聯合航空 (UAL) 2018 Q4 法說會逐字稿

Good morning, and welcome to United Continental Holdings earnings conference call for the fourth quarter and full year 2018. My name is Brandon, and I will be your conference facilitator today. (Operator Instructions)

This call is being recorded and is copyrighted. Please note that no portion of the call may be recorded, transcribed or rebroadcast without the company's permission. Your participation implies your consent to our recording of this call. If you do not agree with these terms, simply drop off the line.

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

Thank you, Brandon. Good morning, everyone, and welcome to United's fourth quarter and full year 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 a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please refer to the tables at the end of our earnings release, investor update and presentation, copies of which are available on our website.

Joining us here in Chicago to discuss our results and outlook 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 other members of the team 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 thank you all for joining us today. Well, what a difference a year makes. You'll, no doubt, remember that a year ago, we laid out our multi-year growth strategy and set forth a series of concrete promises. I'm proud to say that in 2018, our incredible United team, over 90,000 strong, got to work fulfilling those promises because what matters is proof not promise.

You'll remember that we said we would deliver higher unit revenue in 2018 while simultaneously increasing supply, and we have. Not many on Wall Street believed this was possible when we initially announced our plan, and now there are a few who question the value of our continued growth. As we've talked about this uniquely United growth strategy that not all capacity is created equal, and I think we've proved that this year. In fact, our PRASM has or is expected to outpace the industry in each of the last 4 quarters and is likely to outpace the industry by approximately 200 basis points in 2018.

If we turn to Slide 5, you'll also remember that we said we expected to increase our 2018 adjusted EPS to $6.50 -- between $6.50 and $8.50, and we have. But we did better at $9.13 per share for the year. We also said we would be laser-focused on cost discipline with a full year CASM-ex goal of flat to down 1%. We have, again, delivered on that promise, expecting to lead the industry with a CASM-ex down 0.2% for the year.

We also said that we'd ensure that our commitment to a smart growth strategy wouldn't detract from our focus on running a great operation, and we have. In fact, we flew more passengers than ever last year and achieved the highest completion rate in our history.

So no doubt, there is much more work to be done, and we are very proud of the significant progress we made in 2018, and I thank all our employees.

Now the question, of course, becomes what difference will the next year make. So as we look ahead to 2019, we are paying very close attention to the government shutdown, potential trade disruption and other sources of economic instability. We read the same headlines that you do, and while concerning, we've not, to this point, detected much of an impact on our numbers. Scott will walk through our facts and -- for making this particular point, but of course, we will keep watching. And in the meantime, we'll just stay focused on the priorities that we can control, in particular, the way we serve our customers.

So switching to that. More than ever, we're focused on putting our customers, all of them, at the center of everything that we do. This year, we'll continue to roll out a series of innovations and improvements to the customer experience and, we believe, will continue to reshape United's image. We'll introduce a series of new routes, boosted by new customer-friendly aircraft that are designed to make United the airline our customers choose to fly.

Just next week, we will be able to download a completely reimagined version of the United app. It's already the #1 downloaded app amongst U.S. carriers, but we are making it even better, putting useful information at your fingertips without losing the features our customers love. We'll also continue to add useful information to over 60,000 mobile devices used by our employees that have real-time information and communicate better and solve your problems in the moment. These are just a few of the examples of the digital advantage that has resulted from the new entrepreneurial culture that we're fostering here at United. This culture, coupled with our deep company-wide commitment to our core4 principles, will be essential to the success of our efforts to take our standard of customer service to a whole new level.

Lastly, moving to Slide 6. Let me emphasize that while we are delivering on our commitments to our customers, we're also delivering on our commitments to you, our shareholders. Last year, our ability to recover almost 100% of the year-over-year increase in fuel expense helped us achieve a full year adjusted EPS of $9.13. In 2019, we are committed to delivering an adjusted EPS target of $10 to $12, which puts us nicely ahead of the pace to deliver our adjusted EPS of $11 to $13 in 2020.

So with that, let me hand it over to Scott.

Thanks, Oscar, and thanks, everyone, for joining us on the call today. 2018 was a fantastic year financially, operationally and for our customers. We operated the most on-time flights in United's history. This is the result of the commitment and hard work of the entire United team as they came together to deliver a great operation and experience for our customers. From the front line to the corporate support center, everyone played a part, and I'd like to thank all of them.

In 2018, we continued to run a great operation, including top-tier D:00 performance, all while flying a record number of passengers and with record load factors. We had the best-ever consolidated completion factor in our history and drove a record 9.3% revenue growth year-over-year. As Andrew will talk about later, we believe our strong operation and continuously improving customer focus drove about 1 point of PRASM improvement in the quarter. These operational stats, coupled with our strong PRASM performance and our return to margin growth in the fourth quarter, are clear evidence that the growth plan we announced at this time last January is the right strategy for United.

As we look to 2019, we all know that there's a relationship between cost, with fuel being the industry's most volatile cost, and revenue. It's precisely what gives us the confidence to give annual and multiyear adjusted EPS guidance. This historical relationship is why we were confident giving full year guidance for the first time last year and were able to maintain and raise that guidance even as fuel rose significantly during the year. This historical relationship not only gives us confidence for 1-year guidance but also allowed us to provide $11 to $13 adjusted EPS guidance for 2020 because we were confident that PRASM would increase in a world of higher fuel.

Said another way, unpredictable fuel costs are a reality, but at United, they will not be an excuse to miss our guidance. Our revenue strategy, combined with our cost discipline, gives us confidence that we can continue -- that we continue to meet or exceed our adjusted 2019 EPS targets anywhere between $40 and $80 Brent oil.

