聯合航空 (UAL) 2019 Q4 法說會逐字稿

Good morning, and welcome to United Airlines Holdings' Earnings Conference Call for the Fourth Quarter and Full Year 2019.

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

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

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

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, Vice President of Corporate Development and Investor Relations.

Please go ahead, sir.

Thank you, Brandon.

Good morning, everyone, and welcome to United's Fourth Quarter and Full Year 2019 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 Airlines 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.

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

Thank you, Mike, and it's a pleasure to join you all this morning.

2019 was a banner year for us at United, highlighted by a 4-quarter streak of growing profit margins.

This winning streak allowed us to reach our 2020 adjusted EPS target of $11 to $13 per share, 1 full year ahead of schedule.

This incredible performance would not have been possible without the dedication of the finest collection of airline professionals in the world, so I want to thank the 96,000 members of the United family who work so hard to serve our customers.

I'm also pleased that they will share in our success with a profit-sharing payment that's, on average, 45% higher than last year.

With all that we've had to overcome in 2019, there's no group of airline employees in the world that is more deserving.

You'll hear more details about our financial performance from Scott and Gerry, but I also want to include -- I'll quickly touch on our fourth quarter results.

Our adjusted earnings per share of $2.67 was 11% higher than the fourth quarter of last year.

This reflects 50 basis points of adjusted pretax margin expansion in this last fourth quarter, which, as I mentioned, is the fourth consecutive quarter that our pretax margin has grown and the fifth consecutive quarter on an adjusted basis.

As you'll hear today, we're all quite proud of what we accomplished last year, but I'm most excited about what it means for our ability to plan and deliver for our customers, employees and over the long term.

And that also includes the announcement that we made at the end of 2019 about the leadership of this company with keeping this bright future in mind.

Thinking back to where United was when I took over as CEO in September of 2015 and where we are today, this company's success is a testament to the power of long-term commitment to our proof, not promise, philosophy.

By every metric and benchmark by which the health and strength of a company is measured and judged, the United of today finds itself in a much stronger position than the United 4 years ago.

I made it a personal priority to guarantee our future by assembling a deep bench of talent in order to give our customers, employee base and investors confidence in our direction and leadership.

Today, I am 100% confident that we have the absolute best leadership team of any airline, hands down.

Taking advantage of that talent and cumulative experience by initiating a deliberate, well-planned and transparent transition is what healthy companies do, and that's exactly what we're doing between now and the end of May when I'll assume my new role as Executive Chairman.

It was important for us preserving this continuity and my partnership with Scott means we'll continue to work on capitalizing the bright future that lays ahead not just in 2020 but through the new decade.

That's why we're eagerly anticipating the chance to get together for Investor Day in March to share more about that long-term strategy.

So with that, Scott, over to you.

Thanks, and I'd like to start by thanking you, Oscar, for all that you've done for United and for me, personally, in the last 5 years.

United is a totally different airline today than it was when Oscar became the CEO.

Oscar made it his mission to change the culture of United by bringing the people of United together as a team and put the customer at the center of our decision-making and created an innovative, fast-paced environment where we seek to make the airline better every day and in every way.

For me, personally, Oscar has been a mentor and a friend.

From day 1, Oscar was direct, reminding me that there was more to our business than numbers.

Many corporate executives talk about the importance of employees and customers.

Oscar doesn't just talk about it.

He lives it 24/7.

I will be a much better CEO and person because Oscar reinforced the importance of focusing not only the numbers but also our employees and customers.

Leading by example, as Oscar has, is the only way to truly change a culture and make a difference.

I'm fortunate to have the opportunity to step into Oscar's big shoes as part of a planned and thoughtful transition.

And even after, as Executive Chairman, Oscar won't be far away as we continue on the path toward building the best airline in the world.

That great path is delivering results, and I couldn't be prouder of what the team accomplished in 2019.

We once again achieved our guidance metrics and reached our 2020 adjusted EPS goal a year early.

We've done that by creating a culture of teamwork across the entire company and by focusing on doing the right thing for our customers.

You'll hear more today from Greg Hart, our Chief Operating Officer, who's pinch-hitting for Toby, who is ill today; and then Andrew Nocella, our Chief Customer -- our Chief Commercial Officer, on some of the things we're doing to improve the customer experience.

2019 demonstrates the resilience and potential of United Airlines.

We faced a number of significant headwinds last year, started out with a longer-than-expected government shutdown; the grounding of the MAX; and geopolitical issues in places like China, Iran and Pakistan, among others.

Rather than use those -- the headwinds as excuses, however, the United team simply buckled down and persevere.

It wasn't easy, and we weren't perfect, but we didn't use the bad stuff as an excuse.

That's one reason I view 2019 as a really good proof point of where we're headed in 2020.

To be able to grow full year adjusted EPS by 32% and adjusted pretax margins by 170 basis points, despite all of those headwinds, is pretty remarkable.

We know 2020 will come with its own unique set of challenges.

In fact, a couple have cropped up in just the last 48 hours.

We won't make excuses for those either.

We also can't sit here and tell you that we know exactly how long the MAX will be grounded or what the economic impact of the Asian coronavirus would be.

The safety impact of the coronavirus is, of course, our foremost concern.

We've been coordinating closely with the CDC to ensure that we're taking all the necessary steps to ensure that our customers and employees can travel safely.

At this point, public health agencies are not recommending any travel restrictions, but we'll follow their advice closely because they and we have some experience with situations like this.

By working closely together, we have, in the past, effectively managed situations like this one to keep our people safe.

And in doing so, we've seen demand bounce back.

Managing through uncertainty is something that every airline in the world has to do.

And here at United, our formula isn't complicated: put safety first and focus on delivering for our customers.

Our team executed that strategy beautifully last year, and it's an important part of why we're so confident about what lies ahead in 2020 and beyond.

