聯合航空 (UAL) 2018 Q3 法說會逐字稿

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

My name is Brandon, and I will be your operator -- 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.

Please go ahead, sir.

Thank you, Brandon.

Good morning, everyone, and welcome to United's Third 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 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 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 Executive Vice President and Chief Financial Officer, Gerry Laderman.

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

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

Thank you, Mike, and good morning, everyone.

Thanks for joining us.

As I mentioned last quarter, we expected to have our decision on who was best to fill our CFO seat by -- sometime by today.

We found someone obviously who strikes the -- not only right balance of experience, financial acumen and leadership and has been part of the team all along, Gerry Laderman.

So we're excited to have him in the seat.

As I think about the quarter, we executed on another outstanding quarter, marked by strong financial results and I think lots of momentum.

Like I like to say and I said before, it is about proof, not just promise, and we delivered financial results at the high end of our adjusted earnings per share guidance once again in this quarter.

Now this is because of the hard work and dedication of our employees, and they continue to find absolutely new ways to meet and exceed the expectations for not only you, our shareholders, but of course, our customers.

A quick recap of the financials.

Turning to Slide 4. Yesterday, we reported third quarter adjusted pretax earnings of $1.1 billion with an adjusted pretax margin of 9.7%.

Our adjusted earnings per share of $3.06 was 36% higher than last year.

We did recapture about 100% of the year-over-year increase in fuel through a balance of revenue and cost control.

These results are tremendous and are indicative of the strides we've made on our revenue, operational growth initiatives, customer service, all of the initiatives, which continue to run ahead of the expectations we've established for ourselves.

In fact, Scott will highlight that we realized the strongest PRASM growth in the third quarter in our mid-continent hubs, which also had the highest levels of capacity growth in the quarter, as we laid out to you in January.

Looking into the future, we're sharpening and continuing our focus on our customers.

I'd like to give you a few, maybe 4 examples here of the actions we took just in this last quarter that I think are beginning to separate us from the competition.

They're only part of what makes us uniquely United.

So first, we know from customer feedback the boarding process has long been an area with room for improvement.

After collecting significant feedback from employees and customers around the globe, we rolled out a better boarding process across our system.

Better boarding, that's kind of our brand, means less time waiting in line, and importantly, improve communications with customers and overall a less stressful process for our customers and employees.

Innovations like these have an important impact on customer satisfaction.

Secondly, this summer, we announced several new international routes to the most comprehensive route network in the world, including nonstop service from D.C. to Tel Aviv.

We're the only airline in the world to offer nonstop service between these 2 great capitals.

They both have fast-growing tech sectors.

Third, this quarter, we greatly expanded our innovative every flight has a story program, which offers real-time and plain English updates to customers when their flights are delayed.

Customer feedback on this has made it clear that they greatly value these messages.

And finally, last month, we made a commitment that no other U.S. airline has made: to reduce our carbon emissions by 50% by 2050.

We celebrated this commitment with the longest trans-Atlantic biofuel flight in history between San Francisco and Zürich.

Our long-term investment in biofuels makes this kind of commitment possible.

We plan to continue to lead the way when it comes to implementing strategies that are not only good for our business, but also for the future of the planet.

But our airline's most unique asset is our people, and October 1 was a historic day for our airline.

After nearly 2 years of planning, we completed the full implementation of our flight attendant joint collective bargaining agreement, which required us to merge 2 extraordinarily complicated systems for scheduling our flight attendants.

A change like this isn't always obvious to our customers, especially when it goes smoothly.

But this is an essential component to running an efficient and reliable operation.

So I want to congratulate the over 23,000 flight attendants at United who continue to deliver for our customers and are leading us into United's bright future.

Turning to Slide 5. As we look back over the past 9 months since we unveiled our 2018 and 2020 earnings per share targets and the growth plan that will help achieve us those targets, we have much to be proud of.

We have largely overcome the significant cost headwinds created by rising fuel prices and still raised our 2018 target-adjusted EPS multiple times throughout the year.

We estimate that we will recapture about 90% of the year-over-year increase in fuel on a full year basis.

And today, we are again raising our 2018 adjusted EPS targets to $8 to $8.75.

We set absolute adjusted EPS targets for both 2018 and 2020 in January of this year, and we're getting closer to delivering results near the high end of our initial adjusted EPS range in 2018.

I also feel encouraged by our fourth quarter outlook.

And while we won't provide 2019 adjusted EPS guidance until January, I will say that our preliminary review places us firmly on the path to deliver on our expectations in the $11 to $13 of adjusted EPS in 2020.

So with that, here's Scott.

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

I'd like to start by thanking our employees in continuing to run one of the best operations in the world.

Running a great operation is a table stakes for winning customer loyalty.

But on top of that, the people of United Airlines are focused on improving customer service, and we're seeing that in our internal customer service metrics.

I know it's tough to model operational reliability and customer service, and it takes time for those improvements to translate into customer choice and higher revenue, but at United, we're already seeing that show up in our top line.

As we've said many times, running a reliable operation and great customer service are fundamental to our success.

And without it, our growth strategy simply can't be successful.

As Oscar mentioned, on the 1st of this month, our flight attendant integration took place.

We're thrilled to have all of our flight attendants flying on common mettle.