As Oscar mentioned, there's been a lot of concern on Wall Street about the health of the economy as we enter 2019. We normally don't react to a single week's worth of bookings because of the inherent volatility in bookings. But the first full week back from the holidays is unique as business customers are back in the office and planning business trips. It's the largest booking week of the year and the first opportunity to see what's happened with corporate budgets. Historically, if companies are seeing weakness or are concerned about the outlook, they almost always reduce the travel and entertainment budget for the coming year. As a result, business bookings for the first week of the year are reasonably good, forward indicator for the health of the economy. And despite all the stock market volatility and hand wringings, despite the government shutdown, our business bookings, as measured by all large corporate accounts and travel agencies, were up 11% at slightly higher yields last week. The world can certainly change going forward, but at United Airlines, demand remains solid, at least based on the data we have so far.

Over the last several earnings calls, you heard us talk a lot about the benefits of our growth strategy, but today, I want to talk to you about another change that's harder to quantify and even harder to perceive from the outside of the company but is essential to driving strong PRASM and margin growth. In short, at United, we're changing our culture. We started to shift to a nimbler, faster and more action-oriented approach to improving our customer and employee experience. I can't tell you the number of times I sitting in a meeting or someone walks into my office to show me something new and innovative that we're doing. You're able to see it in the performance of Gemini, the development of an industry-leading mobile app and the powerful new technology that we put in the hands of our employees. Our teams are developing new ideas literally every day and testing them at speeds we wouldn't have thought possible. We're now experimenting with all kinds of new initiatives and solutions, quickly expanding those that work and pulling back those that don't. And this is happening throughout United.

At the start of last year's budget process, as an example, we asked the teams to keep M&A total headcount flat despite growing 5% and adding all kinds of initiatives to their plate. There was a fair bit of anxiety around this from the team, but we did it and achieved the great results that we announce today. For this year's budget process, we took it a step further and set a goal to keep total M&A spending flat. So leaders had to fund growth, new initiatives and pay raises without spending a single dollar more. I'm proud to say that the team has embraced that challenge with a positive can-do spirit. It isn't an easy target to hit, but aided by our new entrepreneurial culture that's taking root, we're confident we'll do it.

We're committed to making United the best airline in the world. We have the world's best network potential, and this ongoing cultural change really is a significant and difficult-to-replicate competitive advantage for United. We had a great year in 2018, and I again want to thank the team for delivering. There's a lot happening at United: the growth plan, focus on the customer, great operations and a new action-oriented culture facilitated by core4, to name just a few. As a result, we're confident that we'll meet or exceed our $10 to $12 EPS guidance in 2019 for any fuel price between $40 and $80 per barrel. As we said before, unpredictable fuel prices will not be an excuse here at United.

2018 was an incredible year and set a solid foundation for the strategy we laid out 1 year ago. We're looking forward to repeating our success in 2019.

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

Thanks, Scott. Turning to Slide 12. I'm pleased to report our revenue momentum continued from the third quarter into the fourth with PRASM growth of 5%, achieving the high end of our expectations. All entities achieved positive PRASM in the quarter. For all of 2018, we achieved 4.3% increase in PRASM on 4.9% more capacity. We achieved the high end of our unit revenue guide each quarter in 2018. Congratulations to the entire United team for top-tier PRASM performance in the quarter.

There were a number of uniquely United initiatives that drove our PRASM outperformance in 2018 outside of just our capacity growth. Our employees delivered a record-setting operational performance and improved our customer service, which we estimated added about 1 point of revenue to our PRASM year-over-year.

Gemini, our propriety revenue management system, which was also rolled out last year, has exceeded our expectations. We've leapfrogged our competitors and have an industry-leading RM tool that delivered 1 point of PRASM growth in 2018.

Lastly, we further sharpened our product segmentation strategy to better deliver our customers the product they want when they want it. These improvements and a host of other commercial and digital initiatives contributed about an additional 1 point to PRASM.

The culture change Scott talked about has delivered an environment where innovation and change are welcome. Overall, we feel good that the plan we laid out in January 2018 is working as we head into 2019.

Now for some details about each of the regions on Slide 13. Domestic PRASM improved 6% year-over-year in the quarter, leading the way across all regions. Domestic capacity increased 6.4% in the quarter and 6.7% for 2018. Corporate revenues were once again strong year-over-year, outpacing our overall top line growth of 11%. We continued to successfully shift our booking profile to reduce dependence on lower-yielding tickets booked further out from departure while increasing our share of high-yielding business tickets generally booked closer in. Gemini worked well last year in implementing this strategy. Our RM posture as we enter 2019 continues and accelerates this practice relative to the industry.

Following 2 years of very strong Atlantic PRASM growth, we saw Q4 PRASM growth of a more moderate 1.6%. Passenger load factor was strong, increasing 5.2 points year-over-year. However, that increase was not large enough to offset decline in coach yields. Our outlook continues to show coach yield weakness and, as a result, slower PRASM growth with the Atlantic in the coming months.

PRASM across the Pacific was up 4.5% year-over-year in Q4, our third quarter positive PRASM. We continue to watch demand levels in business class for China flights and have yet to see any reduction in demand for January resulting from these trade disputes.

After negative PRASM growth in Q2 and Q3 of 2018, Latin performance inflected sharply positive, increasing 3.8% in the fourth quarter. We're optimistic about strong PRASM from the Latin region even with continued weakness in Brazil and Argentina.

Looking ahead, we anticipate first quarter consolidated system PRASM to be flat to up 3% year-over-year. The shift of the Easter holiday to mid-April is expected to be an 80 basis point headwind for Q1, with an equal tailwind for Q2.

