聯合航空 (UAL) 2018 Q2 法說會逐字稿

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

My name is Brandon, and I'll be your operator for today.

(Operator Instructions)

This call is being recorded and is copyrighted.

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

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

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

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

You may go ahead, sir.

Thank you, Brandon.

Good morning, everyone, and welcome to United's second 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 3 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 course of our call, we will discuss several non-GAAP financial measures.

For 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 are Chief Executive Officer, Oscar Munoz; President, Scott Kirby; Executive Vice President and Chief Commercial Officer, Andrew Nocella; and Senior Vice President, Finance, and Acting Chief Financial Officer, Gerry Laderman.

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

Thank you, Mike.

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

We delivered a great second quarter even in the face of some external headwinds that had an impact on our entire industry, but our growth plan and our commitment to a high standard of operational performance has put us in a position, and it leaves us feeling very optimistic about the second half of the year.

As you all know, 3 of the critical areas that we are focusing on in order to deliver on our strategic growth plan are: one, financial discipline; our operational reliability; and of course, customer service.

In the second quarter, we continued to perform strongly and made strides forward on all those 3 fronts.

Let me first start with the customer.

We have a steady cadence of initiatives that we are rolling out that will elevate the United customer experience to a new level, making us the airline customers want to fly and return to time and again.

We finished another quarter with industry-leading on-time departures.

Also, we achieved the top end of our guidance range despite higher fuel prices due to both strong revenue and disciplined cost management.

And I want to thank our more than 90,000 employees and tens of thousands of others who support us for their outstanding work and dedication to keep our airline running safe and on time.

I'd like to turn on the financials on Slide 4. Yesterday, we reported adjusted pretax earnings of $1.1 billion with an adjusted pretax margin of 10.4%.

Our adjusted earnings per share of $3.23 was 17% higher than our second quarter adjusted earnings per share last year.

This performance reflects both the strong results we are already seeing from our revenue initiatives, which are delivering ahead of expectations, as well as our continued strong cost discipline.

Next, on Slide 5. I want to focus on what we're doing to elevate the United experience for both our employees and customers because that remains absolutely key to achieving our longer-term objectives.

We are continuing to augment our core4 training, which is empowering our employees to better care for our customers.

Simply, the core4 is about adding flexibility to a previously rigid and rules-based system.

Across our airline, we are continuing to put the customer at the center of everything that we do because, as we all know, in the long-term, that's how we can make United the airline that customers choose to fly.

On a newsworthy note, by our next earnings call in October, I'm excited to say that we will have completed the integration of our flight attendant groups, and we'll be flying together on common metal, pause for applause here, and serving our customers better than ever because we will truly be a united United Airlines.

Now as we continue to invest in our people, we are also investing in our product.

We've achieved, I think, what I would call an operational tempo with the rollout of United Polaris business class service, and I'm pleased to say that a new Polaris-equipped aircraft is entering service every 10 days on average through 2020.

These new aircraft, combined with our world-class Polaris Lounges, give our customers an industry-leading international business class experience.

Turning to Slide 6. Our performance and financial outcome in the second quarter has further increased our confidence that we can offset the higher fuel prices the entire industry is facing.

Through the end of the second quarter, we've recaptured approximately 75% of the earnings headwind from higher fuel through higher yield and commercial and operational initiatives.

We expect revenues -- revenue to continue to be highly correlated with fuel prices, but importantly, we plan to manage the business to maximize profitability as we move forward in implementing our growth plan.

Scott will address in more detail later in the presentation, but our guardrails as a management team are our adjusted EPS targets, not ASM growth.

If fuel environment shifts or, for that matter, anything else in the macro environment changes, we've demonstrated the ability to nimbly manage the challenges posed by the current environment.

And so in putting all of this together, I'm pleased to say that we're raising our adjusted EPS guidance for the full year.

Our new guidance range is $7.25 to $8.75 and reflects the higher fuel prices that we expect will be more than offset by improved revenue and continued cost discipline.

This is the best evidence that our growth plan is working and adds to our confidence in our strategic plan to deliver $11 to $13 in adjusted EPS in 2020.

Now before I turn the call over to Scott, I'd like to quickly update you on our CFO search.

It is progressing quickly, and we're down to a very short list.

We're committed to recruiting an executive with airline experience who strikes the right balance as a business partner.

Gerry Laderman has done a phenomenal job in the role, and our commitment to cost discipline remains as strong as ever.

With that, here's Scott.

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

I'd like to start by thanking the entire United team for delivering another quarter of top-tier operational performance.

Our growth plan and our commitment to customers is all built on the foundation of running a great operation.

We were #1 among our primary competitors for D:00 for the quarter.

We're continuing to build momentum and operational performance, and I'm proud to be a member of the United team that's delivering these excellent results.

Moving on to the revenue environment.

We continue to see broad-based strength across all regions, with the exception of Latin America.

Andrew will provide more detail, but we're very happy that early returns from our commercial, operational and growth plan initiatives are already showing up in our results.

I'd also like to recognize our cargo team for an excellent start to the year.

They've continued a run of several years of improving results with first half revenue up 19% year-over-year.

They've also done a terrific job in providing specialized product and services to our customers, and their efforts are reflected in our results and strong operational performance.

Reliability is particularly important to cargo customers, so our operational improvement gives the cargo team a fantastic product to sell to customers.

I'm sure that you've all seen that we also lowered our full year capacity outlook to the lower end of the range.