In closing, I'm truly honored to be given the chance to lead this great team.

All of us at United are committed to making this the best airline in the world.

You'll hear more on the call today and on our Investor Day in March about some of what's ahead in the long term, but we're all excited and committed to getting better every day for our customers, employees and shareholders.

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

Thanks, Scott.

At United, our focus is to ensure our customers have a great experience with United across their entire travel journey.

Consistency is key as we deliver caring service to every customer on every flight every day.

With that in mind, I'd like to thank our over 160 million customers from around the world, whether you are taking an important business trip or a well-deserved personal vacation.

We know you have multiple airlines to choose from, and we truly appreciate your business.

Improving our customer experience works hand in hand with our growth strategy, strengthening customer loyalty and increasing our feel within travelers.

We're investing in the areas that customers tell us matter most, and we're seeing positive returns on our customer satisfaction scores.

More importantly, customers are increasingly willing to recommend United to their family and friends, and that is good for the bottom line.

In 2019, we saw United's largest ever year-over-year improvement in Net Promoter Scores.

Where did this progress come from?

As we've shared with you over the past year, we've made several foundational investments.

Perhaps more important than any investments in our hard products, we continued our commitment to core4 and caring customer service through various employee engagement investments such as our Backstage 2019 event series, where we brought all of our 25,000 flight attendants to Chicago.

We elevated the flying experience for all travelers by expanding our economy snack selection and offering free DIRECTV.

We launched ConnectionSaver, a new system that identifies flights to hold for customers making tight connections.

We began operating the CRJ-550, offering first class and Economy Plus seating as well as plenty of carry-on storage space, all on a 50-seat aircraft.

Customer feedback has been fantastic.

And since its launch, the 550 is delivering our highest customer satisfaction scores on our short-haul routes.

We introduced new benefits for our MileagePlus members with no expiration dates on our miles and offering free or discounted CLEAR memberships to provide an easier, more predictable, secure experience at all of our hubs.

Looking forward, we are even more excited about our portfolio of planned customer-focused investments this year as announced at our meeting day.

We'll begin to upgrade our aircraft interiors, featuring new overhead bins that offer a 1:1 bag to customer storage ratio.

We're updating our single-class 50-seat regional aircraft with new seats and adding personal device entertainment.

We're enhancing our food offering, which includes preorder capabilities.

We'll also be upgrading airport facilities at our hubs and some of our large line stations.

Finally, we'll continue our commitment to improving customer service.

Starting this week, we'll bring all of our airport and contact center customer service representatives to Backstage 2020, an immersive 2-day experience focused on caring for our customers.

The investments we have planned in 2020 are broad, improving the customer experience across many touch points.

We'll try a number of new ideas focused on key markets, quickly learn what is impactful to our customers and then plan to roll out the best ideas more broadly.

With that, I'll pass it off to Andrew to talk more about our commercial initiatives.

Thanks, Greg.

2020 will be a year where many of our commercial and customer initiatives mature and gain critical consistency.

In fact, the year is already off to a nice start.

Ticketed revenue per business is strong for the first 2 full weeks of this year, an encouraging indicator for the rest of the year.

Before going into a few details about early expectations for 2020, let's review our performance in the last quarter.

For the fourth quarter, PRASM grew at 0.8%.

Performance at the end of the year was really strong globally and met our PRASM plan with one exception, parts of Asia, which I'll speak about in a moment.

In fact, the Sunday after Thanksgiving was one for the record books where system PRASM increased 15% year-over-year, our best day ever.

PRASM performance in our domestic network was up 0.6% on a 2.6% increase in capacity in the quarter.

This PRASM increase was realized despite the 737 MAX grounding, which limited our mid-continent connectivity plans.

International performance was even better than domestic in the quarter with a 1.5% increase in PRASM on a 3.8% increase in capacity.

We're really pleased with the international momentum we're seeing relative to industry results over the last few months.

Latin America was our best-performing international region in the fourth quarter.

Latin PRASM increased 6.3% on a 4.4% increase in capacity.

Performance across the Pacific sequentially improved in the quarter relative to the third but was still negative.

PRASM has decreased 1.2% on a 0.7% decrease in capacity.

Almost all the weakness occurred in Hong Kong, Beijing and Shanghai.

All of these -- all 3 of these were 2.6 point drag on Pacific performance and a 0.3 point drag on system performance.

Atlantic PRASM was down 0.2% in the quarter on a 7.6% increase in capacity.

Due to weakness in the manufacturing sector, Germany point-of-sale demand continued to be soft, particularly for premium business.

All of that was partially offset by strong U.S. point-of-sale demand.

Looking ahead for the first quarter of 2020, we expect our consolidated passenger unit revenue to be flat to up 2%.

Demand in Hong Kong remains difficult to predict.

However, I will say that book PRASM for Hong Kong is not expected to be a drag on PRASM results in the first quarter.

We've also started to see demand trends for Germany stabilize in recent weeks with stronger demand from industrials, which has been sluggish for most of 2019.

On each conference call, I like to point out a few initiatives we have rolling out and their impacts on the business and our customers.

While we're improving the experience of flying United for all of our customers, many of our commercial initiatives are focused on capturing high premium demand in our hub markets in 2020 and beyond.

The Business Travel News survey, BTN, is a key assessment of how airlines are perceived by corporate buyers and global travel agencies, the primary source of premium business for United.

United finished in second place in late 2019 in this important survey and proven more than ever before in a single year, really distinguishing ourselves from many of our competitors.

This survey is a great example of listening and responding effectively to corporate buyers' needs.

Congratulations to both our sales team and our frontline staff we've empowered to make this happen.