During the week of the integration, our entire leadership team had the privilege of visiting our crew bases around the world to meet with our flight attendants who are the key to our product and customer service.

It's energizing to get to talk to hundreds of flight attendants and hear their enthusiasm for the future and their ideas on what more we can do to make the customer experience even better.

Moving on to the revenue environment.

With the exception of some countries in Latin America, we continue to see very strong demand across all regions and cabins.

Andrew will provide additional details in a moment, but this is one of the best revenue environments we've ever seen.

And coupled with the commercial, operational, customer service and growth initiatives we have in place, I've never felt as excited and optimistic about the near term and the long term as I do right now at United.

While Andrew will talk more about the revenue environment, I can't help but steal a little bit of his thunder to brag on what the team under his leadership, combined with support from the rest of the company, has accomplished with the growth plan.

In January, we unveiled our growth strategy, and this summer's profitability exceeded even our expectations.

We grew our mid-continent hubs nearly 10% in the third quarter with an almost 7% increase in PRASM.

At the same time, we continued to grow the balance of the network in line with GDP and delivered a strong 5.6% increase in PRASM in those markets.

Looking ahead, we're obviously encouraged to have been able to raise our 2018 adjusted EPS guidance each quarter as we went through the year in spite of the headwind from higher fuel.

While 2018 has started off ahead of our 3-year plan, we continue to be focused on delivering or exceeding our target $11 to $13 in adjusted EPS in 2020.

The growth plan is a means to the end for delivering on our commitments in 2020 and beyond, and we're pleased to see it working so well so quickly.

For full year 2018, we now estimate that we'll be able to pass through about 90% of the run-up in fuel, up from 75% last quarter, allowing us to raise our 2018 adjusted EPS guidance for the third time.

It was also encouraging to see pretax earnings grow modestly in the third quarter.

We're also looking forward to returning to margin growth, however.

As we ended the third quarter and entered the fourth quarter, we were cautiously optimistic that the fourth quarter was going to be the quarter we turn the corner and return to margin expansion.

Unfortunately, the recent rapid run-up in fuel now makes that more difficult for the fourth quarter.

As we demonstrated throughout the year, we've done a good job of recovering the increase in fuel prices, but it does come with a lag, which makes it hard to recover large intra-quarter moves in fuel within that quarter.

We're looking forward to 2019 when we do expect to not only deliver on adjusted EPS growth, but also return to adjusted pretax margin expansion.

So far, 2018 has been a great year for United.

The team continues to execute on the growth plan while running a smooth operation and providing a better experience for our customers.

We're still in the early innings of many of our initiatives and are excited about proving that United is on the right path to be the best airline for customers, employees and investors.

We're working every day to be the airline that our customers want to fly.

Our success in the third quarter is another step towards realizing United's full potential.

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

Thanks, Scott.

Take a look at the revenue environment on Slide 11.

We reported a 6.1% increase in system PRASM year-over-year for the third quarter, beating the high end of our 4% to 6% expectations.

Congratulations to the entire United team for top-tier PRASM performance in the quarter.

I'd also like to specifically recognize the commercial team who had worked collaboratively on hundreds of different commercial initiatives, big and small, to drive this result.

All of us on the commercial team, however, would like to give a big thank you to our operations team and frontline employees.

Reliability and customer service really matter.

Improving our reliability and customer experience drives customers to choose to fly United, and that makes it far easier for our commercial initiatives to succeed.

Domestic PRASM improved 6.7% year-over-year in the first quarter, well ahead of our 1.7% performance in the first half.

Domestic capacity increased 7.6%.

We saw strength as we moved through the quarter, with demand and yields ahead of expectations.

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

Our new revenue management system, Gemini, improved our forecast accuracy, which allowed us to run record load factors for much of the quarter without increasing our involuntary denied boarding rate.

In fact, our involuntary denied boarding rates were down 87% versus the third quarter of 2017 and 98% versus 2016.

Mainline load factors hovered around 90% for the entire month of July and set an internal record for domestic mainline at 91.2%.

We also successfully shifted our booking profile and reduced dependence on lower-yielding tickets booked further out from departure while increasing our share of higher-yielding business tickets generally booked closer in.

This traffic mix change was enabled by Gemini's greater forecast accuracy.

The Atlantic region had our strongest year-over-year PRASM of any region in the quarter, increasing 7.1%, including a 1 point benefit from foreign exchange.

We saw revenue strength each month in the quarter, with August PRASM up nearly 10%.

This positive year-over-year PRASM momentum was driven by strong load factor performance in both cabins, up almost 5 points year-over-year.

We successfully initiated new service to Porto, Reykjavik and Zürich.

For 2019, we've announced new service to Naples, Prague, Tel Aviv and Amsterdam.

We continue to expect strong results across the Atlantic for as far as we can see.

While the Atlantic had our strongest PRASM performance, we again made material progress in the Pacific.

PRASM was up a solid 5.3% year-over-year, including a 1 point benefit from foreign exchange.

Each month in the quarter saw increasing RASM strength year-over-year.

Yuan has rebounded nicely, and China performance, excluding Hong Kong, was strong.

Unlike the Atlantic, however, Pacific PRASM remains down on a year over 2 year basis.

This leads us to optimism that we have further to go on improving Pacific PRASMs.

We continue to watch demand levels in business class for China flights and have yet to see any reduction in demand for future periods resulting from trade disruptions.