While the growth plan and our commercial and operational initiatives are exceeding our expectations at this admittedly early stage, this capacity reduction is just the expected result of higher fuel prices.

As Oscar said, we're currently recovering about 75% of the fuel price increase, but that's not 100% yet.

And as a result, our scheduling team simply turns back some flights at the margin.

One of the questions we're hearing from investors lately is: What happens if the economy dips into a recession or a trade war impacts demand?

To address that, I'll take a minute to describe our guiding principles and our flexibility to respond to adverse macroeconomic conditions.

Now to start, our guiding financial principle is hitting our adjusted earnings per share targets, both this year and through 2020.

The capacity plan that we announced in January are our means to that end that we believe will allow us to maximize profitability.

But if fuel, the economy or anything else obstructs that, we have significant flexibility to respond with capacity reductions, even without deferring deliveries or reducing aircraft utilization, which are always available but generally not the best option.

In the event of a downturn, we can easily return leased aircraft at least at expiration and/or retire our older aircraft and use these retired aircraft to support the rest of the operation.

When an older aircraft comes due for engine and airframe overhaul, we can either complete the overhaul then continue flying it.

Or alternatively, we can ground the aircraft and essentially use many of the parts from these aircraft as spare and replacement parts for the remaining fleet.

The economic impact of retiring the aircraft is actually positive to the P&L because we both avoid the expense of the overhaul and save on inventory cost since using the parts from our retired aircraft is less expensive than sourcing new parts from third parties.

That's one of the key reasons we have been and remain active in the used aircraft market.

It gives us valuable flexibility to respond to a downturn if that is needed.

While it would obviously require a pretty severe downturn to use all of our flexibility, we have the flexibility to reduce the fleet by up to double-digit percentages per year if that was required.

We built a fleet plan that allows us to capitalize on the opportunity inherent in the growth plan but while still maintaining the flexibility to quickly respond to adverse conditions.

That, however, is not what we expect to have to do because everything we see today says the demand is strong.

We, as a management team, are focused on delivering our $7.25 to $8.75 in adjusted EPS this year and $11 to $13 in adjusted EPS in 2020.

We acknowledge that we can't predict the macro environment, but we're prepared to adjust our strategy as we march toward those EPS goals.

To try and wrap up, we're pleased with how the first half of the year has gone, but know that we have plenty of work to do in the second half and in the years to come.

You can see that our team is running a reliable operation, and we're committed to growing it efficiently and productively as we expand our mid-continent connecting hubs.

We also know that none of that matters if we're not also an airline the customers want to fly.

I'm happy to say that the core4 is showing early signs of success as customer satisfaction scores are moving in the right direction, and that's because we're letting our people do what they do best: Take care of our customers and each other.

We realize we have a lot of work to do to regain customer confidence.

And the core4, along with our other investments and initiatives, are designed to trigger a permanent shift in our culture as we become the United we all want to be.

We've just started unlocking United's full potential.

We've seen some of our best results in our mid-continent hubs as we've increased overall connectivity and productivity.

We're optimistic that the second half will continue that momentum, and it's with these results and our early bookings for the third quarter that we felt comfortable increasing our full year 2018 EPS guidance again today.

With that, I'll turn it over to Andrew.

Thanks, Scott.

Taking a look at the revenue environment on Slide 15, we reported a 3% increase in system PRASM year-over-year for the second quarter, at the high end of our expectations.

Domestic PRASM improved 1.7% year-over-year in the quarter.

We saw growing strength as we moved through the quarter, with overall demand and increased market share well ahead of our expectations.

Strong performance from our revenue management team and Gemini, our new yield revenue management system, combined with an improving pricing environment, allowed us to drive higher domestic PRASM even in tough industry conditions.

Additionally, our peer domestic revenues actually outperformed the domestic portion of international journey, or DPIJ, in the year-over-year growth as our re-banking and other initiatives really began to take hold.

Corporate revenues were up double digits year-over-year, well outpacing our top line growth.

We continue to look for sales opportunities to better position ourselves across all channels and products.

Once again, the Atlantic region had the strongest year-over-year PRASM of any region in the quarter, increasing 7.9%.

We saw revenue strength each month in the quarter and now have seen improvements for 6 consecutive quarters.

This positive year-over-year PRASM momentum was driven by strong load factor performance in both cabins, up over 5 percentage points year-over-year, as well as 2-point PRASM benefit from foreign exchange.

Our trans-Atlantic joint venture with Lufthansa and Air Canada is working better than ever, and all our new flights are ahead of our financial projections.

While the Atlantic had our strongest PRASM performance, we actually made the most progress in the Pacific.

PRASM was up 3.4 points year-over-year, the first positive quarter in the region since the third quarter of 2014.

Guam has rebounded nicely, and our outlook shows improved results for the remainder of the year as well.

With demand recovering in Guam, we plan to begin to restore capacity later this year in Guam as we schedule widebody jets on flights to Tokyo in place of our 737s.

Overall, forward-looking trends for the summer look very promising for both the Atlantic and Pacific, with anticipated continued strength in demand for both cabins.

Our Latin entity trailed the Atlantic and Pacific in performance and was the only region with negative revenue performance, being down 2.9% in the quarter.

While the region is more challenged than others, flights to Mexico, beach destinations in particular, had pretty severe demand weakness due to increased supply and travel warnings.

We made adjustments to capacity in this region, and we continue to monitor our capacity levels in the region going forward.

We expect that Latin performance will trail other regions for the remainder of 2018.

Looking ahead, we anticipate third quarter PRASM to be up between 4% and 6% year-over-year, with strong performance in all regions other than Latin America.

Moving to Slide 16.

I'd like to give an update on some of our commercial initiatives.

We're excited to have a long list of initiatives still ahead of us, and we expect to derive better revenue and margin performance.

Our commercial initiatives are also focused on raising the bar and delivering a better experience to our employees and customers on every flight and at every touch point.

We've only just begun with a lot of runway and a lot of incremental improvements for years to come.

As we ended the first quarter, Gemini, our new revenue management system, was rolled out on all flights.

We quickly had it running on all cabins in the second quarter to complete the rollout, and results have exceeded our expectations.

I'm really proud of the whole team involved in the rollout, and we believe our second quarter results and third quarter outlook reflect the power of Gemini in action.

We continue to make enhancements to Gemini, and we believe we'll drive incremental value for years.

In the quarter, we expanded Basic Economy to parts of Latin America and introduced Basic Economy-like fare to Europe.

And so far, the rollout has gone as planned.

While there's still room for further optimization, it has been an effective, competitive tool, and we plan to continue to expand its use in the U.S. and abroad.

In the second quarter, we observed strong results following our re-bank initiatives in Houston and Chicago.

One of the goals of the re-bank was to give customers in short-haul cities more options when connecting.

In Houston and Chicago combined, we saw over a 10% increase in both big/medium to small city revenue and almost a 20% increase in small to small city revenue.

We're very pleased by these results in these markets and are seeing nearly double-digit RASM improvements in small Houston markets.

We intend to use these learnings to drive better results in other hubs and are on track to re-bank Denver, as promised, in early 2019.

On the co-brand card, we launched the new United Explorer Card in the beginning of June.

Along with Chase, we've invested in a new marketing campaign that highlights the card's appealing new benefits that are tailored to our travel-savvy customers and provide additional value to both new and existing card members.

Even though this rollout didn't occur till June, during the quarter, we saw a record low attrition, over 10% card growth acquisitions and about a 3% increase in spend.

This is the fastest rate year-over-year in card acquisition growth we've seen since the third quarter of 2015.

We expect year-over-year growth in card acquisitions to grow faster in the third and fourth quarter.

Moving to Polaris on Slide 17.

As Oscar mentioned, we continue to be on track with our aircraft reconfiguration schedule and currently have 29 aircraft flying with the new seat.

In the quarter, we also opened 3 new Polaris Lounges in San Francisco, Newark and Houston.

Early feedback on the lounges have been extremely positive.

We plan to open the Los Angeles lounge later this year and Washington-Dulles by the end of 2019.

So in summary, we feel the revenue environment is robust and that we are set up for a strong third quarter.

Our growth and commercial initiatives have taken off in the right direction, and we feel confident those initiatives will help offset increases in fuel and enable us to reach our long-term adjusted EPS targets.

And with that, I'll turn it over to Gerry to review our financial results.

Thanks, Andrew.

Before getting to the numbers, I just want to say how happy I am to be back for a return engagement.

I can honestly say that it's a lot more fun this time around.

As you've heard, there's terrific momentum at United.

In addition, I have the pleasure of working with a great group of colleagues on the executive team and the best finance organization in the business.

And for those of you wondering, you can be assured that we continue to execute on our cost initiatives and our disciplined capital allocation strategy.

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

You can refer to those documents for the details.

But for the highlights, Slide 19 is a summary of our GAAP financials, and Slide 20 shows our adjusted results.

We recorded adjusted earnings per share of $3.23.

That's 17% higher than the second quarter of 2017.

Adjusted pretax income was $1.1 billion, and adjusted pretax margin was 10.4%.

Slide 21 shows our total unit cost for the second quarter 2018 and our estimates for the third quarter and full year.

Turning now to Slide 22.

Nonfuel unit cost for the second quarter decreased 0.4% on a year-over-year basis versus our original expectation of flat to up 1%.

This dip on cost performance was due to several factors, including the timing of certain maintenance and IT expenses moving into the second half of the year, early results on our initiatives to drive increased cost savings through efficiencies in our supply chain and optimizing our maintenance program checks.

I want to thank everyone at United for continuing our efforts to manage cost effectively.

This is particularly important in a higher fuel price environment.

We expect third quarter nonfuel unit cost to be flat to down 1% compared to the third quarter of 2017.

This guidance is consistent with our prior commentary for second half cost performance as we wrap the ramp-up of the 50-seat flying that began a year ago and continue to see the benefit of our cost savings initiatives.

Also, our capacity growth rate is expected to be higher in the second half, with much of the increased rate of growth driven by flying during off-peak periods that has low marginal unit costs.

Overall, we remain confident in our nonfuel unit cost guidance of down 1% to flat for the full year 2018.

As described on Slide 23, we have purchased just under $1 billion of our shares in the first half of 2018.

This represents about 5% of total shares outstanding at the end of 2017.

We currently have $2 billion remaining in share repurchase authority and plan to continue to opportunistically return excess cash to shareholders through repurchases of our stock.

At the same time, we will ensure that our balance sheet remains strong, with debt levels that are manageable throughout the economic cycle.

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

On fleet, we took delivery of 1 Boeing 777-300ER and 6 Boeing 737 MAX 9 aircraft in the second quarter.

We are the first North American carrier to operate the MAX 9, which began scheduled flying in early June.

The performance of the aircraft has been excellent so far, and we look forward to taking 4 additional aircraft this year.