As we look at the revenue environment, the primary change we observed is pricing across the Atlantic. While it has gotten weaker, we believe it will improve as we enter peak travel in Q2. Overall, we do not think anything fundamental has changed as we look at the demand environment. That being said, the government shutdown and other factors have created some uncertainty in our Q1 outlook, and as such, we've guided to a 3-point range in unit revenue this quarter. As Scott mentioned earlier, domestic business bookings for the week of January 7, the first clean booking week of the year, were strong, indicating to us that our momentum continues to be on track.

Our capacity outlook for 2019 remains at 4% to 6%. Our passenger segmentation strategies remain on track. Induction of wide-body jets equipped with our all-aisle access flatbed Polaris seats continue to be on target. The mid-continent strategy continues with our Denver rebank scheduled for February. We're pleased with the results we've seen in both Houston and Chicago and see even more upside in Denver. And the possible itineraries at all 3 subs have grown about 12% year-over-year.

The Basic Economy footprint has continued to grow. We continue to closely monitor our relative share performance related to Basic Economy sales. We feel it is important to differentiate our basic product, and we continue to be pleased with the operational benefits of our bag policy. Another key component to our passenger segmentation strategy is Premium Plus, our new intercontinental premium economy seat. Early sales figures for Premium Plus have average fares of approximately 2x the coach fare, above what we had planned for.

Our ancillary revenue had a fantastic year as well with revenues up 13% for the year. Increase in fees paid to upgrading to first class was a key area of success. In late 2018, we also started the sale of a limited number of preferred coach seats that will be a new revenue stream in 2019. As always, coach passengers have the option of either picking a non-preferred seat for free or waiting to select an eligible seat for free at time of check-in.

In summary, we're all set up for a strong first quarter, and we'll continue to focus on enhancing the customer experience.

And with that, I'd like to turn it over to Gerry.

Thanks, Andrew. Good morning, everyone. Yesterday afternoon, we released our fourth quarter and full year 2018 earnings and our first quarter and full year 2019 investor update. You can refer to those documents for additional details.

For the highlights, Slide 17 is a summary of our GAAP financials and Slide 18 shows our non-GAAP adjusted results. For the fourth quarter, we reported adjusted earnings per share of $2.41. That's 67% higher than a year ago and above the high end of our own expectations. Adjusted pretax income was $814 million, and adjusted pretax margin was 7.8%, up nearly 100 basis points versus the fourth quarter of 2017.

For the full year, we reported adjusted earnings per share of $9.13, which is 33% higher than 2017. This is a fantastic result and above the high end of our guidance. Adjusted pretax income was $3.2 billion, and adjusted pretax margin was 7.7%. We are all proud of these results, and we believe they provide powerful evidence that our growth strategy is working.

Slide 19 shows our total unit cost for the fourth quarter and full year 2018 and our forecast for the first quarter and full year 2019.

Turning to Slide 20. Nonfuel unit cost in the fourth quarter decreased 0.7% on a year-over-year basis, better than the midpoint of our expectations going into the quarter. We continue to benefit from improved asset utilization, smarter maintenance practices and lower aircraft ownership costs. For both the first quarter and full year 2019, we plan to again manage our nonfuel unit cost to flat or better and expect our cost discipline this year to remain industry-leading. We believe that running an efficient airline is a prerequisite to growth, and we expect to continue to benefit from a lot of the same initiatives we had in 2018 and to take advantages of new opportunities. For example, as we begin to exit certain aircraft types, such as our oldest Airbus A320s and Boeing 757s, we will benefit from optimizing the retirement schedule and related maintenance costs for these aircraft.

It's also worth noting that we continue to benefit on the cost side from running a more reliable operation. Greater reliability allows for more efficient planning, allowing for less overtime as well as improved irregular operation recovery and generally fewer buffers across the system.

As you see on Slide 21, we repurchased $240 million in shares of our common stock in the fourth quarter at an average price of $88. Over the full year, we repurchased about $1.25 billion of our shares at an average price of $71 per share. I expect we will continue to be opportunistic with our share repurchases as our shares trade below our view of intrinsic value.

During the month of December, we ordered 4 additional Boeing 777-300ER aircraft, with 2 of these aircraft delivering this year and 2 delivering next year. These aircraft are highly efficient for routes that have demand for large premium cabins. Also during the month of December, we finalized an order for 24 additional Boeing 737 MAX aircraft with deliveries beginning next year. These aircraft will allow us to replace older and smaller-gauge aircraft domestically and support our capacity plan. The unit cost advantage of these more fuel-efficient and larger aircraft is expected to be in the double digits and support our CASM-ex initiatives for years to come.

Our adjusted CapEx spend for 2018 ended at $4.2 billion, above our earlier expectations. This difference is largely due to opportunistic purchases of used aircraft and aircraft off lease, which were not originally in our plan. We continually work to maximize both return on invested capital and our aircraft ownership cost as we update and upgauge our fleet. Even with this incremental spend, however, we had strong free cash flow of approximately $2 billion for the year.

For 2019, taking into account the additional firm aircraft order I mentioned, along with existing aircraft orders, continued opportunistic purchases of used aircraft and other high-value investments, we currently anticipate spending approximately $4.7 billion in adjusted CapEx for 2019.

Finally, Slide 22 includes a summary of our current guidance, including the projected fuel price range for the first quarter. The range provided for capacity, revenue and cost implies a first quarter expectation of adjusted pretax margin between 2.5% and 4.5%, implying at the midpoint of this range 150 basis points of margin improvement on an adjusted basis year-over-year.