Premium Plus, our new mid-tier, wide-body jet product is ideally suited for our hub markets and created a 0.6 point tailwind for system PRASM in Q4, a slight acceleration versus Q3 and a trend that we expect to continue for most of 2020.

We're also now selling Premium Plus seats on select flights between New York and L.A. and San Francisco and are seeing great results.

Our analysis suggests that Premium Plus is having minimal impact on demand for Polaris business class seats.

For the first half of 2020, we expect to grow business class capacity across the Atlantic by almost 20%.

We had, in the past, undersized business class cabins in key business markets like London Heathrow and Switzerland, all offering too many economy cabin seats.

We're now rightsizing the size of our premium cabins.

More business class capacity is yet another initiative proven to help us achieve our full network potential.

2020 will be a big year as we expect to finish most of our planned Polaris seating installation and Polaris clubs.

Our Washington Dulles Polaris club is scheduled to open this spring.

And by the end of the year, 90% of our wide-body jets are anticipated to have the new Polaris seats, including all of our 777s and 767-300s.

In fact, this past weekend, we loaded our schedule from May and beyond for all 55 of our 777-200ERs have new Polaris and new Premium Plus seats selling as of May 8 of this year.

We also launched our new cabin upgrade system called PlusPoints in late 2019.

The goal is simple: to automate upgrades.

We create -- we also created a skip-the-waitlist feature for Polaris upgrades that's available from time to time in different geographies.

Currently, it's available in South America.

We look forward to resuming our mid-continent growth plan designed to maximize connectivity once the MAX is flying again.

Even without the MAX, we're making progress in smaller communities with the addition of the CRJ-550.

We also recently modified our Denver bank structure, and it will be, in fact, this February, and we're already seeing positive response in our bookings for that change.

I also wanted to make a moment and talk about growth of our ancillary revenues.

For the year, we grew ancillary revenues by over 12% on a 3.5% more capacity.

As we look deeper into 2020, we expect this momentum to continue as we focus on better ways to distribute Economy Plus.

Getting this product on more shelves is one of our highest priorities, and a better display on united.com, which is already in beta testing, is a first step.

And then another important milestone is that the record performance -- a record performance of united.com and other direct channels which now account for 50% of tickets for United in 2019.

I also wanted to note that WiFi usage has grown by 45% in 2019 as we fixed many of the bandwidth problems.

While the technology and bandwidth doesn't yet exist, we're getting ready for the day when domestic WiFi will be free for our customers.

Thanks to the entire United team for a great 2019.

With that, I'll turn it over to Gerry to discuss our financial results.

Thanks, Andrew.

Good morning, everyone.

And for those of you in Dublin for Aviation Week, good afternoon.

Yesterday afternoon, we issued our fourth quarter and full year 2019 earnings release and our first quarter and full year 2020 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 non-GAAP adjusted results.

We are pleased to report adjusted earnings per share of $12.05 for the full year, up 32% versus 2018.

For the year, adjusted pretax income was $4.1 billion, and adjusted pretax margin was 9.4%, up 1.7 points year-over-year.

Our fourth quarter adjusted pretax margin was -- of 8.2% was up 0.5%, marking the fifth consecutive quarter of adjusted pretax margin expansion.

As Oscar and Scott mentioned earlier, our resilience throughout the year helped us to offset challenges across the system and drive margin improvement.

Slide 16 shows our total unit cost growth for the fourth quarter and full year 2019 and our forecast for the first quarter of 2020.

Turning to Slide 17.

Nonfuel unit cost in the fourth quarter increased 2.7% on a year-over-year basis.

This came in better than our original expectations of around 3.5%, as our team worked relentlessly to offset various cost pressures.

This brought our full year 2019 CASM-ex to up 1%.

As I've said before, the grounding of the MAX impacted CASM-ex by at least 1%.

So excluding this impact, unit costs in 2019 would have been flat or better year-over-year.

Looking ahead, we expect first quarter 2020 CASM-ex to be up 1% to 2% year-over-year.

As you can see on Slide 18, during the quarter, we took delivery of 4 new and 2 used mainline aircraft as well as 9 new regional aircraft.

We also announced an order to purchase 50 new Airbus A321XLR aircraft, which we plan to take delivery of beginning in 2024.

The XLR will not only allow us to finish retiring our last remaining Boeing 757-200s by replacing them with aircraft that are approximately 30% more fuel efficient, but in addition, the XLR's range capabilities will also open potential new destinations to further develop our route network and provide customers with more options to travel the globe.

Also in the fourth quarter, we repurchased $216 million worth of shares of our common stock at an average price of $88.95 per share, bringing our share repurchases for the full year to $1.6 billion.

As of year-end 2019, we had $3.1 billion left in authorization, and we'll continue to be opportunistic in our share repurchase strategy.

Our adjusted capital expenditures for 2019 ended at $5 billion.

This came in slightly above our guidance of $4.9 billion as our Airbus order that we announced in December drove some incremental predelivery payments.

We currently anticipate spending approximately $7 billion in adjusted CapEx for 2020.

We continue to expect this to be a peak CapEx year driven largely by the acquisition of 17 wide-body aircraft this year.

In addition, as Greg and Andrew mentioned before, we are making a lot of high-return, customer-centric investments that we will expect will not only improve customer experience but will help us be a more profitable airline.

As we think about both CapEx and our share repurchase program, we are very cognizant of their impact on our fortress balance sheet that we have established and planned to maintain.

The discipline we have shown as we continue to maintain strong liquidity, a large and growing pool of unencumbered assets and a very manageable scheduled debt repayments has been rewarded with tremendous access to attractive debt financing throughout our capital structure.

In addition, our success in managing the balance sheet and reducing financial risk continues to be recognized.

Just last week, Moody's joined S&P in upgrading our credit ratings to positive outlook.

Lastly, Slide 19 has a summary of our current guidance for the first quarter and full year 2020.