Our Latin entity trails the Atlantic and Pacific and was once again the only region with negative year-over-year unit revenue performance in the quarter, being down 3.4% year-over-year.

While the region is more challenged than others, flights to Cancún, Brazil and Argentina experienced significant demand weakness.

While Q3 Latin performance was once again disappointing, looking forward, we see a mild recovery taking hold in certain parts of the region, specifically Mexico business markets and the Caribbean.

We are optimistic about improved RASM results in the fourth quarter in Latin America.

Looking ahead, we anticipate fourth quarter PRASM to be up 3% to 5% year-over-year.

Moving on to Slide 12, I'd like to give an update on some of our commercial initiatives.

Induction of widebody jets equipped with our all-aisle access flatbed Polaris seat continue to be on target.

Our Los Angeles Polaris Lounge remains on track to open later this year and the Washington Dulles lounge is expected to open by late 2019.

Our Chicago Polaris Lounge was awarded Best Business Class Lounge by the 2018 World Airline Awards from Skytrax.

We continue to retrofit 1 aircraft on average every 10 days with each passing month, as more of our aircraft equipped with the hard products, our fleet transformation is being noticed by our customers.

International premium RASMs grew 3.7x faster than coach in the third quarter, and we can't wait to see how we'll perform once Polaris seats are fully rolled out.

Our passenger segmentation strategies remain on track as we continue to grow the footprint of Basic Economy.

We closely monitor our relative share performance related to Basic Economy sales.

We feel it's important to differentiate the Basic Economy product.

We continue to be pleased with the operational benefits of our bag policies.

Another key component to our passenger segmentation strategy is Premium Plus, our new intercontinental premium economy seat.

The product is now on a small number of 777 jets and sold in the short term as Economy Plus.

We continue to expect to reach a critical mass of equipped aircraft early next year for an official product launch.

Premium Plus is scheduled to be rolled out by late 2020 across most of the widebody fleet on a similar schedule to Polaris.

More details on Premium Plus will be released later this week as we prepare for our first sales next year.

Earlier this week, we announced the second phase of optimizing our Newark and Dulles schedules for local and connecting passengers.

These change allows us to focus Newark capacity on local passengers and connecting passengers to and from our intercontinental departures while adding scope to Dulles for domestic connecting passengers.

The first phase of changes is now flying, and we're really pleased with the early results.

Our rebanking efforts in Chicago and Houston have performed well.

In the third quarter, both hubs' RASM in catchment markets, something we focused on, grew over 2x the remainder of the hub.

We recently loaded for sale our rebanked Denver hub for February 2019.

Our ancillary revenue per on-board passenger is up 10% this quarter, led by increased demand for Economy Plus.

We recently implemented new functionality that allows customers to upgrade their flight outside of the booking window and check-in window, which provides many more opportunities for customers to buy into the premium cabin.

In summary, we feel the revenue environment is robust and that we're set up really well for a strong fourth quarter.

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

Thanks, Andrew.

Good morning, everyone.

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

You can refer to those documents for additional detail.

For the highlights, Slide 14 is a summary of our GAAP financials and Slide 15 shows our adjusted results.

For the third quarter, we reported adjusted earnings per share of $3.06.

That's 36% higher in the third quarter of 2017.

Adjusted pretax income was $1.1 billion and adjusted pretax margin was 9.7%.

Slide 16 shows our total unit costs for the third quarter of 2018 and our estimates for the fourth quarter and full year.

Turning to Slide 17.

Nonfuel unit costs for the third quarter decreased 0.4% on a year-over-year basis, near the midpoint of our expectations going into the quarter.

As we better utilize our assets in the quarter, especially in the shorter month of September, our unit cost performance benefited greatly.

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

This guidance implies that our 2018 nonfuel unit costs are expected to be down between 0.1% and 0.3%.

The implied midpoint is higher than our previous guidance and is driven by 2 primary cost drivers, both of which I would define as good costs.

First, our stronger passenger revenue performance in the third quarter, even higher than our own optimistic expectations, led to higher distribution expense than we estimated at the time we issued our guidance.

This higher distribution expense drove approximately $30 million of incremental cost, mostly in credit card fees and GDS expense.

In addition, the great work done by our cargo team throughout the year has led to approximately $125 million in incremental cargo revenue compared to our original expectations for the year.

While this has been a great tailwind to our earnings, it does come with approximately $20 million of incremental costs tied to additional handling and trucking needed to carry the additional freight.

The combination of these 2 good costs led to approximately $50 million in unanticipated headwinds, translating into 20 basis points of additional CASM for the year.

But to be very clear, this does not alter our view going forward.

And as we move into the second year of our growth strategy, we are still targeting flat or better nonfuel unit costs for 2019.

As we speak, we are in the midst of our 2019 budgeting process, and we will have more to share with you on our earnings call in January.

However, based upon all the work done to date, I am confident we will deliver on our CASM-ex target in 2019.

As you see on Slide 18, we purchased $34 million in shares of our common stock in the quarter and have purchased just over $1 billion of our shares through the first 3 quarters of the year at an average price of $68.16.

Our repurchase strategy over the last few quarters has been to use a grid-based 10b5-1 trading program.

Our trading grid for the quarter was established before our second quarter earnings call back in July.