Also on Slide 22, we provide a summary of our full year 2019 guidance. We are confident that we will deliver our adjusted EPS guidance of $10 to $12 this year. As you all know, fuel has been extremely volatile over the last few months, and we're, frankly, not in the business of forecasting where jet fuel prices settle. What we are confident about is our ability to nimbly manage our airlines to deliver bottom line results in a wide range of macro environments. In that spirit, we've run numerous scenarios for fuel from as low as $40 per barrel to as high as $80 per barrel. We're committing today to meet or exceed our guidance of $10 to $12 in adjusted EPS this year within that very wide range of fuel prices.

Before we take questions, last Wednesday, we released our December and full year 2018 traffic results. Moving forward, we will no longer be issuing these monthly traffic results. As we focus on our long-term earnings targets, we believe monthly updates are unnecessary distractions from the steady progress we expect to deliver.

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

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

(Operator Instructions) And from JPMorgan, we have Jamie Baker.

I'd like to start with a quick cost question for Gerry. The 4% pilot raise that's effective this month or has already gone into effect this month, I obviously have estimates, but can you share with us in dollars what that drives in terms of incremental 2019 expense? I just want to better understand the underlying W-2 component of pilot comp as we look forward to next year, and I don't necessarily trust Form 41 on this.

Jamie, that's a detail we can just follow up with you later.

Okay. Fair enough. Second, when I think about last year's RASM and what that potentially portends coming into this year, I think most of the focus understandably was on the mid-continent growth, the speed with which RASM ramped quickly in those markets. But the reality is you've also culled a considerable number of what presumably were underperforming, unprofitable markets across the network. Is there any way to quantify which has had more of a positive impact than the other, I mean, adding the new stuff or cutting the weak stuff? The reason I ask is that I've got to imagine most of the underperformers have already been cut, which suggests that RASM going forward is going to be much more indicative of how the network actually handles the growth component, if that makes sense. Any color?

I'm not sure I agree. I think while we did get rid of a few routes of, I think, approximately 30 that were underperforming financially, I think there's more to come. And Jamie, what I would say is the potential of -- or the way we look at it is our pipeline of ideas and changes was not just for 2018. There's a lot of initiatives for 2018 that apply for 2019, and then there's a whole list of other initiatives that come online, and I'll just add a few examples, I suppose. The Gemini RM system, which we turned on early last year, it really didn't get fully exposed until 2Q. So we think there's tailwinds from that, that will continue to come. In 2019, we have another 60 wide-body jets that will get Polaris all-access aisle seats. We're going to rebank the Denver hub on February 14. That's not in our baseline numbers. And the number of departures per bank goes from 43 to 50. The other tidbit example, but we've cut the number of pre-6:00 a.m. flights by 50%. For 2019, our 6:00 a.m. flights have RASMs that are 9% greater than our 5:00 a.m. flights. Last fall, I talked about the transfer of aircraft from Newark to Dulles. That transfer, we're doing Phase 2 of it as we speak right now. We've moved about 33 aircraft flying around, and amazingly enough, the margin point change for that is 50 points for those 33 aircraft. And almost all of that will be in 2019. We have the spool up of capacity we added in 2018 into '19, for example, our Singapore and Sydney new flights. That's about 1% of our company, and we expect those 2 new flights to perform much better this year than they did last year. We'll obviously continue to add our catchment area growth line from mid-continent hubs. That's worked well. But even better than that, the number of flights that are in bank in 2019 versus 2018 at all of these hubs has gone from 89% to 95%. In-bank flights have better RASM. We're growing our premium cabins from Newark to L.A. and San Francisco. It's really important for us. We're going to continue to grow our co-brand card. We're going to continue to spool up Premium Plus. The point is there's a whole host of RASM initiatives as we go into 2019 that we think are going to fuel United Airlines. They're not all about growth. In fact, many of them are not at all about growth as we go forward.

From Wolfe Research, we have Hunter Keay.

I think this is probably 2 for Scott. Scott, how will this strong run of financial results and the business momentum you guys have been showing impacted the tone or the pace of the negotiation with the pilots, particularly on some of these more complicated issues?

So first, I'm actually afraid to answer a question after everything that Andrew said. I kind of want to stop the call after that. Hard to go up from there. But look, good results create a good background for everyone, like getting -- whether it's getting contracts done, doing deals with other partners. It certainly doesn't hurt the tone at the table. We are having good -- we're not going to talk about the details today, but we're having good discussions with ALPA. We have good relations with all of our unions. We're looking forward to getting competitive deals done that are good for our people and good for the company, and we're confident that we're going to get there. But good results help the tone of everything.

Okay, good. And then also, Scott, what have you learned in the last 5 years about how the market values airline stocks and also how investors value airline capital deployment?

Well, that's going to be a tough question. Look, first, I think, whether I've learned it or not, I think at the end of the day, results are what are going to matter, and results are what matter the most. We are trying to focus, as Oscar often says, on proof, not promise. It's a dramatic difference as we sit here today than what we said almost exactly a year ago, when we announced the growth plan. And the difference is that we're proving that what we're doing works. We spent time today trying to talk about things beyond growth. Andrew had 3 points of PRASM that -- we think 3 points of PRASM in the quarter about things that had nothing to do with growth. There's just an awful lot going on here at United that we feel really confident that we're going to be able to continue to drive earnings and margin growth for years to come. And ultimately, that will matter. I do think from an investor perspective, credibility is important. And when I say credibility, I mean credibility on delivering on your numbers. We talked about, last year, a no-excuses sort of mentality and the importance of hitting guidance. Today, we've tried to even expand on that by saying we're giving you guidance that is good for any fuel price range between $40 and $80 a barrel on Brent oil. We know that there are going to be speed bumps that are going to happen. The government shutdown is one of those things. And as we look long term, there are going to be quarters, there's going to be a time when those speed bumps become significant enough that, despite our best efforts, we can't overcome them in any given quarter or year. We hope that's not this quarter. We hope that's not this year. But we're also giving you guidance that allows us to hit some speed bumps. We have resiliency, flexibility to adjust. And then even if we hit speed bumps, we are committed, as we said before, moving heaven and earth to hit our numbers. And I don't know what that means for industry multiple. But as long as we keep growing earnings every year, as long as we keep delivering on our commitments, I believe not only will we get a higher stock price from higher earnings, but we will get a higher multiple as that credibility grows and people have more confidence.