As you can see, we will no longer be providing capacity guidance for the quarter or full year or CASM-ex guidance for the full year.

Our focus is our long-term earnings targets.

And as we move forward, we will plan for capacity at levels that allow us to achieve those targets.

We currently expect full year 2020 adjusted earnings per share to be between $11 and $13.

While some may view this guidance to be a little conservative, we are only 3 weeks into the new year and are still facing uncertainty in both the timing of the reintroduction of the MAX and speed at which our associated capacity will ramp up.

As always, we plan to update this target throughout the year as we continue to execute on all of our initiatives, and we absolutely aspire to end the year in a higher range, regardless of known and unknown headwinds that we, as an industry, routinely face.

The most recent examples are Boeing's announcement yesterday on the MAX and the uncertainty around the coronavirus in Asia.

We will gain more clarity on these items in the weeks to come.

And at our Investor Day in March, we will provide an update to our outlook.

In addition, at our Investor Day, we plan to once again provide multiyear EPS guidance.

With that, Mike will now begin the Q&A.

Thank you, Gerry.

First, we will take questions from the analyst community.

Then we will take questions from the media.

(Operator Instructions)

(Operator Instructions) And first up from Barclays, we have Brandon Oglenski.

Congrats on what was a, in hindsight, challenging year in 2019.

So I guess incrementally on the CapEx because this is a pretty big year at $7 billion.

And I think if we go back to your slides in 2018, looks like maybe $5 billion to $6 billion was more of the expected range.

So can you talk to some of the opportunities that you see there that you're willing to put capital behind this year and maybe even go a little bit deeper on the non-aircraft side as well?

So the -- yes, as I said, the spike in CapEx is really attributable to those wide-body aircraft.

The 17 aircraft is -- it's just a peak year for that.

And really, when you're looking at our fleet plan, you kind of have to look at it over a several year time horizon to take sort of more of the run rate number.

So it's really nothing more than that for this year.

I would also point out that in that number, we are assuming the delivery of some MAX aircraft.

And so we end up with no MAX aircraft.

I would expect that number to come down a little bit.

On the non-aircraft side, I would say from what I'm seeing right now, the number is a little bit higher this year than last year, but that is all attributable to really finishing the various reconfiguration projects that we have to get the Polaris modifications done and some of the other customer-centric modification finished.

I appreciate that, Gerry.

And I guess as a quick follow-up, Scott, as you take over here, what do you think is the right metric for investors to focus on?

Is it something like free cash flow?

Or should we be thinking that United is still in this transformation mode?

There's a lot of opportunities out there to focus more on earnings, revenue.

What should we focus on?

Well, all of the metrics are highly correlated with earnings.

And so I think the principal metric is probably earnings, higher earnings, drive higher free cash flow, higher earnings to drive higher margins, higher earnings to drive higher return on invested capital.

And so I think we're kind of dancing on the head of a pin when we try to distinguish between those because they're all so highly correlated.

And because they're all highly correlated, I think we'll focus more, as we are on our guidance, on earnings.

From Wolfe Research, we have Hunter Keay.

Scott, sort of a philosophical question on pricing, not -- certainly not a tactical one.

You've been very clear over the years about the need to match the lowest fares in your market to win the long game.

I'm just wondering if that's becoming outdated.

I know you never get anchored in your opinions, but I'm wondering if there's a point where you feel good enough about the quality of your service that you're providing to where sort of blanket price matching becomes not only unnecessary but actually harmful to the brand even in the long run.

So we are increasingly focused on improving the brand at United Airlines and the perception amongst customers.

We're making significant investments in that.

We've talked about Backstage, and Greg talked about a number of those investments.

And it's increasingly clear that there is a large segment of customers who choose based on the quality of the product and the quality of the customer experience.

There are also customers out there who still choose their product based on price.

And really, what I would say is what we've done is try to create a segmentation where we can offer both sets of customers what they are looking for.

And our Basic Economy product tends to be more focused on price, and the rest of our products can be less focused on being price competitive.

Okay.

And then what percentage of your credit cardholders or Premier status holders, either one, has zip codes outside of your hub city catchment areas?

Where was it before this recent growth spurt?

And where do you want it to be?

Hunter, it's Andrew.

I'd say -- I don't have the number off the top of my head.

I think it's in the neighborhood of 50% from my memory.

60%?

50%, 5-0.

And I think we'd like to continue to diversify outside of our hubs.

We're doing -- we'll have Kristina contact you to give you a few more details.

From Vertical Research, we have Darryl Genovesi.

Gerry, I realize you don't want to provide an explicit 2020 CASM-ex guide, but can you please help us understand some of what's changed since your October call when you guided 2020 CASM-ex flat?

For instance, what percentage of your 2020 capacity did the MAX represent back then?

And then relative to that, what's the CASM-ex hit associated with not having it for any period of time, however you want to define it?

Sure.

Let me put it this way.

We have not changed our commitment over the next several years that our goal remains flat CASM-ex.

And as I said in 2019, but to the MAX, we would have been at least flat.

And actually, in 2020, the same is generally true.

And let me give you a little bit of color on the MAX.

Looking at it today, we currently anticipate the MAX creates about 1 to 2 points of CASM-ex pressure.

So even if the MAX remains out for the full year, taking the worst case, we expect that to be less than 2 points of CASM-ex pressure.

But let me remind you that none of this deviates from our commitment to deliver on our EPS target.

Okay.

And then just a quick follow-up on the non-op.

What's driving the year-over-year decline in the first quarter?

I assume pension is probably down a little bit, but if there's anything else.

And then also, do you see that carrying through the year?

So that's generally, actually, some changes we made in some of our post-employment benefit, some of our post-retirement medical plan, where we were able to save some money without changing the benefits at all.

