聯合航空 (UAL) 2018 Q1 法說會逐字稿

Good morning, and welcome to United Continental Holdings Earnings Conference Call for the First Quarter 2018.

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

(Operator Instructions) This call is being recorded and is copyrighted.

Please note that no portion of the call may be recorded, transcribed or rebroadcast without the company's permission.

Your participation implies your consent to our recording of this call.

If you do not agree with these terms, simply drop off the line.

I will now turn the presentation over to your host for today's call, Mike Leskinen, Managing Director of Investor Relations.

You may begin, sir.

Thank you, Brandon.

Good morning, everyone, and welcome to United's First Quarter 2018 Earnings Conference Call.

Yesterday, we issued our earnings release and separate investor update.

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

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

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

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

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

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

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

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

Joining us here in Chicago to discuss our results and outlook: our 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.

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

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

Thank you, Mike.

Good morning, everybody, and thank you for being on the call today.

Before I go into our first quarter results, I would like us to take a moment and just keep all the passengers and crew of Southwest Flight 1380 in our thoughts.

I know that the entire United family stands shoulder to shoulder with our Southwest colleagues in this difficult time.

As we turn to Slide 4, yesterday, we reported adjusted pretax earnings of $179 million with a pretax margin of 2% as adjusted.

We achieved the top end of our guidance due to a strong demand environment and robust revenue trends, particularly in our international markets.

Our earnings per share of $0.50 as adjusted was 19% higher than our first quarter results of last year.

Our first quarter reflects exceptional operational performance in the face of back-to-back winter storms in the Northeast as well as other various weathers event.

And not only did our employees power through these challenges, they continued to deliver record-setting operational performance.

I want to thank all 90,000 of our employees for their outstanding work and dedication to keep our airline running not only safe but on time.

Every day, every flight, our team is focused on delivering a positive experience for our customers throughout their journey.

We are equipping our employees with the modern tools and support they need to provide our customers with the best possible travel experience.

As you can see on Slide 5, this quarter, we completed the rollout of 10,000 mobile devices for our airport agents, which support gate functions such as rebooking during irregular operations, providing upgrades, coordinating family seating and many other tasks.

These tools not only help our employees and customers but help drive efficiency, something we are extremely focused on.

During the quarter, we also began training our team on United's customer service decision framework developed alongside our frontline employees, and we call this the core4.

It's a hierarchical framework based on the principles of safe, caring, dependable and efficient.

The biggest change is that caring is second only to safety, and what that means is giving our employees the flexibility and, more importantly, the ownership to take actions for our customers when our policies and procedures don't fit the situation at hand.

Early results evident in our customer satisfaction scores are very positive, and we're on track to have 80% of our employees complete this core4 training by the end of the year.

As you know, improving customer service and experience is one of the top priorities for us here at United.

At our January 23 investor event, we laid out a 3-year plan to deliver a CAGR and earnings per share of about 25%, as shown on Slide 6. To execute on this plan, we have 2 primary focus areas.

First is strengthening and growing our domestic network, and second is driving asset efficiency and productivity, which is underpinned by our commitment to keep CASM-ex flat or better through 2020.

We have tremendous network potential and have defined and aligned on the strategy designed to unlock our opportunities and better leverage what we call our uniquely United strengths.

We are very confident in our multiyear network growth strategy and remain committed to the long-term financial targets we laid out in January.

In fact, we've seen early successes on many of our new routes.

That said, we believe the strongest evidence that the plan is working is our march towards our adjusted EPS targets.

Despite the recent increases in fuel, today, we are tightening our full year 2018 adjusted EPS guidance range by $0.50 based on the combination of our first quarter results and our increased confidence in the remainder of the year.

Our new adjusted EPS guidance range is now $7 to $8.50.

We are entering the second quarter with a momentum, encouraged by trends in the revenue environment and how our employees continue to raise the bar on operational performance and customer service.

And so with that, I'll turn it over to Scott.

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

To begin, I'd like to thank all of our employees for delivering another quarter of top-tier operational performance.

We set our best-ever first quarter consolidated D:0, with March marking the seventh month in a row of being first amongst our primary competitors.

We believe that D:0 really is the best measure of an airline's core operating performance, and I'm proud to be a part of this leading team.

And while running a great operation, getting customers to their destination on time with their bags and with a minimum amount of hassle is an essential requirement to being a customer-centric airline.

It clearly isn't enough.

We, at United, have to do much more than just run an on-time airline.

Empowering our frontline to put customers first, use their judgment, really, is one of the keys to making United great in the long term.

That's the reason why you hear all of us talk about the core4 training as such a critical element of our plans here at United.

The core4 represents not just some flavor-of-the-day corporate speak but a real necessity to change our DNA and put the customers first.

Moving on to the revenue environment.

All regions performed above expectations for the quarter.

Both business and leisure bookings did well domestically, and the front cabin drove outperformance in our international receipts.

The healthy revenue environment, coupled with the commercial initiatives Andrew Nocella will touch on shortly, got 2018 off to a strong start.

Running a great operation allows us to focus on executing our network strategy to strengthen and grow our hubs.

On Slide 10, we've tightened our full year capacity guidance to 4.5% to 5.5% from the previous 4% to 6%.

In addition, it seems there may be some misunderstandings about scope relative to our 3-year growth plans that I'd like to take a moment to try to clear up.

We believe changing scope and getting a regional product that is competitive is important to United's long-term future.

However, it takes time to negotiate a new agreement, then takes time to negotiate an aircraft deal, and then it takes 18 months or more before the first aircraft are built and start actually flying.