From Bank of America, we have Andrew Didora.

I guess my first question is around the growth. You reiterated your 4% to 6% growth plan in '19. 4Q was at the high end of this. 1Q is going to be towards the higher end. I guess just in this kind of backdrop of slightly slowing global economic growth, why is the high end the prudent way to start off the year?

We end 2018 on a high note, and we look at how things are doing right now, and we think we're still on a high note. There are definitely risk factors out there, and we've widened our range for RASM, but we feel really good about our plan. And as Scott already said, this is a lot more than growth that is driving the RASM of the company. And so all those other initiatives are just as important and unique, I think, to United at this point. And so we're excited to go in that direction and believe we can deliver on the results we've talked about and promised for the year.

I guess just looking at that growth a little bit more closely. Just based on the schedules, it still seems like a big part of, I guess, your domestic strategy as you head through '19 is so much more focused around the regional flying. So maybe can you give us a sense of where you think -- what inning are you in, in terms of your mid-continent build-out? And how long can this kind of regional growth you think continue to outperform mainline?

I think it's done, obviously, very well, and we have more runway there. We are going to take it quarter by quarter, and we're going to adjust as needed to the extent things don't look the way they like -- we like them. But at this point, they do. We are still relatively undersized in our level of connectivity we offer. And so we are working hard at that and improving the quality of the schedules, and you'll see more of that. But I just think we're very bullish on where we've been and where we're going, and we'll be nimble if we have to change.

Great. And then just quickly and one last question. You mentioned the Denver rebanking beginning kind of mid-next month. How would you rank that rebanking opportunity relative to what you've done in Houston and Chicago?

Sure. It's similar, maybe worth a little bit more. We're taking the number of banks down by one, which is increasing our connectivity. We'll have 43 aircraft -- or 50 aircraft on the ground at the same time on average versus 43. So we're pretty optimistic about it. But that being said, there are other changes we are making to the schedule in Chicago, in Houston as well to better tweak those and make them better. The early flights of the day and the more in-bank flights are a good example for that. So we are going to continue to mine this mid-continent hub strategy, and we think we have a long way to go. And again, not all those things are entirely about growth. Changing when our flights depart or making the bank sizes different is not necessarily about growth. So there's a lot of different dimensions that we're working on.

From Citigroup we have Kevin Crissey.

Maybe it's for you as well, Andrew. When we look at the 2018 performance, which was very strong from a revenue perspective, I want to understand the effect that regional variances and easy comparisons had versus strategy and also like what -- whether you see 2019 having more of the dollar benefit from the initiatives you put in place than 2018. Basically, I'm trying to see how we should see comps and regional variances versus your strategy over '18 and '19.

I think we performed really well in 2018. I mean, I'm not going to attribute it to easy comps. In particular, for the fourth quarter, I'm not going to attribute it to easy comps. I think we had a reasonable setup, and we hit it out of the park in the fourth quarter, and we're really happy about it. As we go forward to the next year, we have a whole host of initiatives. We are not going to break them out and say what each one is worth. And by the way, there's plenty of initiatives that we didn't talk about, and there's plenty of initiatives that increase margin but do lower RASM, just the nature of the beast. And so we feel really bullish as we go into this year that there is a little bit more of uncertainty, which is why we widened the range of the RASM guide, but we believe our initiatives are going to still deliver and lead to the EPS targets that Mike and the team have laid out.

Okay. Maybe if I could look at this maybe a little differently. What aspect of your network strategy was most beneficial in 2018? If I had to say you could only pick one thing to have done that you did in 2018, which one would you do again?

You're asking a network guy that question, and it's hard to answer because we did so many great things. But I think getting more aircraft on the ground at the same time is just fundamental, and that is connectivity. So that is awfully important, and we look forward to doing more of that in 2019. The other example I'll give is we grew capacity a lot on off-peak days, and we did that because in years past, United had, in theory, cut capacity on those days to boost RASM, when, in fact, our results for this year showed that our RASM on those off-peak days actually went up more than our average RASM. And that's because United uniquely cuts muscle from the bone is the best way to say it, and that actually lowered RASM. It didn't increase RASM. So one of my favorite things in 2018 is taking off-peak days, growing them faster than average and increasing RASM faster than the company's average throughout the year. I don't know if we can do that again in 2019 as all we did was return those off-peak days to just the normal schedule that we should have always had and many of our competitors have as normal. That was an exciting achievement for the year.

And maybe one little quick question for Gerry. Gerry, the slide on the flatter, better costs in Q1 and assumably for the year, is that drawn to scale? Is that supposed to indicate similar numbers? Or is that just a directionality down?

Kevin, this is Mike. It is not to scale. Do not get your ruler out.

And from Crédit Suisse, we have Joe Caiado.

First question for Andrew and Gerry. Just following up on Andrew's earlier question on Denver and your expectations from the rebank. I think you've previously said you expected that to start driving improved results in Denver starting in late February. I'm just wondering if that expectation is embedded in your Q1 PRASM guidance.

Yes. Yes and yes, February 14 and yes.

Okay. And then that expectation is, again, based off of your lessons learned in Chicago and Houston but maybe a little bit better, it sounds like. Or are you not assuming that potential for it to be a little bit better?