That's really the principal driver there.

From JPMorgan, we have Jamie Baker.

The first one, probably for Gerry.

As it relates to the $11 to $13 guide for this year, I'm hoping you could talk a bit more about how that might have evolved.

There was a time when it was suggested that it could move higher.

Clearly, conditions evolved in a way that prevented that from happening, and I don't think this came as a surprise.

I'm not being critical of this fact.

I'm just curious as to how your model for 2020 evolved over, say, the last 4 to 5 months, what the various puts and takes were, whether $12 to $14 was ever pondered.

So Jamie, let me tell you, from my perspective, it could have been $10 to $14.

Just looking at the first 2 weeks of January, and I look at the spot price for jet fuel every day and the impact it has on the forward curve for the rest of the year.

And if you look at it, too, you would have seen a lot of volatility.

So given that, given some of the other unknowns out there and some of the knowns that we just don't know yet how they're going to impact us.

As I mentioned earlier and my general nature of being a little conservative, that's where we came out.

And as I mentioned, we absolutely aspire to raise the range over the course of the year, but we'll have to see what happens over the course of the next few months.

Okay.

That's helpful.

I appreciate it.

And second, just related to the MAX, I believe you have one sim in Denver.

Could you tell us what the sim order book looks like, something I've never asked before?

And more importantly, as Boeing inevitably has to shift around the skyline, what would your interest be in rescheduling deliveries given the presumed desperation of other global operators and whether there's an opportunity to monetize simulator access?

Jamie, this is Greg.

We've got currently one fixed training device, MAX fixed training device up and running.

We'll have a full-motion sim up and running in the next, I want to say, 6 to 8 weeks.

And over the coming months, we'll take delivery of 2 more sims.

So we actually feel really comfortable in terms of where we are relative to simulator capability.

Obviously, we assumed a quicker delivery stream from Boeing than what we've seen, and we're more than amply prepared for whatever might come in terms of delivery stream.

Opportunity to monetize that access or that capacity?

Yes.

Jamie, it's something we've done here at United in the past.

We actually haven't thought about it too much.

We've been focused on our plans, internal plans to make sure that we could meet whatever delivery stream we have on the aircraft.

It's obviously something that we'll think about, but I wouldn't expect to have -- us have too much third-party activity in our sim Boeings.

From Bank of America, we have Andrew Didora.

Gerry, just had kind of a follow-up on the unit costs, and I know you're not giving a full year outlook.

But the 1Q guide of 1% to 2% was better than what we were thinking, better than the back half of 2019 and up 2.5%.

Just trying to get a sense for is this 1% to 2% a good quarterly run rate while the MAX is out?

Or was there some timing we could -- we should consider here?

I guess, basically, any color you can provide about the cost cadence throughout the year would be helpful.

Sure.

As you identified, there's always timing when you're looking at quarterly CASM numbers.

Last year, you may remember, there were some maintenance events weighted more heavily towards the back end of the year.

So the first half of the year, CASM-ex was better than the back half, but we always take that into account when we look at the full year and look at our commitment to deliver.

But for the MAX, flat or better CASM-ex.

Is that the way we should think about kind of the out-years once the MAX is back as sort of flat to down CASM?

Is that what the plan is right now without stealing any thunder from March?

It's been our commitment.

We've been public for several years on that, that that's our commitment.

Keep in mind, one of the tailwinds we're going to have, which has now been delayed a little bit, is on gauge.

If you look at our -- what would have been our MAX delivery schedule, you would have seen the MAX 10 coming in.

And those aircraft, in addition to growth, replacing smaller-gauge aircraft.

So that's still a terrific tailwind that we have over the next few years.

From Goldman Sachs, we have Catherine O'Brien.

So a question.

I think this year, your performance is commendable despite the headwinds of the MAX, and I really appreciate your no-excuses mentality.

But can you help us think about the negative impact to the MAX thus far?

Just trying to get a handle on what the core business could have produced without that headwind.

Should we think about any impact above and beyond that CASM-ex headwind you alluded to earlier?

Well, keep in mind the -- had we had the MAX, we would have benefited both on the CASM side and on the revenue side as well.

We, as the other carriers who did not have the MAX, lost income as a result.

Right.

So I guess just maybe like any color on like maybe like margin detrimental or EPS you're willing to share?

Look, I'd say we've been careful to not use any of the events that have happened as excuses.

We delivered on getting a year early to our $11 to $13 EPS goal, and we're not going to start now using them as excuses.

So we'll keep our conversations private with Boeing on what we think the impact was and just leave it at that.

Okay.

Fair enough.

And then maybe just ask one quick follow-up.

So you've always had a really strong international network.

And of course, you've been focused on strengthening parts of your domestic over the last couple of years.

But United still has the highest percentage of passenger revenue booked on international network.

Do you think that's the right mix?

Or do you think we're going to see that change as you continue to strengthen your domestic network?

It's Andrew speaking.

It's a really good question.

And obviously, these things cycle over time.

There's definitely a long period of time where international margins were greater than domestic.

Clearly, over the last few years, domestic margins have been greater.

And we've been pivoting here at United to fix our mid-continent gaps that we talk about regularly, and we still think that is a priority.

Unfortunately, the MAX delay has delayed our ability to properly fix the connectivity in our mid-continent hubs, and so we're going to be focused on that as we go forward for the next few years.

But underlying all of that is really, I think, the best global network of any airline, 2 from the United States, and we're really proud of that, and we think it has a lot of opportunities.

We do think these things cycle, and we'll be ready when the international environment is even better.

And we did see strong momentum late last year where that environment is better, and international profit margins, in fact, are higher.

And I think that's going to come someday in the future.

But right now, focused on domestic.

But we have a lot of strength, and we have a lot of optionality in our international network.

From Evercore, we have Duane Pfennigwerth.

On co-brand expansion potential, certainly not going to ask you about timing.

But at points in time, United talked about kind of a gap to where market rates were, and those were kind of agreements you were close to.

Some of that commentary was before Delta's expansion with Amex.

And so my question is, in your opinion, did Delta reset the bar for the market or just catch up to where the market already was?

Obviously, Delta's advertised their new deal with Amex a lot, and we see it.

We're in close contact with our partner, Chase, and we continue to work with them on making sure that our program card is the biggest and best it can be.

It's been growing a lot over the last few years.

In fact, we're about to launch a new business card, which we're really proud of.

So there's a lot more to come into the space, I think, is what I would tell you today.

Exactly where the market is, where we are and where others are, I think it's really a little bit difficult to tell sometimes based on what is reported and what's not reported.

But we'll continue to make sure that the United co-brand is the best it can be.

And then just for a follow-up, the premium seating expansion clearly came across in the presentation.

You're talking about making it easier to upsell premium economy.

I wonder if you could quantify how many points of RASM that potentially represents when you're ramped.

Sure.

We'll, actually, I think talk about that more at Investor Day coming up, but we have definitely tilted our capacity.

As we enter 2020, we expect the premium products to be a bigger proportion of our revenue pie for the year, and we expect that to have a really meaningful impact on RASM, but we'll save all those details for a few weeks from now.

From UBS, we have Myles Walton.

Andrew, you talked about the ancillary growth about 12%, and I think you tied it to the greater point of sale at united.com and direct channels reaching 50%.

I'm curious, can you give some maybe meat around the argument of what the conversion rate looks like for the ancillary when they're on the direct channels and also how high you think that direct channel can get to over the next couple of years?

It's a big -- it's a hard number to move.

So getting from 50% to 60% is not something that's going to happen overnight, but we would like to see united.com and our direct channels move towards the mid-50s over the next few years.

It's a big goal.

We'll see if we can get there.

That being said, there's no doubt we're motivated to move in that direction because the conversion rates on united.com for ancillary revenues are simply dramatically higher.

We won't give the exact numbers, but they are higher.

So we are continuing to work to make that number higher in united.com by changing how we display and show things and the products we offer.

And we're also working with our partners that are third-party distributors to see how we can make those numbers get better as well, so I think there's a lot more upside.

What I talked about earlier was the fact that Economy Plus was being put on the shelf on united.com.

In the past, I didn't think we properly displayed that.

And with this new beta test we have going on, on properly displaying the Economy Plus seats, we think that could have a meaningful impact on Economy Plus seat sales going forward.

We have to get our products on the shelf for them to sell properly.

And just one clarification.

I think in response to a previous question, you talked about the -10 getting pushed out further, and that was part of the upgauging or seat growth per departure.

I think you had given a previous metric, about 3% growth in seat per departure.

Is that still valid for 2020?

I want to get that number.

It's definitely not valid in Q1.

That number is a negative number on gauge in Q1 which we're disappointed by.

But somebody can give you the annual number.

I think it's not -- it's no longer valid, unfortunately.

From Cowen and Company, we have Helane Becker.

Scott, when you look at the -- or actually, anybody can answer this, who knows the answer.

When you look at what you had talked about a couple of years ago about replacing smaller aircraft with larger aircraft in key markets, can you just update us on where that stands now?

Like is that program completely done and so all the capacity growth that you're doing in 2020 is going to be in new markets and in connecting the dots?

Well, I'll let Andrew add to it, but it's nowhere close to done, and it was a big setback.

The MAX has been a big setback.

There were a number of markets that would have been upgauged last year that would be -- being upgauged this year, upgauged the following year that are behind because of the MAX delay.

Yes.

I think that's absolutely correct.

Yes.

We're just not where we hoped we'd be at this point.

We have a lot more gauge to come going forward, as Gerry also hinted at, but maybe the other way to look at it is our schedule depth.

We're just not where we need to be on competitive schedule depth, and we're trying to correct that.

And we're also trying to engage in the right direction.

And the MAX delay has kind of boarded our progress on that front, at least for 2019 and it looks like for a big chunk of 2020 at this point.

From Raymond James, we have Savi Syth.

Andrew, if I might just ask a little bit of a follow-up on the kind of regional entity trends that you were talking about, could you give a little bit more color on generally what you're seeing today on that front?

I know you mentioned Hong Kong will stop being a pressure, and Germany is maybe kind of bottoming or rebounding.

So is it fair to assume that those entities we should see a sequential improvement?

Just any additional color would be helpful.

All right.

I think for the quarter, at a macro level, the entities, I expect to come in, in basically the same ranked order.

So I expect that the Latin American division will be our best; I think domestic, second; and then Europe, third; and Asia, last again.

In terms of a little bit more color, we're just watching the situation in China, Beijing and Shanghai and also Hong Kong very carefully.

We do think that Hong Kong, based on current trends, is no longer a drag on PRASM, which was nice to see.

I do expect that Beijing and Shanghai will still be a slight drag on PRASM.

But I would -- what I can tell you is that demand over the last 8 weeks to Beijing and Shanghai has actually increased.

So from a revenue perspective, for the last 12 months, our ticketed revenues to Beijing and Shanghai have been down 4%.

But over the last 8 weeks, they've been up 3%.

So I do think we've turned the corner there, absent any other significant situations that arise in China, particularly Beijing and Shanghai.

So good progress there.

We're watching Australia very carefully.

The wildfires really had some impact on demand, so we'll keep a close eye on that.

But all the rest of Asia, Japan looks very good and Taiwan as well.

South America, I think, is kind of leading the charge as well as Mexico and Central America, so that all looks I think very good.

And in Europe, we've been deploying our new 767 high-J to London Heathrow.

I think that's having a nice tailwind on the system.