So while it is important in the long run competitive position at United, there really was never enough time for us to get all of that done and aircraft delivered to have a meaningful change in our regional fleet before 2020.

So our targets through 2020 were not and are not predicated on changes to scope.

We have great confidence in our $11 to $13 adjusted EPS target, but it is based on our existing fleet plan.

We're pleased with how the year began, but as we look forward to the remainder of the year, we'll continue to focus on running a great operation, executing the growth plan and increasing our efficiency and productivity.

We also note we have more to do for the customer experience, which is represented by our core4.

We feel really good about the demand environment overall and, more specifically, for how that revenue outlook is shaping up here at United.

And while we're doing everything we can to drive revenue performance, our cost base is the lever that we can most control, and doing so is fundamental to improving our earnings profile.

Andrew Levy will talk more about our cost performance and our opportunities moving forward, and I'd like to thank him and the entire United team for their hard work in the first quarter to keep us in the middle of our guidance range despite the significant impact of storms.

We felt encouraged about how the first quarter came in and are optimistic about the next couple of quarters that we have visibility on.

It's early, but based on everything that we can see so far, it gives us increasing confidence that we're on the right path with the growth plan.

But before I turn it over, I'd also like to congratulate Mr. Leskinen, who has a baby due tomorrow, and assure his wife, Melissa, that we will rush him to the airport after this call to make sure he gets home in time.

And with that, I'll turn it over to the Andrews.

Thanks, Scott.

Turning to the revenue environment on Slide 13.

Our system PRASM was 2.7% higher year-over-year for the first quarter.

As Scott mentioned, all regions exceeded initial expectations, with close-in strength materializing the week before Easter holiday, which has been historically weak.

We also had a 50 basis point tailwind from foreign exchange in the quarter.

Domestic unit revenue sequentially improved throughout the quarter, with corporate revenues being up 9% year-over-year, led by the energy sector.

This outpaced our top line growth of 6%.

As a result of an intensified competitive landscape and corporate pricing, particularly the small and medium enterprise segment, we invested in sales initiatives that have sharpened our competitive position across all sectors, geographies and the entire fare spectrum.

The Atlantic region had our strongest year-over-year PRASM of any region in the quarter.

We saw sequential improvement each month in the quarter and now have seen improvement for 6 consecutive quarters.

This positive year-over-year PRASM momentum is driven by strong [leisure traffic] performance in the economy cabin, and we continue to see strong revenue performance upfront as well as a 2-point benefit from foreign exchange.

Overall, forward-looking trends for the second quarter look promising, with anticipated continued strength in demand for both cabins.

Latin followed in performance, with the bulk of the strength driven by the Caribbean beach markets and Central America, both of which had double-digit PRASM growth in the quarter.

After 13 quarters of underperformance in the Pacific, PRASM inflected strongly positive in the month of March.

With demand catching up to supply, China PRASM improved throughout the quarter.

Excluding Micronesia, our Transpac PRASM would have been positive in Q1.

Looking ahead, we anticipate second quarter PRASM to be up 1% to 3% year-over-year.

Moving to Slide 14.

I'd like to give an update on some of our commercial initiatives we outlined at our investor event earlier this year.

At the first -- at the end of the first quarter, Gemini, our new revenue management system, is rolled out on all flights, and we expect Gemini to be running in all cabins by the end of this month.

Initial results are on plan and showed better managed flights, as measured by a more optimal mix of mid yield fares.

I'm really proud of the team, and we believe these preliminary results are encouraging and represent the opportunity we can expect Gemini to drive moving forward.

Our Basic Economy product continues to evolve and is currently available for purchase in about 2/3 of our domestic nonstop markets.

Now that it's begun to mature and is competing with similar products from our large competitors, Basic Economy is contributing as we hoped, with 60% to 70% of our customers buying up to standard.

While there's still room for further optimization, it's been an effective competitive tool.

In November, we began offering dynamic pricing for Everyday Awards on our mileage -- for our MileagePlus members.

Since making this announcement, we have seen a 16% increase in saver awards.

This allows MileagePlus to offer lower-price awards to members while, at the same time, optimizing award expense to United.

On the MileagePlus card, new card acquisitions continue to build on strong fourth quarter performance, and we reached an inflection point with a 7% increase in acquisitions in the quarter.

This is the largest number of new accounts in the quarter since the second quarter of 2016.

Card spend was up 3%, which we view as a significant opportunity to further grow.

We'll continue to work with Chase to grow card acquisitions and improve the program to make it better for our joint customers.

Another customer enhancement is on Wi-Fi.

We're bringing Viasat's latest-generation inflight entertainment and connectivity system to the 70 aircraft, including our Boeing 737 MAX.

This system is designed to provide customers with vast, reliable Internet connections and to be able to connect with key business applications such as corporate VPN and secure e-mail.

Moving on to Polaris on Slide 15.

We remain on track with our aircraft reconfiguration schedule.

We plan to induct a Polaris-configured aircraft every 10 days through the end of 2020.

We're very excited about Polaris, and have continued to invest and improve the soft product in response to customer and employee feedback.

We're currently on schedule to open 4 Polaris lounges this year, with San Francisco opening in just a few days at the end of this month; and Newark and Houston in one more month; and Los Angeles, later this year.

In summary, we feel the revenue environment is robust and the strongest we've seen in a long time.

Our commercial initiatives have taken off in the right direction.

And with that, I'll turn it over to Andrew.

Thanks, Andrew.

Yesterday afternoon, we released our first quarter 2018 earnings and our second quarter investor update.