Well, I mean, each hub had a baseline that we're trying to improve from, and Denver is a great hub before we made this change, to be very clear. So each number for each hub is different based on exactly what we were doing. Denver has one fewer bank. It's a dramatic increase in our connectivity, particularly during the middle of the day. It's a dramatic decrease in the number of pre-6:00 a.m. flights, and it's an increase in the number of early a.m. departures out of Denver for our local passengers. So we're not going to give a specific number for Denver, but as we create the revenue plan for the year and the revenue guidance for Q1, we do make an attempt to make sure that what we are working on is reflected in that guidance.

Great. And then just one more for Gerry. Just given the new lease accounting standards and moving pieces on the balance sheet, do you have an updated view of what you think the right leverage range is for the company going forward?

Yes. As I said before, I think we're in that range. We spent a lot of work over the last 6, 7 years getting our balance sheet into the position it's in today, where we have a very manageable debt load, including our capitalized leases. We have $7 billion of unencumbered assets. We have a very manageable amortization schedule. Everything about our balance sheet is in great shape. I wouldn't anticipate it moving much one way or another. We'll continue to finance new aircraft deliveries. I would expect most of those to be debt. I would say that the lease market is getting a little more attractive than it's been historically, so there could be a mix there. But as new debt comes on, we've got the debt amortizing. So it's going to stay in the range it is, and we're very comfortable with the state of our balance sheet.

And from Deutsche Bank, we have Michael Linenberg.

Have you guys put out an estimate for the impact of the shutdown just given your presence in the D.C. market?

No, we haven't. We do have the largest exposure. I mean, we have the biggest presence in D.C. But as we said, it's hard for us to know what the impact is right now or what it's going to be. We also don't know how long it's going to go. And really, what we did is gave a wider range to reflect that uncertainty. Maybe after the quarter, when it's all over, we'll try to look back and see what the impact was. But right now, we're not going to try to pin a number on it.

Okay, great. And then just a question to Gerry. Just in the income statement, there was a sizable decline in depreciation and amortization -- or excuse me, aircraft rents got cut a bit. And I just wasn't sure if that was actually tied to the move toward lease accounting, and I don't even -- my sense is that, just looking at the balance sheet, that you have yet to make the adjustment. Is that a 2019 phenomenon? So sort of a 2-part question there on lease accounting.

So the reduction in rent expense is largely due to the initiative we have of buying aircraft off lease. Switching from rent expense to basically depreciation, in many cases, is terrific and is factored into our CASM numbers. Particularly for midlife aircraft, the lease expense -- going from lease expense to depreciation reduces ownership cost by 60% to 80% in some cases, so that's why there's that significant drop in rent expense. And then lease accounting is -- you'll start seeing that next year.

And from Barclays, we have Brandon Oglenski.

So listen. I don't mean to be too much of a nerdy analyst here, but if I take the midpoint of your full year guidance and I look at the current fuel curve, I think that implies something like a flat RASM outcome for the year. So I just wanted to ask, is that something in the plans here? Are you guys looking to get momentum on unit revenues throughout the year?

Well, again, Brandon, we'd encourage you not to be a nerdy analyst because, really, what we're trying to say is we can hit -- and we said meet or exceed our $10 to $12 guidance range at any fuel price between $40 and $80. That's another way of saying. At some fuel prices, we think we wind up above that range. But you shouldn't try to pin down a fuel number today and say that's what we think RASM is today because we've intentionally tried to move to a world where we were going to tell you an EPS number and we're going to have a commitment to you that we try to hit -- that we'll do everything we can to hit that EPS number in a wide range of fuel prices, and we're getting away from point guidance on fuel that changes constantly or on RASM.

Okay, appreciate that. And I think I get the sense, too, that there's a higher focus on margin. Or is that also correct or incorrect?

That is correct.

Okay. And then the last one...

From Goldman Sachs, we have Catherine O'Brien.

Can we do one more question just on the complexion of your capacity growth for this year? Based on schedule so far, it looks like you have a couple of long-haul routes that drive about 1 point of capacity, pretty similar to last year. But last year, you also had 2 points from Hawaii. So as it stands now, should we expect more of your capacity to be generated from beefing up some of your hubs? And do you think that's positive for 2019 RASM trends given the performance we've seen this year? Or do you think we start facing tougher comp issues at some point? Any color there would be really helpful.

Alright, I'll try. I mean, there's a lot of moving pieces here, and we did grow Hawaii a lot in 2018. And while we like the margin results of that, RASM, in that case, would have brought down the averages. So we're going for margin. And the fact is Hawaii will have dramatically less growth for United Airlines in 2019, and that's an example of, I think, ultimately, what would be a tailwind to RASM year-over-year. But, Catherine, there are so many moving pieces on that front, and again, we are moving things around that do things that boost RASM, but we're also doing things that take RASM away in the extent that they boost margin. Another good example is our 787-10s flying across the Atlantic. I expect the 787-10 to replace older, less efficient aircraft, and our CASM -- those routes will fall by 10% or 15%. But our RASM is also going to fall on those routes by some percentage, less. So hopefully, that answers your question. I think there are just an incredible number of moving pieces.

That makes sense. And if I can just maybe ask one more quick question on the CASM-ex. I just want to be sure, first, that we shouldn't be assuming that a new potential pilot contract is not in there. And then second, obviously, I know you can't negotiate in public, but could you offer any guidepost on how a new pilot contract could impact your 2019 CASM outlook? Have you built enough variability into that or "better" or do you -- to keep CASM flat? Or do you think that we could see some CASM inflation if we got a new pilot deal?

So keep in mind that embedded in our CASM guidance is the 4% increase the pilots are receiving this year under the current contract. So that's in the number. With respect to a new contract, what we committed to when we put out our multiyear CASM guidance last year was that this would include the impact of labor increases.