That has offset some of the Germany weakness.

But in the case of Germany, we did see demand from our key corporate clients and travel agency sales go positive over the last few weeks, which is really nice to see after pretty much 12 months of negative numbers.

So we're optimistic that Germany is on the mend and moving in the right direction, at least at this point, which has a lot to do with industrial.

So overall, across the globe, there are definitely a few spots, but we generally see encouraging trends.

And from Stifel, we have Joseph DeNardi.

Yes.

Gerry, can you just provide a little bit more color around the step-down in CapEx you're expecting in 2021?

If you look at the last 10-Q, from October, it shows about a $2.5 billion decline in aircraft purchase commitments year-over-year, but that was, I guess, before the Airbus order you referenced.

So can you just maybe update us on what that looks like now in 2021 versus 2020?

It's a little early to be able to give you a good number.

It's largely because until Boeing tells us what the MAX delivery schedule is going to look like, it's just tough.

Next year would have been a year of significant MAX deliveries.

We don't know what's going to happen yet on those.

It's a little premature.

We also don't know how many of the MAXs that we assumed for this year might get pushed.

I mean all we know today is that there were 16 aircraft built.

They're sitting up in Boeing facilities.

We'd like to get those when the aircraft start delivering.

But particularly Boeing having shut down the line, they need to tell us and their other customers how they're going to allocate slots to everybody, and that would drive a lot of the 2021 CapEx number.

So it's just too soon to tell.

Okay.

Gerry, is the step-down a function of -- is it hundreds of millions or is it billions?

Again, it's just too soon to tell on that.

I don't expect it to be billions, plural, but it's really too soon to tell.

Okay.

Maybe just a question for Scott or Andrew.

I'm going to try and stump Scott.

What percent of the tickets sold in 2019 were on fares which were in the market in order to match a competitor's fares versus what percent of tickets sold were [because] that's what Gemini said was the right fare.

I'm not sure I understand the question but overall...

Trying to understand, Scott, how much your revenue is subject to kind of the worst competitor in the market?

How often do you have to just match fares versus how often can you go with what you think is the best fare at that point?

Well, typically, all of our fares are matching something.

There will be multiple fares in the market.

I guess your question is how often are we selling the lowest fare in the market is really the right way to ask the question.

And I don't know the percentage at the time.

I would guess it's a single-digit percent of our seats are sold at the lowest fare available in the market.

Yes.

I would agree with that.

I mean Gemini gives us the guidance in terms of what the demand forecast is, to open up or close down.

And so -- and that said, by market, by day, by everything.

So I'm not sure how else to add.

But I think what you're really getting at is like the lowest fare in the market is probably selling -- we're probably selling single-digit percent of our seats at the absolute lowest fare in the market.

And from Bernstein, we have David Vernon.

Andrew, just to start out on the premium products or the Premium Plus rollout, the tailwind you guys cited kind of grew from 50 to 60 bps from 3 to 4Q.

Just trying to get a sense for what the tailwind should be in 2020 as you ladder in, I think, a broader rollout of that product.

Should that benefit sort of increase as we get through the year assuming stable conditions?

Not looking really for guidance.

Just trying to make sure I understand how that rollout is going to affect the base business.

Yes.

So what I would say is there's -- the rollout will continue, and we're gaining critical mass.

And therefore, I'm optimistic we'll see that number inch up even a little bit more as we head into Q1 and Q2 and maybe even Q3, particularly when all the 777s have product.

Then we start to lap as we really get into the later parts of Q3 and Q4.

And there, it's a little bit different in that I think our expertise and how we've managed product will be a big driver and whether it can expand or not beyond that number.

And so I hesitate to say that as we enter fourth quarter of 2020 that we can keep it at that same pace, but we're optimistic that there's still a lot out there as we learn how to better manage it from day-to-day and flight-to-flight.

And that should expand even a little bit more into 2021 because I think you said that you were going to get to 8% of ASMs by 2021, right?

Yes.

The maturity of the product really by early '21, we have it on -- all the airplanes are going to have it on.

In fact, I think, at this point, we plan to have it on every one of our intercontinental wide-bodies with the exception of 14 767-300s.

But every other aircraft is going to have it, and it's going to be very, very consistent.

So we're excited to get out there, and we think -- we do think it provides a continued tailwind, whether it's 0.5 point or so or 60 points -- to 60 basis points.

That seems aggressive as you get that far out, but it is a continuing tailwind, along with the other actions that we're taking on this front, whether it's more first-class seats on our 319, the high-J 767s that we're flying to London Heathrow and Switzerland.

So there's a lot of initiatives on this front to continue to roll out that we expect provide a tailwind that's unique to United for the next year or 2 at least.

And from Buckingham Research, we have Dan McKenzie.

Andrew, given the news this weekend, I'm wondering if you can help us think about the revenue shock absorbers.

So first, does the preliminary revenue outlook embed some volatility in the demand data?

And then setting aside the news from this weekend, I'm wondering what corporate clients are telling you about their international travel needs in a post-trade deal world.

Is the thought that there could be some acceleration in international demand to come that we just can't see today?

I think that's the case.

We actually, and just in the last few weeks, have seen Beijing and Shanghai demand increase relative to where we were for most of last year, so I don't have an official readout from corporate clients on that part.

But I will say is we looked at corporate demand for last year.

I think it was really healthy.

But when you look at it, divided by the different divisions around the globe, what you find is our Asia Pacific corporate demand was, in fact, negative, where the rest of the world was positive.

So it just provides an easier comp.

So I'm optimistic that absent the issue that we had this last few days that we're going to see stronger results, particularly in the Asia Pacific region, as it relates to that.