The grid allows us to be opportunistic, which generally means buying more if the stock declines, but buying less if the stock increases.

Given the outperformance of the stock since the call at 1 point up about 26%, the maximum repurchase price in the grid was exceeded.

But as a long-term opportunistic purchaser, we're also willing to be patient.

Fluctuations in the stock market over the last several weeks demonstrate that the market will give us future chances to deploy our free cash flow on share repurchases at points in time where the stock declines significantly even though nothing may have changed about our outlook and long-term view of our earnings power.

Our approach will result in quarterly variations in our programs, But we absolutely believe we will be able to grow EPS and remain confident that our stock represents a compelling long-term investment.

Turning to our fleet.

We took delivery of 1 Boeing 737 MAX 9 and 2 used Boeing 767-300ER aircraft in the quarter.

We also took delivery of our third used Boeing 767-300ER aircraft just last week.

For the remainder of 2018, we expect to take delivery of 3 Boeing 787-10 aircraft, 3 Boeing 737 MAX 9 aircraft and our last Boeing 777-300ER aircraft.

We announced earlier this month that we ordered 9 additional Boeing 787-9 aircraft with deliveries of those aircraft starting in 2020.

These aircraft are expected to replace international widebody aircraft flying in our fleet today.

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

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

Slide 19 includes a summary of our current guidance, including fourth quarter's projected fuel price range using the October 12 fuel curve.

The ranges provided for capacity, revenue and cost implies a fourth quarter adjusted pretax margin between 5% and 7%.

Finally, Slide 20 presents a summary of our full year 2018 guidance when rolling our fourth quarter expectations into 3 quarters of actual results.

As Oscar and Scott both mentioned, for the third time this year, we've raised the midpoint of our adjusted EPS guidance.

This is why I am thrilled to be in the CFO seat.

We are delivering on our promises, and I look forward to working closely with my colleagues on the executive team to fully implement our strategy and unlock United's full potential.

With that, I will now turn it back to Mike to begin the 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 JPMorgan, we have Jamie Baker.

First question for Scott.

What would it take to move to a profit pooling structure with your immunized JV partners?

Just curious if you're leaving some margin on the table by not having a structure more like, say, what Delta has with Air France-KLM?

So we've made incredible progress over the last couple of years with our JVs, particularly the Atlantic JV with Air Canada and Lufthansa.

We work much more closely together.

We've done a good job of getting our interests aligned, and you can see that in our results.

Some of our improvement across Atlantic is because of the better cooperation and partnership with those 2 airlines.

Ours is a revenue-based sharing instead of profit sharing.

And mathematically, those come to essentially exactly the same answer.

So it's a lot more complicated to do profit sharing instead of revenue sharing, and I think the answer at the end of the day is essentially exactly the same.

And so we're not philosophically opposed to it, but really don't see much upside and given all the brain damage it would take, we're unlikely to go to that.

Got it, understood.

And also, Scott, and maybe for Greg, with operational metrics having improved, I would think that the value proposition that United can offer when negotiating or renegotiating corporate contracts is higher than what it used to be.

What's the cadence of corporate contract expirations look like over the next 2 to 3 years?

Is it fairly consistent?

Is it front- or back-end loaded?

I'm just thinking about how long it might take for you to start generating more of a domestic yield premium to the industry the way that Delta does, and obviously, winning that corporate share would be a catalyst there.

Any thoughts?

Jamie, it's Andrew.

That's an interesting question.

The contracts are always coming up, and we have a bunch of big ones that we're working on actually right now.

So we think there's plenty of opportunity in the short and medium term to make sure that customers and our corporate clients see the great operation that the whole United team, led by Greg, is running.

Maybe I'll let Greg kind of add on to that.

Sure.

Thanks, Andrew.

As we've improved our operational performance and reliability and our customer service, we've seen some customers return to United that left us when we were not running the greatest of operations several years ago.

And that -- the return of those customers have nothing to do with capacity, but more focused on our operational reliability.

Our team is running what we think is one of the best airlines in the world.

We've led the industry in D0 performance since 2017, and our 90,000 employees have done this while we're operate in one of the most difficult environments with one of the most, I think, most difficult comp structures of anyone.

And in Chicago, where we've got a direct competitor, we've had better D0 performance or better completion performance for 20 months in a row.

Really a credit to the team out there working hard every day to make sure our customers get to where they need to be on time, day in -- flight in, flight out.

And obviously, it didn't happen overnight.

We've got -- as a result of the recovery of the operation, we've seen market share come back that we previously lost.

And we've also seen our improving customer service beginning to pay dividends.

We've seen it in our internal customer metrics, and that translates into customers choosing to fly United when they have a choice more often than not.

And everything we're doing here at United ties together, from the world-class reliability to improving the product and customer service to the growth that drives customers to proactively choose United when given a choice.

From Wolfe Research, we have Hunter Keay.

Yes.

Not to take anything away from that previous exchange you had with Jamie, but part of the reason why you're getting corporate travel is because you're spending so much on travel agency commissions.

You're up 30% year-on-year.

It's tracking to like a $350 million expense for United, these travel agency commissions.

So I'm kind of curious to know how much corporate share are you buying with these incentive fees?

And bigger picture, if you want to talk about it -- because you're not the only one doing it, by the way.