In addition, yesterday, we took delivery of the first of 3 used Boeing 767-300 aircraft we expect to receive this year, and we also expect to welcome the Boeing 787-10 into our fleet, with 3 scheduled to arrive in the fourth quarter.

As we announced on Monday, we have agreed to purchase 4 more Boeing 787 and 24 more Embraer E175 aircraft.

The 787s will enter into service in 2020 and replace older international widebody aircraft.

The E175s will deliver next year and replace aging CRJ-700s.

Like the aircraft they are replacing, these E175s are expected to be configured with 70 seats.

We are also actively looking for additional used aircraft to provide flexibility, as Scott mentioned, and to ensure that as we grow, we do so in a capital-efficient way.

At the moment, we are focusing on a number of potentially attractive opportunities to supplement our new aircraft order book.

Slide 24 includes a summary of our current guidance, including third quarter's projected fuel price range using the July 13 fuel curve.

The range provided for capacity, revenue and cost implies a third quarter adjusted pretax margin between 8% and 10%.

And as Oscar and Scott mentioned earlier, on Slide 25, we are raising our full year adjusted earnings per share guidance by $0.25 to a new range of $7.25 to $8.75.

The results we have delivered in the first half of the year have increased our confidence in our ability to deliver adjusted EPS in this new range.

With that, I will now turn it to Mike to begin Q&A.

Thanks, Gerry.

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.

I guess, Scott, can you -- I know you're not ready to explicitly guide Q4 yet, but the last couple of years, fourth quarter RASM has meaningfully exceeded expectations and it's not entirely clear to me why.

Could you just comment qualitatively on what factors you think drove Q4 sequential RASM improvement in 2016 and '17 and whether you think those factors are in place again this year?

I'll try it, and I'll look to Andrew to add to it if he wants to.

Look, last year, we obviously had a lot of onetime issues in the third quarter that would have made the third quarter to fourth quarter sequentials look better, things like Guam and the hurricane, that would have made them look better.

And I'm not sure that there was anything specific in '16.

But we're hoping, particularly if you strip out the onetime stuff that happened last year, to actually see strong sequential performance again in the fourth quarter.

And as we just look at the overall demand environment, it continues to strengthen, if anything, as we've gone through the first half of the year.

Every month seems to just get better and better.

So we're cautiously optimistic that we can wind up doing better in the fourth quarter even than we currently expect.

I'm sorry, just another question that I had on the fuel recovery.

You're saying you're recovering 70% of the fuel move.

How do you -- I guess how do you measure that?

How do you separate the fuel impact on revenue from what may have originally been a forecasting error?

And I guess the reason I ask is because you say you're recovering 70% of fuel move, but your EPS guidance has moved up, which could be characterized as more than 100% fuel recovery.

Darryl, it's Gerry.

My mother was a math professor, and the one thing she taught me was arithmetic, and this is simply arithmetic.

So if you take our fuel guidance and the forward curve, we're looking at about, let's say, a $2 billion increase in fuel expense.

So the question is how much of that $2 billion do we see we recover.

And if you take the midpoint of the EPS guidance, you kind of use that to calculate pretax.

Basically, that's the math that gets you up to 75% of that $2 billion being recovered.

Okay.

And what's the difference that takes you to -- from your guidance point -- guidance end point at the beginning of the year to where it is today?

Because it would seem like there should be an additional increment.

If you've only -- I mean, fuel went up, right?

Revenue went up, and EPS went up.

Darryl, we can take that off-line.

I'll follow up with you.

You can see what we've done with the PRASM and revenue improving as fuels improved, but that's a separate question than our calculation.

And from JPMorgan, we have Jamie Baker.

First question, I suppose, for Scott or Andrew.

And it's a question on pricing, but I'll try to ask it in a way that you can answer it.

So we're seeing considerably more timed channel pricing in many of your markets, while at the same time, we're not really seeing any substantive broad-based change in domestic fares.

So what I'm trying to sort out is if the former is material and to what extent it may be contributing to your RASM momentum, largely because I doubt it was something that was originally in your plan at the start of the year.

I mean, I think the industry continues to get wiser on how to price in itself.

We at United worked at it really hard.

We obviously have a new revenue management system that is allowing us to perform even better.

So I would say that there is more use of time-verified fares in the marketplace today.

And I think I don't want to go into a lot of details around it, but that was just an evolution of pricing.

And that's kind of where we are, and I think we're happy with our progress in the quarter.

Would you characterize it as sort of fully rolled out at the industry level at this point or potentially more to come in that regard?

I have no idea.

Okay.

All right.

No, no, no.

That's fair.

That's fair.

And second and probably for Oscar.

And look, I hate sounding like a broken record this earnings season, but the industry is clearly working.

United is clearly working and showing momentum.

But the message is just not getting through to the market.

I mean earnings multiples are a joke, and it's probably, I don't know, the kindest 4-letter word that I can think of to describe it.

So the question is: What else is needed at the industry level?

Is there something structural that still needs to be addressed?

Is there something that you, Oscar, personally could draw on, given your experience outside the airline industry?

I mean, what is it going to take to get the de-risking message through to investors so that multiples can better reflect the current industry output?

Yes, Jamie.

I think it's simply -- I use the term constantly that says prove not promise, and I learned that in my previous industry.

The railroad industry was one of very high, very high capacity, very low demand, no possibility of yields, all of us stripping out cost, and the rebating aspect took time.

It took a couple of cycles, downward cycles where we lived through it, cash return, dividends and, of course, everything came back in.

So I think from my perspective, and I'm sure Scott, I'll ask him to add in, but prove not promise is my broader umbrella terminology.