In regards to the -- really, I think forecast and as we look at each quarter and we assess where we think things will turn out, we clearly have a tendency to put a little bit of, I'd like to say, wiggle room in the numbers for unknown things that will happen because it's been pretty predictable that there'll be something unknown that will happen in any part of the globe, and so we do leave room for that.

And I think that you can see that over our track record of the last 2 years plus on the RASM guide.

Whether we left exactly enough room, only time will tell.

But we do feel comfortable with current trends and the room we have left in, but we'll have to wait and see how things unfold over the next week or so to really be able to firmly answer at least how that relates to what's happening in China today at this point.

And from Deutsche Bank, we have Michael Linenberg.

Two quick ones here, Gerry, on just the $7 billion of CapEx.

What's the rough split, aircraft versus non aircraft?

It is roughly, call it, $5 billion aircraft versus the $2 billion non-aircraft.

Okay.

Great.

And then just a question to Andrew.

Andrew, I had heard somewhere that you were considering adding more seats to your 787-8s and 9s.

Is that true?

And what happens to your premium seating on those airplanes if that does go through?

Does that -- is it coming down?

Or is it just a different configuration?

Sure.

So the 789 is the heart of our 787 fleet.

We have the most of those aircraft.

And the seating configuration on that aircraft as it relates to business class seats, I think, remains identical.

If that's not the case, somebody will get back to you.

But we did change the number of business class seats on the 789 as it goes through its reconfiguration over the next 12 months or so.

So we're fine there.

We did find a little bit of room in the coach cabin.

So the density, the number of seats on the aircraft did go up a little bit.

So the aircraft has more seats in total, but we didn't lose any J seats on that.

That being said, I'll just -- on the 788, we did reduce the size of the J class cabin.

I don't know the number off the top of my head.

I think it's 28 to 30 seats relative to where we are today, which I think is 36 seats.

We did that because the missions that we're going to be using the 788 on are likely to be more leisure oriented that have lower business class demand.

We have literally 150-plus wide-bodies with very large J class cabins.

And in fact, some cabin is getting bigger on all the other aircraft types.

On this particular aircraft type in which we only have 12 units, we did reduce the size of the cabin to reflect how we will use the aircraft in the future, which has a more leisure-oriented tilt than business tilt, and we thought that was the right segmentation of seats onboard that aircraft given how it will be used.

But again, it's 12 aircraft out of a fleet of almost 200 wide-body aircraft.

It doesn't move the numbers.

And we'll now take questions from the media.

(Operator Instructions)

And from Bloomberg, we have Justin Bachman.

Yes.

This question, I think, is for Oscar or Scott.

I wanted to ask about your decision to get rid of the capacity guidance and what sort of growth United will see over the next year or 2 or 3 in terms of both the mid-continent and if that's just a function of the MAX uncertainty, or if you're now at a period where you're slowing things down because you feel that you've regained that share that United did not have in the past.

So we have decided -- well, we wanted to focus our efforts and our guidance on earnings.

That's the key metric that we're trying to focus on.

And if that means we should grow 5% to hit our earnings growth targets, then that's we'll do.

If it means we should grow 1% to hit our earnings growth targets, then that's what we'll do.

We're really focused on earnings.

And so we always actually intended, as we've built increasing credibility with hitting our numbers, to stop giving full year capacity guidance beginning next year.

But given we had one competitor already do it and given the uncertainty that we have with the MAX, we did it a year early.

But really, the only thing that our change in guidance had to do with the MAX because we did it a year early because we have a lot of uncertainty this year, but we always intended to do it.

And it's really a focus on driving towards our earnings target and having all of us focused on earnings metrics as the right metric.

Great.

But as far as your comfort with the mid-continent strategy, where does that resume?

Andrew had talked about sort of a halt given the MAX.

Is that coming back when you get the MAX?

I wouldn't say it's a halt.

This is Andrew.

What I'd say is we're just not where we otherwise have liked to be because of the lag of the MAX.

So we have built connectivity.

We focused, in fact, in Denver so that the Denver growth actually does continue.

We have -- we're not where we'd like to be in Houston or Chicago, so only time will tell.

And the other thing I'll add is the CRJ-550, which has been, I think, a smashing success so far, is doing really well, and that does also help our mid-continent activity.

But the MAX aircraft were a key ingredient to what we were trying to accomplish, and they're not available to fly.

And therefore, we're behind schedule on where we'd otherwise liked to be, and we're likely to be behind schedule for the foreseeable future given the latest announcement from Boeing.

And from Wall Street Journal, we have Alison Sider.

I was wondering if you could talk a little bit about how likely simulator training requirements could affect sort of the pace and the cadence of return to service eventually.

What kind of complications might that introduce?

And how long do you think it will take?

Any color you have would be great.

Thanks for the question.

This is Greg.

We don't anticipate any issues if simulator training is required by the FAA.

We -- as we talked about earlier, we have ample simulator capacity, and we're working on plans to allow us to abide by whatever guidance the FAA issues.

Got it.

And if I could just follow up, I guess I'm just wondering if there is any kind of thinking of like a worst-case scenario if the MAX doesn't fly again.

Is there sort of a contingency plan for that like in the backroom somewhere?

Or is that even something you consider a possibility if you would just have to give up on the MAX?

Or how might that play out?

We continue to assume there'll be a safe return of the MAX, and we're actually encouraged at what we hope is a more realistic time line and target.

And we will be announcing soon our own pushback of service that gives us time from what Boeing is now saying about the MAX return to service, to give us time to get the airplane back up and running, including time for classroom training and simulator training for our pilots before they fly.

At this point, we're assessing the impact of the schedule, but we do not anticipate flying the MAX this summer.

This concludes our question-and-answer portion.

We'll now turn it back to Michael Leskinen for closing remarks.

Thanks, Brandon, and thanks to all of you for joining the call today.

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

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for joining.

You may now disconnect.