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

Slide 17 is a summary of our GAAP financials, and Slide 18 shows our adjusted results.

We are pleased to report adjusted earnings of $0.50 per share, which was 19% higher than the first quarter of 2017.

Adjusted pretax income was $179 million, and adjusted pretax margin was 2%.

We were very pleased with how the quarter came in compared to initial expectations.

Slide 19 shows our total cost per ASM for the first quarter of 2018 and our estimates for the second quarter and full year.

Turning to Slide 20.

Non-fuel unit cost in the first quarter increased 0.6% on a year-over-year basis, which was slightly above the middle of our initial guidance range despite the impact from weather events, which cumulatively added 40 bps of non-fuel CASM-ex headwind in the quarter.

We expect second quarter non-fuel CASM-ex to be between flat to up 1% compared to the second quarter of 2017.

The combination of higher regional capacity expense and increased airport costs represents almost 2 points of CASM-ex pressure, but we expect this will largely offset -- these will be largely offset year-over-year by lower unit cost and other line items.

It's important to note these were known areas of cost pressure for the second quarter, when we provided our 2018 cost guidance in January.

We also expect to see a nice decline in CASM-ex during the second half of the year, which we get into on Slide 21.

During the third quarter of 2017, we started to ramp up our 50-seat flying, so as we get into the back half of the year, we start to lap these costs.

This alone is expected to provide a 0.5 point of CASM-ex tailwinds compared with the first half of this year.

Our capacity growth rate is also expected to be meaningfully higher in the last 2 quarters, with much of the increased rate of growth driven by flying during off-peak periods.

As we discussed in January, we believe increasing the productivity of our fixed costs will have a very positive effect on helping contain our growth of non-fuel unit costs in 2018.

We've also launched several initiatives to drive increased cost savings as the year progresses.

These include our supply chain excellence project, which will improve the efficiency of our aircraft parts supply chain, and several projects in our maintenance planning area, which will improve our airframe heavy maintenance programs and further optimize our checks.

Finally, we're continuing to utilize our balance sheet by purchasing aircraft off lease, which optimizes our aircraft ownership costs.

All in all, I'm very confident in reaffirming our non-fuel unit cost guidance of down 1% to flat for the full year 2018.

Turning to Slide 22.

Year-to-date through April 16, we have purchased $747 million of our shares, which represents about 4% of the total shares outstanding at the end of 2017.

That leaves us with $2.3 billion remaining of the $3 billion repurchase authority granted by our board in December of 2017.

We plan to continue to opportunistically return excess cash to shareholders through repurchases of our stock when it's trading below our view of intrinsic value while maintaining appropriate liquidity.

For 2018, we continue to expect adjusted CapEx to be between $3.6 billion and $3.8 billion.

On fleet, we took delivery of 2 Boeing 777-300ERs and 4 Boeing 787-9s in the first quarter.

We also continued to take advantage of our balance sheet and purchased 6 mainline and 17 regional aircraft off of lease, which gives us greater flexibility and better economics for our fleet.

Looking forward to the second quarter, we plan to take delivery of our first 6 Boeing 737 MAX 9 aircraft and are scheduled to begin operating the aircraft in June.

We are very excited about the efficiency improvements and customer experience enhancements this aircraft will bring to our fleet.

We also continue to be very active in the used aircraft market and recently secured a deal for 20 Airbus A319 aircraft scheduled to be delivered to us in 2020 and 2021.

Used aircraft provide us an enhanced opportunity to maximize returns regardless of where we are in the economic cycle, and we are in discussions for more used widebody and narrowbody aircraft.

Slide 23 includes a summary of our current guidance, including second quarter's projected fuel price range using the April 12 fuel curve.

The range provided for capacity, revenue and costs imply the second quarter adjusted pretax margin between 9% and 11%.

And as Oscar mentioned earlier, on Slide 24, we are raising the bottom end of our full year adjusted earnings per share guidance by $0.50 to a new range of $7 to $8.50.

The momentum we've established in the first quarter has increased our confidence in our ability to deliver adjusted EPS in this tightened range.

With that, I'll turn it over to Mike to kick off the Q&A.

Thank you, Andrew.

First, we will take questions from the analyst community, then we will take questions from the media.

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

(Operator Instructions) And from UBS, we have Darryl Genovesi.

Scott or Andrew Nocella, thanks for the color on the scope constraint.

I guess the other constraint to your growth that I've been wondering about is on airport asset.

Do you have enough spare gate and runway availability to execute your growth plan at the Mid-Continent hub?

Or do you need to go out and get more?

For the most part, we have what we need.

Really, when you look at our schedule, the fact is the airline operated bank structures where 1 or 2 of the banks were completely full through the day, but the rest of the bank structures, the rest of the day had excess capacity.

So as we fill in the capacity in the other times of day, it's obviously very cost-efficient.

We don't need incremental gates across most of our hubs, and we're able to grow the airline.

Okay, great.

And then, I guess, on kind of a similar topic.

My sense is that you have some room to grow at Dulles, perhaps, more than anywhere else.

But that wasn't really a focus when you rolled out your network plan back in January.

And so I guess I was just wondering if there's room to drive some more connections over Dulles, specifically, because my sense is that you'd like to refocus Newark more towards the local market.

So Dulles is a great hub.

It operates 4 bank -- 4 departure waves per day today, and only 1 of this departure waves is full from a gate perspective.

So there is a lot of opportunity in Dulles.

We continue to evaluate exactly how to take advantage of that, but we're excited about all of our hubs, and absolutely, Dulles is one of those hubs.