Everybody is ramping up these agency fees to hundreds of millions of dollars.

So how do we make sure these things don't sort of spiral out of control and we have some sort of cost arms race like we had in the '90s on this?

So we have increased our travel agency payments and corporate payments.

I think if you went back and looked at the history, you'd see that, that was a responsive measure as opposed to a leading measure.

And really, basically we have a philosophy, we're not going to lose share over something like that.

Our goal is also not to win share through that, but to win share through being the airline that customers choose to fly.

But we can't allow ourselves to lose share when our competitors are out trying to buy it.

Right, okay.

That's probably all you want to talk about there, I get it.

And then a couple of questions on cash usages in '19.

Can you help me think about pension contributions next year?

And is $5 billion in CapEx -- growth CapEx a good starting point to think about that for '19 given also the moving parts on the fleet front?

On pension, a little too early to tell.

We've been contributing about $400 million a year to our pension, and we are moving well into the direction of having a well-funded plan.

So a little bit too early to tell.

We will know in January what our expected contributions for the year is, but it certainly won't be more than what we've been doing historically.

With respect to CapEx generally, this year was a down year versus last year.

Last year, we had about $4.7 billion of CapEx.

This year, down, we're in that $3.6 billion, $3.8 billion range.

All I can say about next year, which is a year of more aircraft deliveries than this year, I don't expect it to exceed what we did last year.

So I think it would be well below the number you threw out there.

From Citigroup, we have Kevin Crissey.

Can you talk about the growth in your mid-continent hubs and particularly like what aspects are creating the RASM outperformance?

I assume because you highlighted those hubs as opportunities, they must have probably been underperforming in the prior year.

So maybe you could talk about it in terms of why you're getting such good RASM, how much of it is comp, how much of it is restructuring the hub, how much of it's you just needed the overall volume of the growth?

Any which way you could put that in context would be great.

Sure, Kevin.

It's Andrew.

Really pleased by what we've accomplished so far in Houston and Chicago.

We don't think it's easy comps.

But I will say having looked at the performance of all the hubs, I think those 3 hubs in particular, including Denver, can produce higher margins for the company.

And as we went through the details of every nut and bolt of how we put together our schedule.

I think we quickly came to the conclusion that the schedules we previously offered did not provide the right patterns to our customers, the right frequency levels and the right level of connectivity.

And those patterns, in fact, created more low-yield connectivity than high-yield connectivity.

And so we went through a process this year -- or late last year, changing Houston and then Chicago early this year where we reconnected every dot in a way that favored better yields and traffic onboard these aircraft, more connectivity, and it's worked incredibly well.

In fact, it's exceeded our expectations.

They were the fastest-growing part of the airline and RASM, in fact, grew faster there than the other slower parts of the airline.

So we think that is a sign that this philosophy is working.

We are now ready to embark on this same journey in Denver.

In fact, the new schedule in Denver is loaded for sale.

That new schedule includes one less bank of departures, which allow all the remaining banks to be bigger and have a different level of connectivity, which we again expect to drive really good improved results in Denver year-over-year starting in late February.

So really pleased by the performance.

How we build these schedules matter.

It is a gigantic jigsaw puzzle.

And we just were able to put that puzzle together in a much better way for our customers, and that is generating more revenue for the company.

And maybe if I could follow up.

Some of what you talk about sounds like it has elements of procyclicality, meaning your -- the more connections going for higher-yielding connectivity, maybe some investments in the lounges, et cetera.

So there's certainly some concerns in the market about where we are in the cycle.

Can you talk generally about where United is and how you're positioned?

Should we be later in the cycle than maybe current demand suggests?

Well, I think that we're nimble, and we're well on our way towards our EPS targets, and we're going to be making sure we're in that direction.

But Gerry, do you want to add to that?

Yes.

I think one of the important things to remember is the flexibility we've maintained in our fleet.

We're always looking forward to see what can we do if we need to reduce aircraft from the flying schedule, and we have plenty of leased aircraft that we can return instead of buying off-lease, which is what we've been doing recently.

And we have our older aircraft, which we can manage those retirements both to reflect what we need for capacity and also to manage costs and avoid maintenance expense as well.

So I think the fleet flexibility is critical to being able to adjust for whatever the cycle brings.

From Cowen, we have Helane Becker.

So just this question here, what -- you said during the quarter, you were seeing improved premium -- I guess, premium numbers, yields and so on.

How -- can you say how much of that is because you had easy comps with storms last year?

And how much of it is true revenue performance that will continue through the fourth quarter and beyond?

It's Andrew.

I think our guidance for the fourth quarter would tell you that it's not just easy comps.

I think we are putting together a schedule of products and services and delivering it incredibly reliably that is having a few more customers choose United, as Greg just laid out a few minutes ago.

So we're really pleased.

And when we look at where we're going in the fourth quarter, what the premium cabins look like so far in the fourth quarter, we're excited about what the future holds.

Okay.

So maybe I can ask it differently.

Can you say how much premium products outperformed economy products?

I think I did in my script.

It was 3.7 points better.

I mean, the premium cabins did really well across the board, and the premium cabins even did fairly well to Latin America given the overall environment.

Okay.

And are you finding that you don't have enough opportunity to sell those products and that you're turning people away from that?

Or are you able to accommodate everybody who wants to be in that cabin?