And Scott, you probably want to add to that a little bit.

Sure.

Jamie, as somebody who's followed not just the airlines I've worked at but all my competitors over the years pretty intensely, I think one, being as an industry, we've done a poor job of meeting our long-term targets.

And there have been a number of airlines over the years who've given -- whether it was EPS targets, margin targets, CASM-ex targets, absolute earnings ranges.

And as I just think of it off the top of my head, I can only think of one airline that I remember that actually met those targets, and that was -- Southwest met their ROIC target back in, I don't know, 2012, 2014.

And they met their number, and they followed through on that commitment.

They happened to have a premium multiple compared to the rest, but that's not, obviously, the only reason.

But I think if we, as an industry, have a history of putting out targets that we don't meet, how can we expect investors to take those at face value and to trust them?

So at United, that's all we can control, of course.

But we have adopted a "no excuses, sir" mentality.

We've made commitments to everyone on this call that we are going to hit $11 to $13 in earnings per share by 2020 and that we're going to have a CASM that's down over that time period.

And in the short term, we will have times when we miss forecast because things happen that you just can't adjust quickly enough.

When we look out over the longer-term horizon, whether it's a full year, even a full year can be -- things can happen.

But certainly, when we look out to 3 years, there are going to be unexpected bad things happening.

Instead of using those as excuses and coming back to you and saying, well, fuel went up or we decided to make a fleet order or whatever it is, we're going to meet our numbers.

We're going to move heaven and earth.

And sometimes, that means making hard decisions, but we take those as real commitments.

And we're going to do everything in our power to hit those numbers, including making changes and making hard decisions when we have to because we view those as commitments that we've got to hit.

And that, I think, is a different philosophy.

It's been what I'm used to in the industry.

It's the same as Oscar's prove not promise, a lot more words.

And I think that, at least at United Airlines, if we do that, and we intend to do that, our multiple will change.

Yes.

And I would just punctuate all of that with the fact that it isn't easy, right?

I mean, we have to balance this with our customers, with our employees and obviously, with our investors.

And I think that's what causes the difficulty.

But as we've proven, at least for a short period of time, we've been able to do that, and that's going to be our continued focus.

From Buckingham Research, we have Dan McKenzie.

Corporate revenue up double digits.

That seems to be a share shift, but maybe you can clarify.

And the question here really is: How is corporate revenue tracking relative to your initial expectation this year?

And what kind of share shift is factored in to the EPS targets?

And I really appreciate the prior commentary on that.

I think that's -- investors are going to find that very helpful.

We had a really good quarter on corporate revenue, up double digits, and we're really proud, again, of the sales team for doing that.

If I look back last week, there was another airline that reported pretty strong corporate results as well and revenues, so I'm not sure that our numbers imply any significant share shift.

Our teams are out there every day, promoting the great products on United Airlines.

It's getting better every day.

And hopefully, more customers will choose United, and I think they already are.

It shows up in our numbers.

But there's no specified share shift number in our EPS targets, and we're really proud of the team, and we're really proud of our performance in the quarter.

And energy, in particular, was strong.

That uniquely, I think, benefits United Airlines given where our hubs are.

And so that, of course, isn't a share shift story.

That is an energy story.

And technology was also strong.

And again, that uniquely benefits, I think, United Airlines.

Okay.

And more -- I guess a greater expansion of Basic Economy internationally.

I'm just wondering if you can talk about sort of what kind of revenue impact you're seeing at the system level from not having that and how that might be an incremental benefit as we look ahead.

The rollout continues.

We're very happy with it, and there is more to come, both here in the United States and globally.

We added to some of our Latin beach destinations in the quarter, and we also put a basic-like fare across the Atlantic to many of our destinations in Europe.

Those things are going well.

It is about segmentation.

It is about customer choice.

And they're all adding up to exactly what we hope to do.

It's a great competitive tool, and we're going to use it even more and more.

And I think that's my answer.

From Bank of America, we have Andrew Didora.

I guess maybe first one for Oscar or Scott.

One of your large peers spoke about returning to margin growth at some point in 4Q.

Now on my math, the way you get -- you grow margins for all of 4Q is at the high end of your EPS guide.

I know EPS is kind of your guiding post right now.

But maybe can you talk a little bit about, one, how important are margins to you?

And two, what are you focused on to get margins back on an upward trajectory?

Well, thanks.

Margins are incredibly important to us.

The only way we're going to hit our EPS targets is to grow our margins.

As we look out at the balance of the year, if you just do the math, our full year EPS guidance, as you've done, at the midpoint implied that margins are still down a little bit in the fourth quarter.

But we are certainly within shouting distance of having margins grow, and we are hopeful that we'll likely have margins growing by the fourth quarter of this year.

At the midpoint of our guidance, it would imply that they're going to be down a little bit, but it is close enough that we are hopeful that we will have margins growing by the end of the year.

Okay.

And then just second, Scott or maybe Gerry here.

I know your unit cost growth has been -- it's been coming in every quarter since, I think, early 2017, which really coincided with a more significant improvement in your on-time performance.

I guess how much of this cost improvement do you think is attributable to the better operation?

And then maybe to use a baseball analogy, what inning do you think you're in, in terms of this improvement in on-time?

I'll try it.

I wish Greg Hart was here.

He's our Chief Operating Officer.

He's not with us today.

He could brag on the operating team.

I'll look at Gerry to talk about the numbers specifically.

But running a great operation is incredibly important for customer service, and it also has a side benefit of helping on cost.

There's nothing more expensive than running a bad operation.

Yes.

If you remember a few years ago, when there were some buffers in the business, we've been able to reduce those buffers, and that goes right to cost.

And being able to run that operation, I spoke to people and giving them the tools to be able to really turn aircraft faster and just run that great operation.

At the same time, we are able to look beyond that to other parts of the business where we can really drive those costs, particularly, let's say, on the tech op side, where we're able to create more efficient maintenance cycles, more efficient engine maintenance, things like that, that continue to bring savings.

That's why we're comfortable with our full year cost guidance.

Andrew, this is Oscar.

And I'd just jump right in on something that, again, very similar industry in my history.

One thing I learned there as CFO and as the operating guy, running better is running cheaper, and that is a -- there's a huge fundamental benefit to the overall P&L when you do what you're supposed to do in a good and efficient way.

And so I think it's all contributing to our success.

From Wolfe Research, we have Hunter Keay.

Gerry, you said it's a lot more fun this time around in your second iteration as acting CFO.

I'd like to talk about that for a second.

It seemed United -- we've all seen United have some runs where the market gets really excited about extrapolating some momentum into long-term success and that under-earning argument starts to gain momentum, and then something happens.

Not some PR fiasco but like a real financial earnings setback.

So in your view, someone who's been here, what are some of the things that you're seeing that feels stickier this time around that you can maybe quantify or a little more tangible in nature than maybe last time where it didn't really take?

Hunter, it's those things we've talked about, so is the plan.

We saw where we were missing opportunities.

We now have a plan where we are capturing those opportunities.

The whole domestic network strategy that Andrew's team is implementing, that's new.

That's different.

That's going to stick.

The cost initiatives, we've been with that over the years, but with that long-term focus on EPS, it means it's becoming embedded in the way we think.

The entire leadership team is onboard.

Understand that to me, Scott's target, you've got to look at the cost side.

So there's terrific cost discipline, and that's a culture shift in the company that I think is here to stay.

And that doesn't even to get to what I think is the biggest change, which is just the way people feel about coming to work.

I saw this before at a company I used to work for 20 years ago, that you start listening to your employees.

I mean, look what Oscar's done over the last 2 years with all that.

We've seen that before, and we've seen that stick.

So you take all that together, and that's terrific.

What worries me are those things, as you know, that are outside of our control.

Fuel's a little more volatile than it's been, but we're managing that, I think, just fine.

And then you always have those geopolitical events that affect everybody, and I keep my fingers crossed that those will be avoided for a while.

And Hunter, this is Oscar.

Let me just add just a quick -- at least from a long-term perspective, as well having been a board member, and you've seen me in both roles.

I think one of the fundamental differences is, indeed, and I've said this before, especially in January, the plan that we have built is as solid, is as detailed, is as thoughtful and structured.

And with the support of our operational reliability and our people behind it, I think that's what's making the difference.

And we're a very committed group, and it's nice to see and it's a well-deserved recognition here for these 2 quarters, but we'll continue on.

Great.

And then a question for Scott.

What are some of the advantages and disadvantages of operating large-gauge RJs in-house with your own pilots as opposed to third-party agreements?

Well, it's simple.

It's economics.

The issue is all about economics.

And one of the things that all of us here at United, and I personally am proud of over the last 5 or 6 years, is what we've been able to do with pay for our employees.

And they went through an awful lot in the decade or so following 9/11, and it's been great to have contracts with the kind of pay raises, at least, and then that (inaudible) security no one would have thought was possible.

And I'm really proud of that and happy for our people, and they deserve it.

What that means, however, is we have a cost structure that simply doesn't work on small airplanes.

We need to spread those costs out over a larger number of seats.

I've been trying to spread them out over 70 or 80 seats.

It simply doesn't work.

And flying a regional jet at the mainline is north -- it's in the $1 million -- north of $1 million per year per airplane.

And these are airplanes that generate $9 million, $10 million in revenue and make 8%, 9% margins.

And so you can do the math.

You take an airplane that's nicely profitable, and you turn it unprofitable with that kind of cost structure.

And so it's purely about economics.

The great news is that we're growing the mainline.

What our employees really care about is opportunity for them to fly big airplanes, fly widebodies and fly large narrowbodies.

And our growth plan is designed to do just that.

I think that United Airlines, I got to get asked -- as an ex-Air Force guy, I occasionally get asked by people in the Air Force a recommendation on what airline to go fly at, and I can honestly tell them and have been that the best and fastest career growth opportunities for a pilot is at United Airlines because we are the growing the mainline, and we have opportunity to continue the growth plan and growing our mid-continent hubs.

And that's what's important to our pilots, and that's what we're focused on delivering for them.

From Cowen and Company, we have Helane Becker.

I just wanted to follow up one question on, I think, something that Scott might have said.

When you talked about your -- maybe it was Scott or Andrew, when you talked about the hub performance and as you think about growth, especially in a market -- in markets where there's a lot of capacity already, like a Newark, where the only way to grow is really up-gauging, I guess my thought is -- my question is, can you replace the E175s in some of those markets that you're flying with A319s and maintain the profitability of the hub?

This is Andrew.

Absolutely.

I mean, we, over years past, and we commonly refer to Newark-Atlanta as the prime example, used to be able to successfully operate the large aircraft in Newark-Atlanta.

We moved to a period where we're flying smaller aircraft, and we're now moving back to a period where we're flying larger aircraft.

Newark is a fantastic hub.

It's a gigantic market of New York City.

And we have under-gauged it, and we are in the process of fixing it.

It doesn't happen overnight, but we are steadily moving down that road and believe we can grow margins by finding the right aircraft on the right route, and we're well down the path.

Okay.

And then my follow-up question.

Andrew, I really appreciate that on a lot of different levels.

Oscar and Scott, as you think about your business plan going forward and you're hitting on -- you're hitting it, right?

All year long, you've matched these numbers that you talked about on January 23 or maybe exceeded them.

What could go wrong for you or for the business plan that would derail things?

And I mean, I know, Scott, you talked about fuel and adjusting capacity and blah, blah, blah.

But I'm just kind of wondering, from a bigger picture item, what could go wrong that just derails the plan.

He does a lot of blah, blah, blah, by the way.

I'll speak from my perspective and where I sit, and I'm sure Scott will add into it.

I think the biggest risk that you have is, a, you grow complacent.

You spike them all too quickly.

And this is a business that we've all learned has lots of pitfalls waiting around the corner, and so we are just so continuing to have our head on this level, whether it's exogenous items, how we nimbly react to them, focusing on customer service, building competitive advantages.

You'll hear more from us on some of the digital tools that we're providing and all those things.

But again, it's constant vigilance.

It would be -- I think that I would concern myself and do concern myself with.

Scott probably has an addition.

Yes.

Look, the biggest risks are in the kinds of things that have always been the biggest risk, especially in the short term, fuel price, macroeconomic environment, geopolitical events.

And to my earlier point, those things are sometimes going to happen, and there will be points in time that we will miss quarterly guides.

I don't think this will be one of them, and I hope it's not, but we can wake up tomorrow and something happens that causes us to have a problem in the short term.

What we have more control over, however, is our long-term performance because we can adjust to those things.

And most of those things that happened, we can make adjustments to manage the hard decisions, make those adjustments to make sure we hit our $11 to $13 EPS by 2020.

But in the short term, just the normal spike in fuel or microeconomic hit or some kind of adverse geopolitical event, those are the kind of things that we generally can't overcome when we're already in the quarter.

But in the long-term, those are the kind of things that we hope to be able to deal with anyway, and we will certainly move heaven and earth and do everything possible to hit our numbers.

And from Deutsche Bank, we have Mike Linenberg.

Scott, to go back to Hunter's question about flying regionals at mainline, you ran through some math.

Presumably, that was for the 76-seaters.

And my question, I guess, is now that you've done a lot of work on the network, and I know various people at United have said that either you're looking at 100-seaters or you're not looking at 100-seaters.

And now with this A220 seemingly gaining legitimacy in the marketplace, and I do -- I think your predecessors at United did do a lot of work on C Series, like how do you think about the possibility of a 100-seater or maybe it's a 110- or 120-seater?

And does that airplane then have a role at -- within mainline?

And I'm not talking about an A319 or a 737-700.

I mean, I'm really talking about like an E195 or what would be the A220.

Mike, this is Gerry.

I'll take that question.

My team coordinates the analysis of all the options we have on the fleet going forward, working with Andrew's team and Greg Hart's team.

So it's a complicated question on how we manage the fleet.

We've never actually stopped looking at that small narrowbody question.

As you know, we looked at it a few years ago, decided not the time, continued to look at it.

I want to be cautious in my comment.

I don't have a line of manufacturers waiting for me outside this room when we're done with the calls.

I'm not going to tell you too much about what we're looking at when.

But I would say that it's always true that everything's on the table.

One caveat to think about, though, and this goes for that category, really, any category of fleet, which is complexity.

And we're getting much better at really understanding the cost of complexity of operating multiple fleet types.

But there may be a case where there's a particular aircraft that's just perfect for a route.

But if that means bringing in a new fleet type, you've got to burden that with all the costs associated with that.

So we're pretty conscious about that as well.

So as we make decisions on the fleet, we'll let you know.

But from small narrowbodies to large widebodies, we continue to look at every part of the fleet.

Okay, great.

And then just my second follow-up to Andrew.

I guess international premium economy, I think it's actually on some of your airplanes now.

When do you actually start selling that?

And then have you publicly sort of carved that out and said, hey, this is worth X, I don't know, $100 million-plus per annum in revenue?

Can you just comment on that?

Sure.

We haven't released a number on what we think that particular part of our segmentation strategy is worth.

We do have at least 1, maybe 2 777s out there flying with this mid-tier seat onboard, the cabin onboard.

It is not being actively sold as a premium economy seat today because we just don't have critical mass.

We expect to have critical mass late this year, early next year.

We're working on all the IT work that goes within and everything else to support this product onboard the aircraft.

So expect our first sale late this year, possibly early next year and first flight definitely next year, where we have the full products onboard.

That's when we'll have the IT ready, we'll have the product ready, and we'll have critical mass.

From Evercore ISI, we have Duane Pfennigwerth.

I'm not sure if this is for Scott or Oscar, and appreciate the comments about the importance of targets and hitting them.

But I wonder if you could just bridge that commentary with the targets that you put out in the fall of 2016, less than 2 years ago.

If we dreamed the dream then, we were looking at $3.2 billion in incremental earnings off of a base of about $4.5 billion pretax.

We'd be looking at $8 billion this year.

Instead, we're happy to be at $2.8 billion.

Of course, we have a lower tax rate, and you're aggressively buying back stock, lowering the share count, and you've managed expectations really well.

But if I just step back and look at it, margins have been down every single quarter since that plan was rolled out.

So I'm listening -- I'm hearing about the conviction about these longer-term targets.

Can you just bridge the old versus the new?

And when did this sort of increased commitment really happen?

So I'll try.

The old was relative targets as opposed to absolute targets.

And I think that's the biggest difference, saying relative targets versus absolute.

And one of the things that became clear to us is that using relative targets, which we couldn't prove, which you couldn't hold us accountable for, and that was feedback we got from you and others, wasn't appropriate.

And it was impossible to hold sort of anyone accountable for a relative target.

And so because of that, we switched to absolute targets that there's no hiding from.

We either hit $11 to $13 or we don't.

And that's the "no excuses, sir" mentality that we've adopted.

And from Macquarie Capital, we have Susan Donofrio.

Just 2 questions.

One is a follow-up from some of the previous questions, and that is as far as giving the market more hurdles to watch, I'm really gaining confidence as you execute your plan.

Just thinking ahead to '19, I mean, would you expect that to be an earnings improvement story, which steps up to your 2020 target?

Or are there things that we should be thinking about on a fuel-neutral basis, like reinvest in a product, that will produce some headwinds next year, at least, well for 2020?

I'm just trying to think this through.

Well, we've never actually given a 2019 target, and so I'm not going to do it today.

But obviously, getting to 2020, we are assuming that we are making progress between -- that we are having improvement in earnings between -- along the way that is not some step function that happened in 2020.

We are assuming continued progress towards the $11 to $13 per share in 2020.

And Susan, keep in mind, on the cost side, we've been pretty clear that next year and the year after, we're holding ourselves to flat or better CASM.

So at least on that side, we're going to manage that.

This is Oscar.

I'd just pipe in again.

Again, you mentioned something of product investment.

All of that is incumbent upon making the right, balanced investments for our customers and our employees along the way, but continuing to manage our costs as Gerry suggested.

Good.

That's good to hear.

And then I just want to switch to domestic PRASM.

I was wondering if you could give us a little more color just what you're seeing in your re-banked hubs versus the others.

Just some type of relative performance, I think, would be helpful.

Sure.

One of the ways we measure is we divide up our cities into big, medium and small.

And as we went into this project on changing the network, we wanted to increase our share in medium and small city traffic, and that's exactly what we've seen.

So in Houston, our (inaudible) markets are generating 10% RASM increase this year-over-year, and the same is true in Chicago, by the way.

And that's exactly what we were hoping to see.

It's exactly what we're seeing, and it's because of the incremental connectivity that were added to each of those hubs.

So that's how we wanted to measure it.

That's what we're looking for, and that's exactly what we got.

And now we're trying to figure out how to make it even better in those 2 hubs, and we are preparing to launch that in our Denver hub as of February 2019.

So it is on plan, and we're really happy with the performance, and we're measuring it very carefully.

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 Bloomberg, we have Justin Bachman.

I wanted to raise the issue of the Chinese government's demands regarding how you reference Taiwan with that deadline coming up next week.

And I just wondered what your thinking on that is and what are the possible consequences in terms of not complying with that.

Is it possible that United may not be able to serve China down the road?

Well, the latest deadline is still a week away, so there's hope.

And this is clearly a policy disagreement between a couple of governments.

And from our perspective, we're always striving to cooperate with all the governments where we operate, which is a lot of places.

And at this point in time, we're supportive of the efforts by the 2 countries to sort of resolve this disagreement soon.

With regards to potential future aspects, I think at this point in time, I really don't have anything to mention until we get past this next period.

And from Wall Street Journal, we have Alison Sider.

I was hoping you could talk a little bit more about what you're seeing in the Pacific and sort of what's changed there and how sustainable you think that is.

We think it's very sustainable.

We've had a good performance across the region, including China and Japan, definitely China being stronger, but both positive.

So it was great news.

And our Guam and Micronesia operation is also recovering after a difficult 9 months in the region.

So we think that's sustainable.

It's also important to note that while our China performance is better year-over-year, it's still negative year over 2 years.

So that's another indication that we still have more upside left in those markets, in our opinion, and believe that there's further growth to come.

And if I could just ask a quick follow-up.

You touched on this in the call.

Just curious if you've done any analysis of how sensitive that could be to any kind of trade headwinds going forward.

There's -- all we can do is look at our bookings, and I watch them every day across the globe.

And I can tell you at this point, we don't see any impact, and bookings in both cabins, and particularly our premium cabin, was quite normal, if not strong.

So at this point, there's nothing to report, and I don't see any headwinds.

And from CNBC, we have Leslie Josephs.

I have been seeing a bit about these credit card promotions that flight attendants are doing onboard.

I just want to confirm.

They get $100 every time someone signs up?

And how long do you expect that promotion to go on?

So as part of our Explorer Card promotion, we and many offer the opportunity for our flight attendants to let our passengers know about the program and all the benefits that it has when you're flying on United Airlines.

So our flight attendants participate in that program.

It does include a bonus for our flight attendants.

I don't know the exact duration of the $100.

I think it will eventually move to $50 at a later point in time.

But we're excited with the launch of our new card.

We thought it was appropriate to launch it with $100, and that's where we are.

And we'll be monitoring our progress, and it's a great opportunity for the airline and our flight attendants.

Okay.

And it will continue indefinitely?

The promotion...

The onboard promotion.

Will continue indefinitely.

But the amount of compensation will vary over time.

Thank you, ladies and gentlemen, for joining the call today.

This concludes today's conference.

You may now disconnect.