And I do think there's opportunity to grow Dulles in the future.

And then, Andrew Levy, on the CASM guidance, it looks like you need about a 200 basis point deceleration in the second half of the year to get to the full year midpoint.

Can you just help us bucket what some of the big moving pieces are?

If you can help quantify it, that would be helpful.

Well, I think the big pieces are the ones I referred to that are on Slide 21.

The 50-seater alone is a 0.5 point improvement in the second half relative to the first.

We are growing substantially more in the back half of the year.

You can see that from our capacity guide, and as we noted, a decent amount of that growth is coming during off-peak periods, and that's at very, very low marginal costs.

And so that's a cost savings that we'll see in a large number of our P&L and income statement line items.

And then as far as some of the things I specifically mentioned, I don't want to give you actual numbers on what the value of those are.

However, they are accelerating as the year goes on.

For instance, the supply chain excellence project is something we're really excited about.

We spent a lot of time planning at the end of last year, and we're just beginning to ramp that up.

That's going to deliver benefits to us, we think, more so as time goes on, including going into next year.

Aircraft rent expense is something that we continue to see some goodness there as we have shifted more airplanes on the balance sheet, so we'll continue to see some benefits there.

So beyond that, I'm not sure how much more detail we want to give you right now, but we feel really confident that the combination of these items that I've mentioned as well as several others that are less impactful are going to help us drive our CASM-ex meaningfully lower in the second half of the year.

And that's why we're so confident reaffirming the full year guide.

From Cowen, we have Helane Becker.

So my first question is this.

When you think about the first quarter historically, that's been your toughest quarter.

And now you have 2 years in a row where you actually have profits.

And this year, I would say, is fairly significant.

As you think about or as we, I guess, think about, sequentially, fourth quarter to first quarter going forward, is this the new bar?

Are we going to see more profit in the first quarter going forward than historically United has seen?

Helane, I think -- thank you for saying that.

We felt really good about how the first quarter came in this year.

The fourth and first quarters will always be seasonally the weakest for United, and that is simply a fact that we don't have as much service to Florida and the Caribbean.

And so the big exodus from the Northeast to Florida and the Caribbean during the winter is less impactful to United than it is to other airlines.

You are you seeing improvement in those quarters.

I think you'll continue to, but I think you're going to see improvement at United across all quarters.

We think the kinds of improvement that we saw in the first quarter are going to continue to happen in each quarter.

So it happens in the first quarter, but we would expect that to be happening in subsequent quarters as well, including our seasonal peaks in the second and third quarter.

Right.

And so just to follow up, the holidays then are less impactful for you than they might be -- might have been in the past years or they might be for other carriers?

Is that sort of accurate?

Well, I think they're probably similar level of impact for us that they were in past years, but we -- they are less impactful for United than they are, for example, a carrier that has a lot of service in the Northeast to Florida, particularly, the Easter holiday.

It has an impact, certainly, on our domestic network.

The first quarter is helped by it, and the second quarter will be a harder comparison, but the magnitude is much smaller than other carriers.

Got you.

Okay.

And then just for my follow-up real quick, I want to understand Pacific because, I think, Andrew Nocella, you said 1% to 3% after you talked about the Pacific.

But you were talking about 1% to 3% revenue -- unit revenue for the system, right, and not for the Pacific specifically in the second quarter?

That's what I was referring to.

Yes, okay.

And then the Pacific, do you think, will be positive on a full quarter basis then in this quarter?

Is that what you said?

I think it will be.

Our outlook shows that right now.

From Sanford Bernstein, we have David Vernon.

Scott, I was wondering if you might be able to add a little bit of color as to when kind of getting resolution on the scope issues is going to be important to executing the growth strategy and what the future might look like if you can't get the kind of negotiated agreement on that issue that you're looking for right now.

Well, the long term here at United, we are focused on making this the best airline in the world.

And part of that is about having a competitive product and a competitive fleet.

I also understand the reluctance our pilots have historically had on scope because we were taking regional aircraft and flying them in big markets that appropriately should have been mainline markets, places like Newark, Atlanta, Chicago to LaGuardia, Dallas to Chicago.

And for the next several years, for the time reasons that I talked about before or at least through 2020, we never anticipated a change in our fleet plan, just not time to get it done.

In the near term, we are funding our growth plan by taking the regional jets out of markets like Newark to Atlanta and moving them into appropriate regional markets.

And it is important to making this the best airline in the world that we ultimately get that done.

There's no ticking clock or no urgent time line.

We are in -- have actually started early negotiations with our pilots on a number of issues.

This is one that, fortunately, is a win-win as long as we are growing the airline and using regional aircraft in the right kinds of markets to support and feed the mainline with high-yield traffic.

It is something that also helps our pilots by creating more growth opportunities at the mainline, and I believe we will get something done, but there's no ticking time clock for getting it done.

And just sourcing large regional jets out of the -- what should be mainline markets today certainly gets us through pretty much as far as we have on our planning horizon.

So it's really beyond that this opportunity accrues.

All right.

Appreciate the color on that.

Then maybe, Andrew, could you help us understand whether there's some additional headwind coming down the pike on the PRASM side if the growth in the back half of the year is about nonpeak flying?

Or is this something that you guys are kind of already anticipating and shouldn't see a major headwind from -- by adding flights during nonpeak hours?

Yes, it's something we looked at carefully.

I think the foundation for that needs to be, though -- we've changed the profile of how we fly, and we've changed the profile of our connectivity.

And that connectivity, being enhanced at the airline, really helps us most in the off-peak quarters than the peak quarters because of the way passengers flow through the system.

