wouldn't characterize that as a guide.

I think what we're giving you today is a commitment that we're making that is very different than what we talked about in November '16.

So I think that's important to point out.

That was a 3-year view that we felt we would be between flat and 1% based on an assumed rate of capacity, which was a complete theoretical assumed rate of capacity.

I think we made it very clear that, that's all that was.

The reality is not much has changed since then, I can honestly say.

I think adding regional jets, that's something that's different.

We didn't expect that to happen when we came up with those numbers back in -- that was probably early November of 2016 when we put those numbers to bed.

So I think that's probably the single biggest change that's occurred.

But as we talked about, we have a better appreciation for the opportunities that we have to drive productivity and higher levels of efficiency, which really is a -- that is a huge part of the CASM story.

I mean, there's other things, too.

We're scrutinizing our expenses at a level that we haven't done at least in a while, I'm told.

I'm still a relative newcomer, but we just went through a very rigorous budgeting process to try to make sure we understand what we're spending our money on and eliminate areas where we can and still deliver a great product for our customers.

But we can work with you offline to try to give you a bridge, but we don't -- we didn't have one prepared at the moment.

Although I think that realistically, it's really the regionals for the most part.

Everything else is pretty much the same, except for the good guys on the productivity.

This is Brandon Oglenski from Barclays.

So hate to be critical, 2 earnings calls in a row here.

But look, there's a lot of investors here that look at the airline group and say these stocks are at least optically cheap on today's earnings.

But a lot of folks won't buy your stock because the belief is we're on a long-term trajectory to just dilute margins and take profits right back to breakeven and have problems with the balance sheet looking forward.

So a lot of analysts in this room believe things are truly different this time.

But Oscar, I hate to say it, it just feels like this meeting is again contradictory.

I think you opened it up saying the focus at United is on margins.

That was clearly the message in 2016 as well, and I think the problem that people had measuring this is because you widened the margin gap in 2017 with a strategy that was outgrowing the market.

We show up today, it looks like the strategy is, again, to most likely outgrow the market.

That's based on your own forecast, looks like revenue underperforming.

Cost performance, so margins, again, are likely to track below the industry, so the gap is going to widen for a second year in a row in what is a very robust economy.

So where is the confidence that you can instill in your investor base that we can believe those 2020 targets are actually achievable from here with the strategy that seems, for the next 3 years, to be a repeat of what we've already seen?

I would just quibble with the optics of what you just said.

This plan -- the details of this plan, the aggressive guide with regards to CASM, I think we are very confident and focused on that.

And I think as we accomplish, I think, what Scott said earlier, what we're comfortable with in giving you at this point in time, so indeed, we don't sort of provide numbers that are maybe too high and we lose confidence, I think it's important to know that what we have in front of you is a pretty darn good plan.

I think the growth aspect of it, as it's been outlined, and the component pieces of it and the reasons why and the profitability they're in, I think, are important and doable.

We've already -- starting in the fourth quarter, our CASM experience has been great.

So we are norming and forming a team that's really getting at the bowels of this.

And so I'm not -- I don't -- I wouldn't project this plan and this guide and this outline in any way but a really positive view.

And you may disagree with me on that as well, but I'm not going to just (inaudible) our numbers any other way other than the details are here.

I've been in this industry for a long time, and I've never seen -- not seeing the level of detail that we see with regards to Andrew Nocella, who hasn't been asked a question either, so we'll get to you.

The level of detail, OD pair, origin by destination with the profitability expectation, where we're growing, how it measures up, how -- it's the work that we did on our summer program, as the peak that -- it was one of the first concerns about capacity, was we went back and looked at it really hard as to hub -- were we better off after that summer peak of growth than we would've been.

We were significantly better off.

And so from my perspective, as I sort of harness the energy of this team, is growth good?

It is in the right places, at the right time and the right way.

Would that gain us profitability?

We've done different models at different numbers, and this is where we've come out that has the highest profitability.

And then we control the things that we can, which is CASM, and that's what we've done.

We give money back to shareowners.

So we're confident about this plan, and we're going to -- the trick is to deliver on it, and margin contraction, the $1.6 billion of fuel that we're overlapping, I think when you take all those things into account, it's better than you -- better -- I would tell you that it's better than you think.

You may think differently.

We're going to be very focused and energetic and communicating this in a very positive way to our company so that we can deliver.

If I could just follow up with Scott, too.

I think you said 4% to 6% capacity growth for the next 3 years.

Is that right?

I said 4% to 6% and similar in '19 and '20.

Okay.

Now look, I'm just an analyst.

I don't run anything.

So I definitely respect your opinions on the hubs and where your opportunities are in the network.

But as investors and analysts, are we to believe that at some point, this plan is going to result in stimulation in your natural share such that your revenue is going to significantly outperform your markets?

And I just want to ask that in the context of your Rochester example that you just spoke a lot about because I think it was a very right question that aren't you just going to be taking flow from some of your competitors, so what's the competitive response going to be?

I think your response was that the ASMs will sort themselves out between the competitors.

So do you believe that incrementally, you're going to win at the expense of some of your larger domestic competitors?

Look, I'll let you say it that way, and I won't characterize it that way.

I think all of our hubs, if you grow them to their fair size, you're going to win your fair share of those small markets.

And just like we will not be able to defend all of our market share from the Northwest Florida airport, our 2 competitors can't defend all their market share from Rochester because it's just a function of the geography and the connecting hub that you are flying into.

And as sort of Andrew showed you in [your] numbers, we think in year 1, those come in at lower -- that's just an average RASM, as you're moving into a market.

And the same would be true at our competitors.

What's different at United is we spent years shrinking while our competitors were growing, and we're not going to say that's the new baseline.

We're not going to accept 10 margin point lower profitability in our Mid-Continent hubs.

I mean, that's the key.

And growing our hubs to have the kind of connectivity that our competing hubs have, I don't think, by the way, we will get all the way there.

There's reasons, if we wanted to talk about the specifics hub by hub, that we won't get all the way there.

But we'll get close on the profitability of those Mid-Continent hubs by driving higher connectivity in those hubs.

We absolutely -- I mean, really, it is math.

We will get close in those hubs, and we will always have higher profit margins in our international gateways.

And that's what's going to drive profitability for United in -- for the long run and even in the near term as we do that.

Now there will be times, there will be quarters where stuff happens.

I mean, you look at -- like, we had one bad -- really bad quarter this year, the third quarter, where every exogenous event happened in that quarter, whether it was Guam, a hurricane, Pacific weakness, a [LCC] price war that lasted for 3 months.

And we had some self-inflicted wounds in the same quarter, but that doesn't make the trend for what -- the fundamental strategy.

The whole point we were trying to say today on laying out the network strategy is the intellectual rationale for what we're doing.

And I would fundamentally disagree with some of the statements that preceded the question about our underperformance in 2017 was about growth.

That wasn't the issue.

It was a whole bunch of other stuff.

We did have issues.

There's a whole bunch of other stuff, but it wasn't about the growth.

And the growth, particularly if you're growing in places like we're growing, one of the other issues in '17 was lots of competitive capacity.

This was happening in San Francisco and other places.

Our growth and strengthening our hubs is absolutely the critical essential element to driving higher absolute and relative margins at United, and that's just -- I'm absolutely certain of that.

Darryl Genovesi, UBS.

Scott, it's true that I can back into your RASM forecast, it's also true that I have.

I guess what I can't necessarily see is what your underlying macroeconomic assumptions are and, by the same token, I can't see how you sort of view your own RASM performance over the next few years relative to the industry.

So can you kind of help us understand that and also try to help us understand kind of sensitivities around your underlying assumptions?

So Andrew tried to hint at it without giving you specific numbers, so I'm going to hint as well without giving you specific numbers.

We know they're growing faster in the short term drives lower relative RASM.

We know that higher competitive capacity growth in our markets drives lower relative RASM.

We do have a lot of tailwinds.

Andrew talked about Gemini being probably the biggest one, segmentation.

But those aren't necessarily -- I mean, I think a lot of those are relative tailwinds because we're behind our -- where our competitors are, but those aren't just relative tail -- those are tailwinds relative to not doing anything, but doesn't necessarily -- our competitors aren't going to sit still.

Delta didn't -- Delta and American didn't fire their whole yield management teams and just sit on their hands with their yield management systems.

I think our 1.2 points that we're already seeing from that is going to be meaningfully better than they get, but they're not going to be 0. And so we try to give you a flavor.

We do have specific numbers that we have internally, but we're not going to talk about our growth forecast.

But you can -- I mean, you can do the math and get probably within a reasonable range of what we think our relative performance is going to be given what we have said.

And look, I know because I read all of your reports.

I know what you forecast, that we are more conservative at a macro level and I hope you're right.

But again, we are trying -- what we don't want to do is put an aggressive forecast out here today that things are going really well and we miss the absolute forecast.

We're trying to make absolute commitments to you here today.

And while I've said before we're not 100% certain we'll get there, we feel like we can deliver on these numbers in 2018 and on 2020, and we want to be able to deliver.

And so we're probably more conservative than you, and I hope you're right.

Oscar, just a quick one.

How frequently are you intending on updating this guidance?

We haven't talked about it.

I think we are definitely going to give you, every quarter, an update on everything we're doing.

Our EPS doesn't track ratably -- or so, it will move around.

But I think every quarter and possibly -- at some time 2 or 3 quarters down, I think it'd be important to give you a sense, the scorecard that we have up there and other scorecards that we have.

So we'll be a lot more visible.

I think more importantly you'll see, certainly, me a little bit more often with either Andrew Levy or Scott with all of the investors that we've been focusing, I've been focusing on a lot of things and a lot of places.

And I think if I had a key learning on the year, especially towards the tail end, is that this part of our world is incredibly important.

And so we'll give you the updates as we see.

But mostly, hopefully, we just want to give you some good results that track along the things that we're doing, which is why we're putting those EPS targets out there.

David Vernon with Bernstein.

Scott, really appreciate the color on what you need to do to build out the network and manufacture that connectivity.

Can you give us a sense for how the financial returns from that strategy will pay off as you implement it?

Are you -- I imagine you're expecting a little bit lower load factors.

You mentioned before that yield should be okay.

How do you think the cadence of the payoff from the strategy is going to play out between '18 and '20?

So actually, the -- growing the network ought to drive higher load factors.

You look, like, at that Las Vegas example and you put 10 more options for connectivity.

It ought to do 2 things, especially as we get the yield management system tuned.

One, on peak demand days during the summer, we can spill off some of the lower loads because -- let's just -- city X had the lowest yields and now city Y, one of the new 10 cities, has higher yields and we can take the city Y passengers to city X. But also in off-peak periods, you can now fill -- where you run a 70% load factor today, you can run a 75% load factor because you have more demand.

So the hub stuff ought to drive higher demand.

The place where we have lower load factors is what Andrew talked about, which is on the yield management system, which we had a built-in bias in the yield management system to dramatically under-forecast.

And when you're under-forecasting demand, you're saying there's fewer people left to come.

And so even in your peak period, you're selling too soon.

You're selling out far in advance.

And so what's happened now as we got the yield management system is you're not selling as many seats far in advance, and that leaves more seats to be sold to close in, which are at much higher yields, as Andrew pointed out, [2-point] higher yields in the test, but you essentially ran a point lower load factor because you didn't sell all of those seats.

I mean, I guess I had heard your response to the first question around the yield is not necessarily taking a hit from growing the capacity and if load factors are going to go up and...

That was really a competitive question about what's going to happen when we add service into these small cities.

And I don't think -- I think ultimately, capacity doesn't happen overnight, but I think capacity in those small cities adjust to the level of demand.

None of the big network carriers go into small cities and try -- or any cities and try to stimulate demand by lowering prices.

The pricing structure, when we went -- as we've gone into small cities, and we've gone into a bunch of them in the last year, the pricing structure never changed.

What changes is there's more capacity, and demand changes and moves across airlines.

And it's not like some executive sitting on a table like this says, "Oh, because American Airlines started flying to Northwest Florida, let's go cut one flight." It happens from the bottom up because you see -- we'll see less demand than we otherwise would have seen in Houston to Northwest Florida, and I'll never even know what happened and Andrew won't know what happened.

But somehow, capacity will adjust because we've lost demand in that market.

And our system and our processes and our scheduling department will make those adjustments.

This is really a competitive question, and I get the competitive question all the time about our growth.

And I know it's complicated.

People don't like the natural share answer, but it really is and it really is about geography.

And we're not the only ones getting our natural share.

It's just that we start further behind.

And because we start further behind, we have more near-term growth to make up until we get back to where we were 7, 8 years ago relative to Delta and American.

And maybe just, Andrew, as a quick follow-up, I commend your confidence in putting a narrower guidance range out in 2020 than for 2018.

Can you give us a sense for what are the assumptions around economic growth, oil price, when you build that long-term forecast?

Like, what do you have to believe that you can't control to put those numbers -- those $11, $12 numbers in play?

Yes, and I think what you might have been asking is, is I think, is kind of what's your 2019 number?

Is this a hockey stick?

Because you talked about the cadence, I guess.

I think we gave you a fuel number, or you'll see a fuel number in there.

It's $2.11, it uses a forward curve, it is slightly backward dated, so we get some benefits in '19 and '20.

As far as GDP, we haven't shared that.

I will tell you that we're not assuming anything out of the ordinary, I think it'd be fair to say.

So we're not assuming a recessionary environment or acceleration of growth.

But we're using forecasts from companies that we hire to give us long-term macroeconomic forecasts.

And I'm not sure if there's another part to your question, but I mean, those are some of the things -- CASM, we talked a little bit about that.

I mean, we've tried to give you a sense as to what we're going to do in '18 and to get to flat or better in '19 and '20.

I mean, it's not a 2020.

It's -- every year we're going to do that and you get to the number.

So you can make the assumptions about RASM, figure it out.

Might be a better question for the board, but I wanted to ask you about the incentives and these earnings targets, which are positive, but to the extent that those are actually tied to your incentive comp.

So there were some important changes made last year where it moved much more to a relative margin expansion.

I think the weighting on ROIC and ROIC improvement actually went down.

And if memory serves, it was a 2017, 2018 measurement period, which feels like this would be the payoff year.

So the question is, do you see those formulas changing?

And are you explicitly going to link your compensation to these earnings targets that you've offered today?

Yes, the relative aspect has always been part of it and will continue to be that way.

These particular targets, obviously, we're just rolling them out.

Our comp committee will meet here in the next month or so to establish targets going forward.

So of course, they'll be tied with -- in that regard.

The only other changes that I think we're seeing now is on the customer service angle -- is going to amplify those a little bit.

And so the board is still -- the comp committee is still working through that, so I don't want to get ahead of them in what they're thinking, but relative margin is and will continue to be a big part of our long-term incentive plan.

Not explicit earnings?

Again, I don't think so because we haven't -- but again, the comp committee will have to work through that.

It's -- I don't want to commit them to something that...

Joe DeNardi, Stifel.

Scott, one of the areas of the business where you don't have to worry about competitive response is the credit card.

You've talked about...

There are some who would quibble with that, but finish the question.

You've talked in the past it's about a 1.5 points margin headwind for you guys.

What's the strategy for closing that?

So look, 2 things.

First, I will quibble with the start because it is competitive.

In Houston, we're the natural player, if you're Houston, Denver, to have the credit card.

But in the rest of the country, and there's a bunch of markets that are jump balls, if you're in Kansas -- if you're in any of the cities that aren't hubs, it's a jump ball and the kind of people that get frequent -- that get the credit -- airline credit cards are the kind of people that travel and need to fly.

And they have a -- just like a Houston-based customer is naturally biased to have a United Airlines credit card, a Kansas City or Wilmington, North Carolina customer has a natural bias to have the credit card of the airline that is biggest in that city because that gives them the most optionality for flying.

And so it is a competitive issue.

It's not just about our RASM.

We underperform, and we would expect this to underperform in places that aren't our hubs because if we're #3, it's harder to get -- it's harder for a customer to have the rationale to want our card.

So competitive position matters not just for the hub scale and pass-through revenue.

It matters for the credit card.

The second issue that we do have is I think in spite of that, we have a real opportunity to grow the number of customers that are signing up for our card.

It is one of our big initiatives.

We didn't talk about it today.

It is one of the things that Andrew and his team are working really hard on.

I am, too.

And look, Andrew Nocella and I, we've said a bunch of times today, we're not reinventing the wheel; have both been involved, at our 2 previous airline in step function increases and the card revenues at those airlines.

And it's not exactly the same situation.

It's not exactly the same playbook here, but we do have a good partner in Chase and Jamie Baker has assured me he's going to help me get this done and -- but we have a great partner, but we got to work to do it.

And we're 2 big companies and I wish it was happening faster, but we are working with them to drive particularly higher originations and higher card sign-ups for us with Chase.

And we have some ways that we have some cards in our hand to help make that happen.

But it really is twofold.

We can do a better job with our existing relationship.

And if we're small in all these small cities, we are behind the eight ball in trying to get people to sign up for our card.

I've been reminded that we have a cocktail event.

So I know there are a lot of questions and all of our executives are going to stay in the room for the next hour plus, for questions.

So we'll cut it here.

All right.

Okay.

Thank you.

Thank you.

Whoever had that next question over there, [I'll take it.]