That's a good question.

And we spent a lot of time trying to figure out how many seats should be on our aircraft and how many seats should be in each and every cabin.

United's hubs are located in the best premium markets on the globe.

They represent the majority of business traffic to and from the United States.

It is something, I think, very unique to us.

And so we think we have appropriately sized our cabins to accommodate the business class needs or the premium needs across the globe.

So I think we're pretty pleased with that, and we offer, I think, pretty large-sized cabins to make sure whether you're going to China or London Heathrow, we can do that.

We continue to look at the number of premium class seats we have onboard all our aircraft given where our hubs are located.

And I think, actually, we'll have more to say on this in the future as we make sure that we have the right number onboard every single aircraft we have.

From Deutsche Bank, we have Michael Linenberg.

Two here.

Andrew, the industry, obviously, it's becoming very much of a real estate game.

And when I look at your position in Newark, there is a new terminal going up.

And I'm just curious, your footprint at that new terminal relative to what you have today, is it of similar size?

Or do you have room to build out further?

And I'm just asking this because as you go through these phases, where you pull markets out of Newark and put them into Dulles, there's probably some loss there, maybe it's connections, maybe these routes are loss leading and it makes the most sense.

But I'm just curious on space opportunities that you have with the new airport and maybe the P&L impact of these changes as you move airplanes from one -- or flights from one airport to another.

All right.

Mike, to be really clear, while we are moving certain markets out of Newark into Dulles, those are markets that tend to have no material local traffic to and from Newark.

We are not reducing our footprint at the airport.

So we have replaced the flights that we've removed with new incremental frequencies to the bigger destinations that have a much more -- larger population base to fly to and from New York, whether it be Nashville, Tennessee or Memphis or you name it.

So our footprint's not declining at the airport at all.

And in fact, by moving these flights around, we're offering better intercontinental connectivity for our global flights, and we're offering more local customers better choices for flights.

So that is what we're doing in New York and that is better suited for Newark, and Dulles is better suited for these connecting traffic flows.

So there is absolutely no reduction in Newark.

And in fact, the number of seats we're offering out of Newark is growing as we use larger aircraft to these larger destinations.

So we're really pleased by that.

In terms of the new terminal in Newark, we're really excited by all the developments that [Port] is doing in Newark in terms of redeveloping the facilities, and we continue to work with them.

I don't think we have anything to say today about United's exact footprint in that facility.

But hopefully, we will in the future.

And again, we're really excited about what we're doing in New York and Newark, in particular.

And as I said in my script, the success of the changes we've already implemented, which happened earlier this month, is really beyond our expectations already.

And we just announced Phase 2 of that given how well it's going.

Okay, great.

Just a quick one for Gerry.

Gerry, would you know just roughly your split between fixed and floating rate debt on balance sheet?

Roughly speaking, let's call it about 80-20.

Okay.

80, fixed?

Fixed, yes.

Obviously, the bulk of the aircraft financing is all fixed.

We have a little bit of aircraft financing floating.

And then our term loans is the other big piece, but the vast majority is fixed.

From Barclays, we have Brandon Oglenski.

So Oscar or Gerry, you commented in your prepared remarks that you're well on track to hit your 2020 EPS targets.

And I know you don't want to talk about 2019 right now.

But can you give us 2 points here?

What fuel are you assuming in that EPS range looking forward?

And then secondly, should we be thinking this is a linear progression?

Or are there upfront development costs in either revenue or the cost side that would make this more back-end loaded or front-end loaded?

So on fuel, it's pretty simple.

We always assume our forecast to forward curve and use that for our modeling purposes.

In terms of hitting our earnings targets, however, we believe as has been demonstrated this year that there is a link between fuel prices and revenue.

It does come with a short lag.

But much like this year, if we just started the year and just look at the forward fuel curve, it went up pretty significantly.

And our revenues and other initiatives kicked in to recover that increase in fuel price.

And as we look at 2019 and at 2020, it really is not predicated on a price of fuel.

It is predicated on a relationship between revenue and fuel price, and that's what gave us confidence earlier this year to put out a 2020 target.

It's what gives us confidence today to say that we can have margin expansion next year and gives us confidence that we can hit the 2020 target of $11 to $13 because regardless of what fuel does, we believe we'll be able to recover those increases or those changes with a short lag.

Okay, I appreciate that.

And then on the CapEx question earlier, Gerry, should we be thinking that 9% to 10% of revenue is the right place to be, looking forward?

Or is that more in the expansionary phase here in United and it should taper off as we look out in the future?

It depends.

The visibility we have for 2019 is pretty solid.

2020 and beyond is too early to tell.

Let me give you a couple of data points, though.

So in a world where, let's say, we -- and this was in the past where we weren't growing, just kind of maintenance CapEx for us would run roughly $3 billion to $3.5 billion.

That's a combination of nonaircraft CapEx, which runs, call it, $1.5 billion a year, plus or minus a little bit.

We can always adjust that just depending on circumstances.

But then when you have an aircraft fleet of our size and you're just dealing with the natural replacement cycle, assuming 25-, 30-year life on aircraft, that's what get you to kind of the $3 billion to $3.5 billion sort of what I would describe as maintenance CapEx.

That's one of the reasons why as we grow, and obviously some of that growth will require additional aircraft, we want to mix the new aircraft with used aircraft to really manage our CapEx going forward.

And from Morgan Stanley, we have Rajeev Lalwani.

Scott, Andrew, a question for you on the 4Q PRASM guide.

Can you maybe just break out how much of that 4% or so is attributable with the Gemini, the reversal of Basic Economy and the approach there and so on?

And then also, just any initial thoughts on 2019 capacity.

Looking backwards -- in fact, going all the way back to January or February last year when we were in New York, I think we said Gemini was worth roughly 0.7.

We've analyzed how we think Gemini is doing, and we do think it's in that range, if not a little bit above that range.

So we're pretty pleased by that, and we are continuing to make more improvements to the system.

In fact, we made a number of significant tweaks this summer.

So as those fully ramp up into the system, we think it has some upside going into 2019.

We're not breaking out all the other initiatives.

As I said when I started the call, we literally have hundreds of different things we're working on.

Some of them are really big like Gemini, our redevelopment, our lounge network for Polaris or putting Premium Plus on aircraft, and some of them are really small that would never get anybody's attention.

But we're all working together as one team and making sure we have a strong pipeline of items that can continue to drive incremental RASM as we go forward -- or incremental margin, more to the point.

And so we're really pleased by that.

It requires a constant set of innovations and changes and building that pipeline to make sure that we can continue to do that as far as the eye can see.

And I feel really comfortable that the whole commercial group is on target to continue to deliver that, and we're really pleased with the results so far.

2019 capacity?

So we're -- we'll give formal 2019 capacity in January.

We're in the process of building the budget.

And the team is doing the bottoms-up build, which is how we build our capacity plan, not top-down.

All of that is driven by the north star of meeting or exceeding our 2020 earnings target of $11 to $13 per share.

And we're not dogmatic about capacity.

But to the extent it is the best way to achieve that, then we're going to be focused on achieving our commitment for the $11 to $13 per share in earnings.

And as you look at what has happened in 2019, clearly, the growth plan has been successful so far.

Our CASM is better than it otherwise would have been, our RASM is better than it otherwise would have been, our earnings, our margins better than they otherwise would have been.

And so at least as we sit here today, it certainly feels like the growth plan is working well, and so it would be hard to abandon the growth plan and change our capacity plans as long as it's continuing to work well.

But we'll give formal guidance in January.

Okay.

If I could just sneak one quick one in for Gerry.

Gerry, is there anything included in the $11 to $13 number for buybacks?

[Repurchases].

No, just very little.

From Bank of America, we have Andrew Didora.

Scott or maybe Andrew, I know domestic pricing is really just finding its footing right now, but how do you think about the elasticity of demand and at what level of fares or fare growth would you be maybe become a little bit more concerned about volumes?

So demand is inelastic.

Almost any way you look at it, I think the price elasticity of demand for leisure travelers is about minus 0.7; and for business demand, it's about minus 0.3.

Another way of thinking about this, fares in real terms are down about 50% in the last 30 years.

It's been great for consumers.

It's been great for people being out and getting to travel.

It's been good for the overall economy, but we have a very long way to go before we would get to a point where I think we need to worry about price elasticity impacting demand.

Interesting.

And then, maybe going back towards the focus in the mid-continent hubs.

Can you maybe give us a bit of a status update on where the buildup has gone relative to plan?

What inning are you in, in terms of the buildup there?

And once you get past the rebanking in Denver, kind of what is left there in mid-continent?

And I guess, I ask because the network focus of late, at least from some of the releases we've seen, seems to be centered a lot more around your East Coast hubs right now.

Yes.

I would say, we're still early in this particular game related to the hub restructures.

Sometimes, you put these together and they require tweaks based on what you learn.

Right now, I would just say, we're well ahead of where we thought we'd be in Houston and Chicago, and their performance, I think, shows it.

And Denver's coming online.

So I think there's more to come.

We're going to learn a lot about Denver over the next 6 months and what we've got right and what potentially we'll tweak.

We haven't made any significant changes to Houston or Chicago yet because they are performing really well, so that may be the end game at least for now.

But what I will say about schedules just in general is it really is a jigsaw puzzle that we've put together time after time as we create the schedule, and the group just loves to do that.

And so the answer does change based on all the factors that go into it, whether it be the macro economy and what competition is doing.

And we're going to be nimble, and we'll continue to adjust.

But we think we're still relatively early in the game.

Denver is about to come upon us in a few months, and we're excited about what we've seen so far.

And we will likely make more tweaks to make it even better going forward.

From Buckingham Research, we have Dan McKenzie.

With respect to the commentary about margin expansion in 2019, that's just not a part of the investor conversations that I'm having.

I'm just wondering if you can just help us understand or pinpoint with more specificity where that confidence is coming from.

Is it macro driven?

Is it the commercial initiatives that are ahead of schedule?

And for example, if you were looking for $600 million in net revenue improvement from the network initiatives, is it because you're getting the $600 million today already?

I'm just wondering if you could just help us pinpoint where that confidence is coming from on the revenue side.

Well, on a high level, it's everything.

It's cost discipline.

It's running a good operation.

It's great customer service.

It is all the commercial initiatives that you talked about.

So it's not one single element.

And look, we've got 100% recovery of earnings in the third quarter, not the margin expansion.

But if we would have had this call 3 weeks ago, we would have expected that we had a good shot at margin expansion in the fourth quarter.

Now fuel ran a couple hundred million dollars increase or so for the fourth quarter in the last couple of weeks.

And as we said, that's hard to recover in the short term.

But we're almost there right now.

And we think all of those initiatives we're going to -- Gerry said in his prepared remarks, we're confident that we're going to have CASM flat or better next year.

So we have that going for us.

We are confident that the customer service and operational performance will continue to be leading -- world leading.

And the commercial initiatives just continue to hit on almost all cylinders.

And so you put all that together, we really feel like we're on track next year to not just grow earnings and EPS, but also to expand margins because we're on the trajectory to do it right now.

This concludes the analyst and investor portion of our call today.

We will now take questions from the media.

(Operator Instructions) And from Wall Street Journal, we have Alison Sider.

You talked a lot about the strength in premium.

I was wondering if you could tell us anything about whether fares for premium products are rising faster than for economy in the main cabin.

This is Andrew.

In looking back over the last few months, we did more premium cabin growth in load factors than we did in yield or otherwise fares.

So I would say, our premium fares were up, they were -- the change in our PRASM on the business class cabins, particularly across the Atlantic, had more to do with higher paid load factors, which we were really pleased to see.

So going forward, I think I see a little bit more yield strength than load factor.

I think we're going to have both that I now see yield kicking in more going forward as we head into the fourth quarter for the premium business.

And if I could just ask one more.

You mentioned sort of demand for Economy Plus driving ancillary revenue.

I was wondering if you could tell us a little more about what -- at what rate people are kind of buying up to Economy Plus and also whether that includes plans that you all discussed to sort of charge extra for the preferred seats that are still within economy but may be closer to the front.

That doesn't -- I think we haven't officially launched that yet.

We've talked about it, the latter, in terms of preferred seats.

Economy Plus has just been a great hit.

We have a large Economy Plus cabin onboard our aircraft, and we are working every day on more and more ways to make people realize that we have that particular product available, which provides a little bit more legroom and the seat's closer to the front of the airplane.

And I think really the secret recipe here is making it available and making it seen by more passengers and more distribution outlets year-over-year.

And so our digital team is working hard at that, and that is I think driving the result that we talked about on the call.

So we will continue to make sure we make that product available, as widely dispersed as possible.

And I think that alone will drive the growth.

And we do have more paid load factor room in that section of the aircraft, so we're excited to see what we can deliver on that line item in 2019.

And from Bloomberg News, we have Justin Bachman.

I wanted to ask a little bit about what's driving the business traffic and what's driving yields there in terms of whether it's greater volumes from your corporate contracts or if it's close-in bookings.

Or what are you seeing and some of the color on what's behind the business traveler?

It may differ a little bit by region, but overall, globally, it's strong.

It's not even -- it's even, I think, decent in Latin America, quite honestly.

It's coming across the board, though.

Our sales force has been out there pounding the street, as we've talked about on the past calls, and doing a great job.

But more importantly, we're running a great operation, and that is helping people choose United in a greater rate than they've ever done before.

And we're rolling out what is a fantastic business class product that we talk about as Polaris.

We have one aircraft entering the fleet every 10 days with Polaris seats, and those seats are just really best-in-class.

And I think we have a lot of runway to go.

I can't wait until we have Polaris business class seats on every single one of our widebody jets.

It can't come soon enough.

From USA Today, we have Dawn Gilbertson.

Andrew, this question is for you, and you may have answered it in a roundabout way in your opening comments.

But on Basic Economy, do you guys have any plans to change your carry-on bag restriction like American did in September?

And if not, why not?

On Basic, we are happy with where we're at.

The way we designed Basic was carefully constructed to be, I think, a win for allowing us to segment our products, to allow us to compete effectively against ultralow-cost competitors and allow our operation to deliver better results for everybody in terms of on-time departures.

And it's working as designed, and so we're full speed ahead with where we're at.

So no plan to change that policy on the carry-on bag?

There are no plans to change any policies.

And from CNBC, we have Leslie Josephs.

I saw there was a lot of growth in regional.

Could you update me on where you guys are with possible scope release with your negotiations with pilots?

And also just a question for Oscar.

Do you want to stay on past 2020?

You have a 5-year agreement, right?

It is a turnaround.

So I'll start with scope.

I'll leave the second part to Oscar.

First, we are in negotiations with our pilots.

Those are progressing, and there's cordial tone at the table, cooperative tone.

We disagree on some things but are working together to understand each side's perspective.

With regard to scope, I and all of us at United fully understand the history that our pilots have had and where they have seen their jobs outsourced to regionals, certainly, their perspective, and their perspective I would agree with.

And because of that, they are sensitive on scope.

But the world is different today.

We are growing United mainline, and we -- it's working well, and we intend to continue that.

And that's what matters to our pilots.

And if we can find a way -- we will find a way where we can use regionals to have competitive scope.

We need to have competitive scope with American and Delta.

Look, it's competitive scope that helps fuel the growth for mainline, that's going to be a win-win for everyone.

And I am confident that we will ultimately get to a place that is good for our pilots, that they think is good for them and that is good for the company as well.

Thank you.

Ladies and gentlemen, this concludes today's call.

Thank you for joining.

You may disconnect.