We have more seats.

So in the off-peak time period, as we build this connectivity, we feel really good.

Q1 came in with the off-peak flying better than our expectations, and that's given us a lot of good views as to what the fourth quarter will look like in a similar off-peak situation.

So again, the fundamental change is the connectivity new to the airline is allowing us to absorb this capacity in off-peak periods and do very well with it.

So you're not seeing a big difference on the fares for the earlier or later departures?

Well, there is a difference in the fares, but the marginal CASM and the RASMs we're bringing in, we think, is margin-accretive and we're managing the margin, and we think it's working out well.

From Barclays, we have Brandon Oglenski.

I guess I want to piggyback off of David's question there.

I mean, you guys do have lots of moving pieces in the network right now, like rebanking Chicago and adding connectivity in your Hawaiian expansion as well.

But then on the positive side, too, you have the Gemini and the revenue management systems spooling up.

So I guess I just want to ask, should we think about these expansion projects spooling up over time, driving incremental revenue as time progresses?

And with like the revenue management initiatives, should investors expect that we start to see these accrue to unit revenues a few quarters out?

Or is this more of a margin story?

Definitely managing the margin, but as we move forward, the routes, new routes definitely have lower RASM in their first year than their second year.

So I think there's a lot of -- I'd say a lot of different moving pieces and a lot of initiatives, some of which will overlap with each other.

But we're really hopeful that when we look at how a route will do in year 2 and how this capacity does in year 2, it will be better than year 1. We're also -- with Gemini, we've recently turned the system on.

We think we have a long way to go with Gemini in terms of making it better.

And there are further enhancements coming, so whether it is that or many of the other initiatives we have in the pipeline, we think the pipeline is pretty full with ideas that are going to drive margin and drive RASM in the long run.

Okay, appreciate that.

And on the international side, you did comment that, I think, you're rolling out a Polaris-equipped aircraft at some frequency now, so that product is actually hitting the market.

I think you also launched a new economy or premium economy product as well.

Can you speak to some of those initiatives and what you think that could actually add longer term?

Sure.

As I said, we're rolling out a Polaris plane every 10 days.

We are going to be done by the end of 2020, and we're really happy with that.

Premium Plus is our new mid-tier product in between Polaris and economy.

That is going to ultimately be done in the same schedule as the Polaris aircraft, so we have a little bit less than 3 years to go.

Just given how we do aircraft modifications, that's what made the most sense.

So we have approximately 3 years to go on both products.

We should start to sell Premium Plus sometime very late this year or early next year for our first flight in the first quarter, but we will have aircraft showing up into the system later this summer with the seat available for purchase with an upgrade.

So we're very excited about all these initiatives.

These are, I think, really important.

It further -- it pushes us down the road of segmentation, particularly with the mid-tier cabin.

It's exactly where we want to go, and we're really confident in its ability to deliver value for the airline.

So a lot more to come on that front, but we're on our way, and we're really proud of the product that we're going to be putting in the air over the coming months and years.

And from Bank of America, we have Andrew Didora.

I guess, Scott or Andrew, kind of staying on this theme of the RASM and margin accretion from this new hub-spoke flying.

I guess when I do look at your domestic schedules, obviously, regional ASMs are up around 10% this year versus down last year, mainline not drastically different.

With regional flying garnering nearly double the PRASM of mainline, shouldn't this have a positive mix effect on your RASM?

Am I thinking about this the right way?

And if so, can you provide any color on what you think a potential tailwind from more of this flying could be?

We have introduced a number of 50-seaters, and I like to think we're at our max in the number of 50-seaters that are flying for United.

And those aircraft do come in with higher RASMs, and they push higher-RASM, higher-yield traffic across the entire United system, both domestically and internationally.

A lot of the flying is brand-new.

It is doing as expected.

We're happy with it.

We'll make tweaks as needed, but this is going to be a tailwind to RASM as we go forward, and we're pretty pleased by it.

I'm not sure what else to add to that.

Okay.

And then my second question is maybe digging in a bit more on what you're seeing on the corporate travel side.

I know your corporate revenues in the quarter were up, I think, 9%, led by energy.

But this is a theme we've been hearing, kind of positive commentary not just out of you guys and some of your peers but from hotel companies as well.

Can you give us a sense of maybe where -- like where you are in the corporate pricing cycle?

Where does it stand today versus 2014?

And have you seen any change in corporate's behavior during any recent contract rate negotiations that you've had?

I wouldn't say we've seen any recent changes.

Overall, we see a very strong demand environment.

And when you look at our international divisions, the premium cabin is leading the way across most of the entities.

So we're pretty pleased by that.

Our sales force has really just hit it out of the park over the last few quarters as we've adjusted and made changes to all of our programs to make sure we're competitive.

And we're really happy with how share is changing, and we're really happy to have a competitive product out there.

So this is going really well.

Top line growth of 6% and corporate sales up 9%, so this is a bigger portion of our aircraft.

And that's exactly what we want to see, and we don't see any negative trends at this point in regards to this at all, and Q2 should be another great quarter for corporate business.

From Raymond James, we have Savi Syth.

If I could -- just a bit more broadly on the regional perspective.

I know you mentioned Pacific, obviously, inflected in the third -- in March and should be positive as we go into the second quarter.

Can you talk about the other entities and maybe kind of sequentially, what you might be anticipating there?

Well, I think Atlantic is going to lead the way.

Atlantic is seeing really good demand in both cabins, so we're really pleased by that.

So Atlantic should be our strongest international entity, followed by Pacific in the quarter.

We've made the appropriate changes in Guam, so that's no longer RASM negative for us.

In fact, it's RASM positive going forward.

China looks very good.

China has been good for the last 2 quarters.

Prior to that, they had a number of negative quarters, and China looks good going forward.

Latin America is fine, but it's the weakest of the 3 international entities.

And that really is, I think, a big part about the holiday shift.

The holiday shift for Easter, I think, had a -- has the bigger impact in the United network on the Latin American division than the Pacific division, for example.

So I would expect, while Latin had a great Q1, driven by the holiday shift, sequentially, it will be lower in Q2, as we would expect it to be, because of that.

So overall, Atlantic, first; Pacific, second; Latin, third.

How does domestic fall within it?

Domestic falls just fine.

I mean, I'm not going to break out the numbers, but given where we are and what we're doing and the corporate trends we see, we're really happy with all of our entities as we go forward into Q2.

Great.

And if I may follow up just a little bit on the connecting traffic question.

Could you remind me again, as you can execute on that strategy, what the timing is on the build-up and moving things around and like how long that takes?

And also, maybe a follow-up to that is I know Moody's had a questioning of the competitiveness of Chicago from an airport cost standpoint.

How important is airport cost in your kind of calculus of connecting traffic?

Yes.

So on the hub restructures, we spent a lot of time on this, and we did Houston late last year.

Unfortunately, we did it exactly when there was a hurricane that came through the region, so it manipulated the numbers a lot.

But we're really happy with what we see so far in Houston, which is an increase in our mix of a higher yield in the business, which is what we were hoping for.

But we continue to monitor it, and we continue to make tweaks to the flight schedule as we normally would and the hub structure schedule as appropriate.

Chicago, we just implemented in February, so we really don't have any results at this point as to how we're doing there.

I mean, overall, given our outlook for the next quarter, we think things are positive, but we'll measure that thoroughly in the coming months and figure out how to make tweaks to make it even better.

And it's not something that you do on day 1. It is something that evolves over time as we learn what works and what needs to be changed to optimize it better.

But so far, so good.

And we have Denver planned for either late this year or early next year, depending on the number of circumstances to make that structure even better.

So great so far, good so far, but we still need to measure this a lot more and make tweaks as appropriate.

And I'm guessing the airport costs are not a big driver of kind of the profitability when you think about connecting traffic?

Well, I mean, airport costs are something we monitor closely, and it has been a recent headwind.

So it's something we negotiate with the Air Force, and we want to make sure that all of our hubs have competitive costs in the future, so we're able to do what we need to do from a network perspective.

And we have that all baked in our plan.

We know what it is.

We know what it isn't.

And we're moving forward.

From JPMorgan, we have Jamie Baker.

I've got 4 questions with 5 follow-ups.

First one for Scott or Andrew Nocella.

Has the better corporate environment domestically led you to decrease the inventory allocated to Basic Economy?

Or is your sort of competitive positioning in ultra low-cost carrier overlap markets sort of just business as usual?

Any changes there?

There's no -- well, I'll take one step back and say our inventory for Basic Economy is not a strategic decision; I think it's made -- here's how much we are going to put out.

It really is driven by yield management system.

And the yield management system is trying to maximize the expected value of each seat.

So to the extent demand is stronger, the yield management system will make fewer Basic Economy fares available because they're lowest fares.

And when demand is weaker, it will have more.

So yes, it's a strong demand environment, so that probably means there are fewer Basic Economy seats available, but there's nothing strategic about it or -- and it is really very much at the margins.

Got it.

And second and final question, actually, for Greg Hart.

Obviously in the early innings right now, but if the FAA does order widespread inspection in CFM56-7Bs, how should we think about that in terms of time and expense for United?

Is that a fairly simple exercise?

Or does it require aircraft to be pulled from service?

Jamie, thanks for the question.

Obviously, we don't want to get ahead of the NTSB on this and their investigation.

But there was an event on another airline back in August of 2016, which actually drove a service bulletin that was issued last week.

And we have started work on that service bulletin and are well underway with that process and expect to complete it as quickly as possible.

Obviously, safety is paramount in everything we do here at United Airlines, and then this event or this issue is no different, and we're fully focused on making sure we complete as quickly as we can.

And Jamie, this is Oscar.

Just on the cost question, I think this service bulletin was on board.

We are going to do it, and that's embedded in our cost forecast for the future, so no incremental cost.

But again, safety is of paramount importance.

From Evercore ISI, we have Duane Pfennigwerth.

Just following up on domestic.

As we measure the recovery in domestic PRASM and appreciate seasonal moves from month to month, but there was a time when we'd sort of enter a month behind on advance book yields and kind of make it up close-in.

Can you just talk to advance book yields now for kind of April, May, June?

Advance book yields, the short answer is advance book yields are good.

It's a strong demand environment, so that means not only can you have good close-in demand and reserved seats for close-in demand, you -- if the same thing happens when you're further out, you can be -- have opportunities to be more aggressive there as well.

So we feel good, really good about the demand environment across all entities.

We're trying to contain our enthusiasm, but we feel really good about the demand environment.

Okay.

And then just on Basic Economy and the implementation last year.

You launched it fairly aggressively across the fare ladder.

And if memory serves, you actually lost some share because of that in the early innings.

As we think about it 2Q and in the comp, can you just remind us how much that was worth?

Is that maybe worth 1 point in the comp?

It's really more of a third quarter than a second quarter issue, and I'm not sure what the number was.

We never said a number.

Obviously, our third quarter comp gets -- we kind of had the perfect storm of stuff happening, last year's storms, Guam, in the third quarter.

So our comps, hopefully, should be easier in the third quarter, in particular.

There really was not much of an impact in the second quarter.

We [didn't even] feel that, I don't think, until end of May.

From Deutsche Bank, we have Michael Linenberg.

Just 2 quick ones here.

This is probably Andrew or Scott.

We've heard a lot about increased competition on the West Coast.

You guys are big in L.A. You guys are big in San Fran.

What are you guys seeing in that marketplace?

Sure.

It's Andrew.

Overall, I think particularly from a San Francisco-centric point of view, things are looking good, in fact.

We had positive PRASM in our San Francisco hub in the quarter, and we're really pleased to see that given it's a pretty competitive environment, but we're really confident in what we're doing in San Francisco.

We have a great product, great schedule and all the above and a new Polaris lounge about to open in a few weeks as well.

So we feel really good about San Francisco and what's going on in the West Coast at this point.

Okay.

Then just second question.

This is probably for you, Andrew Nocella, as well.

When we look at passengers flying on domestic segments who are connecting to international, what percentage or what amount of load factor points, however you can express that, what would be that domestic leg where the O&D involves an international destination or origination?

I hesitate to give you exact number, we'll get it to you.

But for United Airlines, it is a pretty significant number going across the whole system, so it is -- it does impact the results when international results get better, our domestic -- we call it the DPIJ -- our domestic portion of the interim journey also gets better.

And I'll have Mike get you the exact load factor number after the call.

From Wolfe Research, we have Hunter Keay.

Scott, do you know what percentage of your business travelers never fly internationally?

Is that something you track?

And do you have a target around what you want that to be?

I don't know, which also means we don't have a target.

Okay.

And then back to scope real quick.

Are you comfortable taking advantage of the 1.25 to 1 ratio language in the existing CBA without a new CBA?

Or would you consider sort of an amended CBA as a gating item to take advantage of that ratio clause even in the event that, that clause doesn't change in the new contract?

If you understand the question.

Yes.

Look, I'm not going to get ahead of the discussions we're having with all the stakeholders, pilots and aircraft manufacturers at the same time.

Obviously, that feedback stopped, but we are talking to them and would like to get to a world where we have something that everyone is onboard with, agrees with, and agrees that it's good for United Airlines and our entire workforce as well.

From Morgan Stanley, we have Rajeev Lalwani.

Scott, a question for you.

As far as rolling out the regional strategy, what surprises have you come across so far?

And specifically, I'm referring to are planes filling up quicker than you're expecting.

Are you not getting a competitor spot?

Just some color, so we can keep track of how things are going.

I think it's going largely as we anticipated.

There's some operational bumps along the road, but we anticipated those.

You never know which ones are going to occur exactly, but we anticipated that there'd be some operational issues.

But I think, actually, the team has done a remarkable job for the amount of change that we have had, to implement it as well as they have.

Look, I mean, the fact that United has been #1 in D:0 for 7 months in a row, with all the growth and all the change and all the regional changes, is a testament to Greg Hart and his entire leadership team because it's hard enough to do that, to produce great results, particularly when we're in the most challenged geography.

But to do it at the same time that we've got -- managing a lot of change is really incredible.

But it is performing largely as we expected.

And then a quick question for Nocella.

You talked about traction on the corporate side.

You threw out some impressive numbers.

Can you just talk more about what's driving that?

Like what is the proposition that you're giving at corporate that's making them come to United?

Is it price?

Is it something else?

Sure.

I really think it is a sales force that has just gotten so excited about United and what we're doing.

And we've talked about all the tools that they need to be competitive in the marketplace and we've armed them, and they're out there promoting United in a way that, I think, has really helped us and has shifted some demand to us.

Although we still have a strong underlying marketplace out there for premium demand as well, so it's all kind of working together.

But I really will give credit to our sales force for making a huge difference in the quarter, and we're really proud of them, and we think Q2, we'll see even more of that.

From Citi, we have Kevin Crissey.

So looking at the domestic RASM and, I think others have alluded to it, the -- what I'll call pure domestic or domestic origin to a domestic destination, given the strength of international RASM, would be lower than the 1.6% that you posted.

So when I think about your future growth and beyond what is scheduled, when I think about 2019 and 2020 growth, how much of those flights are going to be designed for international connecting itineraries versus primarily for domestic origin to domestic destination?

So I think about flights to Orlando as being primarily domestic-focused as opposed to maybe some of the small connections.

I'm not sure I think of it that way.

I mean, our network all works together.

All of our hubs are significant international gateways, and even Denver has a growing international presence at it.

We just started Denver to London Heathrow.

So as it all works together, I don't think I would separate it that way.

And we're bullish across all different segments we have and the new connectivity we're generating, particularly, as we said in January, the connectivity we're creating in the small-to-small or small-to-medium type of cities that have, I think, a really nice yield environment.

So overall, we feel really good about it, and we don't have a distinction.

From Stifel, we have Joseph DeNardi.

Scott, does the importance of regional feed to your growth strategy over the next few years change the way that you think about the need to have a wholly owned regional sub?

I don't think so.

We're agnostic about how we feed the airline.

And we've spent a lot of time on these calls, we've already spent a long time talking about regional feed.

It's not just regional feed.

Regional feed is the -- you just want to understand the higher yield, but a lot of that is also mainline feed.

And as you grow regional feed, you also wind up upgauging regional markets to mainline.

But we are agnostic as to whether or not the best way to do that is through a wholly owned or through a third party, whatever is most efficient.

The best operator at cost is who we will use.

Okay.

And then Scott or maybe Andrew, you guys are both pretty bullish on demand.

Just trying to reconcile, I guess, your exuberance with the second quarter guide.

I know there's a lot of capacity growth, but maybe can you help us like with the same-store PRASM number?

Just any way to reconcile your bullishness around demand with the unit revenue.

Well, I think we have to always say there's this shift in the holiday, so we knew March would be strong and, sequentially, that April would be more difficult, and that, in fact, has happened.

So I don't have a same-store type of analysis for you, but the holiday shift is causing a sequential decline, particularly -- and Latin America is a great example of that.

But it's not unexpected.

I will say that even with that decline, if we look across the Atlantic, I think our outlook across the Atlantic doesn't show that.

So right now, we're really -- I think we said we're bullish across the Atlantic, and we are because of the numbers we're seeing over the next 30 or 45 days, particularly in the business class cabin right now.

Obviously, we're lapping Easter last year, and we're seeing good results across the Atlantic as we do that.

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

We will now take questions from the media.

(Operator Instructions) From Reuters, we have Alana Wise.

So given the tragedy that happened yesterday on the Southwest flight, I'm wondering if United is planning to look into or speed up any inspections of engines in its 737 model jets and any others with the CFM engines.

Alana, this is Oscar.

As Greg mentioned earlier, a service bulletin was issued just last week regarding an event that had happened previously on another airline.

And so as a result, we did kick off the program to address the bulletin, and we'll be fully compliant.

And again, that started just recently, so yes, we will follow the same program.

And do you have any idea of the timetable of completion and how many engines -- how many of these engines are actually in United fleet?

Not really.

This will be ongoing through the course of the year.

This is Greg Hart.

We have about 698 of these engines in our fleet.

And from Flightglobal, we have Edward Russell.

Could you comment on the fleet plan going out through 2020?

I mean, how many -- do you have any mainline aircraft coming off lease in that period?

And do you plan to extend the leases or buy them off [aircraft]?

I mean, give a little idea on what the mainline fleet's going to look like over this period.

This is Andrew.

I don't have the numbers at my fingertips as to how many aircraft are coming off operating lease in the next few years, but the number of aircraft on operating lease continues to shrink as we bring more aircraft onto the balance sheet.

The reason we do that is we are agnostic about financing, but oftentimes, it is just simply better cash economics to have -- to purchase those airplanes rather than continue to lease them.

And so that's -- we've been doing a lot of that.

As far as on a go-forward basis, we look at each individual deal on a case-by-case basis, and I suspect that there are many that we will look to acquire or extend, and there are others that we will simply give back to the lessor.

So we've provided some information there on the 2018 fleet plan in the investor update, and we're not really prepared to go into a whole lot more detail other than the specific call outs we had today on a few expected deliveries that we expect to see, including the Airbus used A319 transaction that we discussed earlier.

Okay.

Is it right to generally assume that the mainline fleet will grow -- likely grow in 2019 to 2020 without going into specifics?

Yes, yes.

I think that clearly, yes, we definitely have that expectation that we will see growth in order to execute on the long-term growth plan that we've provided information on through 2020.

Certainly, a part of that is dependent on adding additional aircraft into the mainline, so we absolutely will be growing the mainline.

From Wall Street Journal, we have Doug Cameron.

Oscar and Scott, I've talked about this before, just kind of deepening the alliance front and putting yourselves in a place which some of your rivals who perhaps had alliances a bit longer have done.

I just wonder if you could comment a little bit on what that actually practically entails.

And I guess, just as a sideline, was there a bit of a credibility gap because of United's operational problems, which kind of made some deeper alliances more problematic?

That's maybe putting the cart before the horse, but any comment on what you can practically do to deepen the alliances would be useful.

So first, actually, Star Alliance -- and United, as a founding member, is the oldest of the alliances.

That's a...

Well, you shouldn't be behind then.

That said, we had opportunities to work more closely together than we had historically.

We've got some phenomenal alliance partners.

We've spent a lot of time working with them.

Andrew Nocella and myself personally meet with them frequently and, having that kind of high level of engagement, has already led to changes.

They're not going to be some big bang that we come out and send out a press release, talking about it.

But we, every day, get better.

If you look across the Atlantic, our impressive results are partially because of our partnerships with Air Canada and Lufthansa and how we are working more closely together as a team.

And we think that there's continuing opportunities to improve that going forward.

But we're very pleased with our partners and how we're working together.

But to be honest, I'm sorry, that's all very vague.

I just (inaudible) because you have brought this up before, the need to deepen the alliances.

And obviously, Delta and American will shout it from the rooftops about the money they're making from their partnerships.

So really interested in digging a little bit deeper than that you have great partners.

Yes.

Unfortunately, that's all confidential stuff that we keep behind the curtain, what exactly we're doing tactically with our partners.

And from Bloomberg News, we have Michael Sasso.

Can you give, I mean, a little bit more information on these 20 used A319s?

We have been hearing that easyJet maybe the source of those.

Can you talk about where they're coming from?

And in fact, are they coming from easyJet?

So the midlife aircraft that we're acquiring, as far as where they're coming from, we're not able to disclose that information due to provisions in the purchase agreement.

So as much as I'd love to tell you that, I'm just not able to do so.

Mike, the seller asked us not to disclose yet.

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

Thanks to all for joining the call today.

Please contact media relations if you have any further questions, and we look forward to talking to you next quarter.

Thanks.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for joining.

You may now disconnect.