And from Evercore, we have Duane Pfennigwerth.

Your commentary about corporate bookings being up 11% last week. Is the federal government included in that figure? And what would you guess your sort of percentage of volume is from the federal government?

Yes, it is included. But actually, before I answer, we're going to apologize to Brandon, who got cut off earlier. The operator cut him off. It wasn't intentional, Brandon. So if you want to get back in, please do. It does -- it includes all of our bookings, so it includes government. I don't have the exact number of what our percentage of government business is. And even if I did, it's not exactly reflective because we can tell you what's on government contract, but we can't tell you all the contractors or partners or others that are flying in to meet with the government. So it wouldn't be a meaningful number, anyway. But the 11% is everything, so it includes the impact of government shutdown, at least for that first week.

And then just for my follow-up, the 4% to 6% this year, just broad brush, I wonder if you could talk about domestic versus international and regional versus mainline and maybe just contrast that at a high level with '18.

Sure. At this point, I think a similar profile. Domestic, because we're focused on our mid-continent hub strategy, will continue to be the higher of the 2 numbers, and international, the lower, obviously, to offset that. And we -- I'm not sure I can add any more from there. But domestic will be a little bit higher and international a little bit lower than the average. And again, it's very similar to what we did in 2018.

And from Cowen, we have Helane Becker.

So I guess in the end, it turns out that your hubs were in the right places. You're generating good traffic growth in each of your locations. Can you talk about the opportunity set you have in San Francisco, L.A. and New York that might add to growth this year that you're not talking about because it's less impactful to the costs but will still be impactful to revenue growth?

Helane, I'm not sure we heard your question. If I understood the bits and pieces correctly, I would say you were asking for 2019 for our -- what role do our coastal gateways play in our plan.

Exactly. Because your growth has been focused on mid-con, and yet you still have opportunities in New York, L.A. and San Fran because I've seen you add capacity in those markets as well. So maybe you could just parse out the difference between the 2. Sorry, I'm losing my voice here.

Okay. Well, I'd say we really do love all our hubs, and we have spoken a lot about our mid-continent hub strategy because our margin gap in the mid-continent hubs is clearly the most significant and more pressing issue for us to address, and that's exactly what we're doing. But I will say that our coastal gateways are really unprecedented, and really, they're long-term potential. And so I'm really excited about them. Newark and Dulles on the East Coast are amazing. Having our single hub in New York City is a great advantage. And we announced new service to Naples and Prague this year out of Newark and Tel Aviv out of Dulles. San Francisco, I think, is the premier gateway to Asia, and we've grown that as well. And we've announced new service to India and Australia out of San Francisco. So we will continue to focus on our mid-continent hubs for the time being. But I do want to say that over the long run, we do recognize that United's international footprint and our ability to mine that is pretty unprecedented. It's unique to United in many respects. And over the long run, I think you'll see a lot more activity there. But in the short run, we have a problem to fix in our mid-continent hubs, and we are well on our way. And we want to close that margin gap that we cited last January in those hubs, and we think we're doing it as we want to do it, and it's working.

And from Barclays, we have Brandon Oglenski back online.

Look, I guess I was going to ask a variation on the question that's been asked a couple of times on the call. But you talked last year about the strategy, about how United has to plug back into these small communities, and we saw a lot of regional flying additions last year. But if I look at your fleet schedule, it does look like the majority of your capacity this year is going to come from mainline aircraft additions. So can you just talk about how does that fit into the connectivity strategy? And does this increased risk that now you're maybe going up more head-to-head with low-fare carriers than you were maybe incrementally in '18?

This is Andrew. The way I would describe that is our deployment of regional jets was not all that optimal in that we see regional jets in mainline markets. So what I think you'll see us do in 2019 is make sure that mainline markets have, more often, the mainline aircraft, and that will allow us to redeploy the regional aircraft into the regional catchment feeder markets. So I don't think that dramatically changes the profile of our flying or competitiveness. It does -- as you can imagine, in the big markets, it lowers our unit cost structure dramatically. It makes those, I think, much more profitable. So it's about getting the right aircraft in the right markets. Our jet fleet size, I think, is approximately the same. I don't have the exact numbers in front of me. So you are right. But how we deploy the aircraft really matters, and that is what -- I think you will see more and more changes as we go through 2019.

And from Bernstein, we have David Vernon.

So Scott, a little under a year ago, you'd laid out the rationale for the hub connectivity strategy. You'd identified about a 10-point margin gap in the mid-con hubs at United. Can you give us a sense for how much of that gap you guys have closed to date and whether or not it's feasible to actually kind of get those mid-con hubs to parity? I'm not sure if there's some geographic differences that might not sort of let that get all the way to the closing the 10% gap.

We haven't actually updated that now because we probably will at some point. But I guess I'd just point you to -- at least part of the relative margin performance at United, where -- I'm doing this math in my head, but probably beat the industry on average by a couple of hundred basis points on year-over-year margin last year. And I'd say half of that is probably from the growth strategy. It happens from all the kinds of other initiatives that we talked about today and that we continue to talk about. So that's probably a good indicator of how much we've closed the gap so far. That would tell you that there's a lot of runway left and a lot of room to go. And ultimately, I think we'll get to margins that are at least in the ballpark of where our competitors are.

Is it right to think that there might be sort of diminishing sort of impact to that, like if some of the first network changes you made were more impactful than the later network changes? Or does it not work that way?

Well, I'll let Andrew add on to this, but the way it works when you grow a hub is it's kind of a quadratic curve turned upside down. So as you're growing, you're driving exponential connectivity, which drives margins growing fast. So the next airplane comes in, it drives margins up. You realize you've gotten to a mature hub when you get to the point that margins at the hub start to flatten out. And that means that you're -- when you get to 900,000 flights a day and you're adding the next route, the next flight and it's to a smaller and smaller place, margins start to flatten out. At that point, you kind of know that you've gotten to a mature hub. And if you keep growing, then you drive margins down. But as you first start growing a hub and start growing connectivity, it has kind of exponential growth in connectivity, which drives a really strong growth in margins. I think we're still at the early part of that curve, particularly in the mid-continent hubs.

Ladies and gentlemen, this concludes the analyst and investor portion of our call today. We will now take questions from the media. (Operator Instructions) And from The Associated Press, we have David Koenig.

I guess this is for Scott. I'm trying to understand the 11% increase in business bookings. How much of that is repeat from existing customers? I mean, are they just -- are your old customers just spending 11% more than they did a year ago? Or how much of it is getting new customers, including maybe taking some away from your competitors?

I don't know is the short answer. Look, we had 11% more bookings. I'm sure some of them are new customers. I'm sure a lot of them are old customers. I think the better way to think about it as opposed to that lens is that businesses still have enough confidence to be getting out and traveling and on the road. And despite all the doom and gloom you hear, if you watch CNBC in the morning, businesses aren't coming through with that, yet. I agree that people are nervous and they're watchful and they're waiting for something bad to happen, but it hasn't happened yet. And the economy is performing better than you would think. If you just listen to some of what people say that are worried, that could all come to pass. But right now, the economy is performing pretty well, and you just see that in strong business bookings. I suspect our competitors -- this is really just a share thing. I suspect -- actually, I think even Delta yesterday talked about strong demand as well, so this is just overall strong demand.

Yes. And Delta put a number on the government shutdown. You didn't. Did you consider that? Or did you decide it's too hard to estimate, the direct and indirect effects?

Look, it's hard to estimate, and we want to get ourselves focused on delivering on our earnings commitment, and that's the focus, and trying as best we can to overcome the speed bumps that get thrown in our way. And starting to quantify them. It feels like not the right way to just say we're going to have to power through and figure out how to get it done. So we didn't spend, really, a lot of time trying to quantify it.

And from Wall Street Journal, we have Micah Maidenberg.

How many passengers have missed United flights because of long TSA or customs line? And is there any way you can quantify how much rebooking them cost United? And then secondly, just overall, how widespread are the delays in screening? Where are you seeing problems?

This is Greg. We've seen pockets of staff issues around the system. But really, what's happened is it hasn't really impacted line waits all that much, and we haven't seen an impact in terms of people not being able to make their fights. Typically, what would happen if we're having that issue is we hold the flights for those customers, and we just haven't had to do that. So the TSA has done a pretty good job of covering for it. I've seen some staffing shortages.

Has United deployed any of its own employees to assist TSA? Delta talked about that yesterday.

We have not. We do have partners who help us with some of the line management and other things that help the TSA with processing our customers, but we haven't used our own employees to do that.

And from Bloomberg, we have Justin Bachman.

This question might be for Oscar or Scott. I wanted to ask about the state of the ALPA talks in terms of the urgency for that this year given that the pilots got a 4% raise. It sort of weighed against the idea and your thoughts on flying E170s with 70 seats on them in the future. What's the level of urgency on getting that deal done?

Look, we're continuing to have constructive conversations with them. We have a good relationship and good partnership, and we are succeeding together, but we're going to leave the negotiations at the table.

And from Reuters, we have Tracy Rucinski.

I wanted to ask a little bit more about your use of regional aircraft as well. You mentioned that last year, the use wasn't very optimal. Regional costs have clearly gone up in part because they're having to pay more to attract pilots. Have these added costs factored into your decision not to deploy them in mainline markets this year?

This is a long-term strategy, and we want to make sure that our smallest regional aircraft are flying in short-haul catchment markets and our mainline aircraft are flying in mainline markets. We just didn't have the right fleet mix historically to do that and we still don't. This is a process that evolves over time. So what you'll see is fewer 50-seat regional jets, in particular, flying on routes that are between major hub cities. That's the right thing to do to. It was the right thing to do 2 years ago. It's the right thing to do today, and we're going to continue to execute on it. And I think that's the right way to look at it.

Okay. And can you give an update on your career path programs for pilots and generally on pilot shortages?

This is Greg. We've got a program in place with a number of our partners to facilitate hiring at those regional partners as well as matriculation, eventually, to the mainline. It's a program that's working really well for us, and we're happy with the results.

And from CNBC, we have Leslie Josephs.

You guys have been adding a lot of premium seating, business class in Polaris. What happens if there's a slowdown? And just how prepared are you guys for a recession or just economic slowdown in general given that you're putting such a focus on corporate travel and high-paying customers?

Leslie, we watch the data. As we said several times in this call, we're watching the data even more closely. We built an airline, as Gerry talked about, a very strong balance sheet. We've got incredible flexibility with the fleet. We've built an airline that we think has a lot of resilience and flexibility in it, created a culture where we can be more quick and nimble about taking actions if we need to. And so we feel pretty good that, in the event things change in the world for the better or for the worse, that we've got the ability to respond nimbly and keep the airline running well and performing well.

Okay. Are there any -- is there anything specific that you've toyed with if there a slowdown? I mean you mentioned being quick and nimble. Anything of -- any color of what the airline could look like if there was a slowdown in demand?

Certainly nothing that we would talk about publicly.

And we will now turn it back to Mike Leskinen for closing remarks.

Thanks to all for joining the call today. Please contact media relations for any media questions, and I will be reaching out to the analysts. Thank you very much.

Thank you. And ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect.