United Airlines Holdings, Inc. (UAL) Q1 2017 Earnings Report, Transcript and Summary

Good morning and welcome to United Continental Holdings Earnings Conference Call for the First Quarter 2017. My name is Brandon and I'll be your conference facilitator today. Following the initial remarks from management, we will open the lines for questions. [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, Julie Stewart, Managing Director of Investor Relations. Please go ahead, Julie.

Thank you, Brandon. Good morning everyone and welcome to United's first quarter 2017 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 three 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 press 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 the call, we will discuss several non-GAAP financial measures. For a reconciliation of these non-GAAP measures to GAAP measures, please refer to the tables at the end of our earnings release and investor update, copies of which are available on our website. Joining us here in Chicago to discuss our results are Chief Executive Officer, Oscar Munoz; President, Scott Kirby; and Chief Financial Officer, Andrew Levy. We also have others in the room available to assist with Q&A. And now I would like to turn the call over to Oscar.

Thank you, Julie. Hello, everyone. Thank you for joining us. Before we review United's performance for the previous quarter, I want to address the events on last week. The incident on Flight 3411 has been a humbling, learning experience for all of us here at United and for me, in particular. In addition to apologizing to Dr. Dao as well as all the passengers aboard, I also want to apologize to our customers. You can and should expect more from us and as CEO, I take full responsibility for making this right. We've always sought to repay our customers' trust with the highest quality of service and deepest level of respect and dignity. We are and will make the necessary policy changes to ensure this never happens again. Those changes began with two key announcements last week. First, from now on, we'll not call for law enforcement to remove passengers from our flight, except in cases of security or safety concerns. Second, crews traveling on our aircraft must be booked at least 60 minutes prior to departure. In addition, we continue to review a broader array of policies and systems that factor into situations like this. And importantly, we are involving our front-line employees and, to a degree, some of our customers to help us take a more common-sense approach to how we do things. We'll communicate the results of our review and the additional actions we will take by April 30th. Now if I could, turning to the topic of earnings and operational performance. As the positive financial results we will discuss today make clear, our people have done a great work to create a more reliable, profitable, and financially sound airline for our customers, investors and everyone we serve. Our financial and operational performance in the first quarter of 2017 gives us a lot of confidence about the foundation we're building, but it's clear we have further to go in terms of elevating the experience our customers have with us. This is a true learning opportunity and will ultimately prove to be a watershed moment for our company as we work harder than ever to put our customers at the center of everything we do. Now, I'll turn it over to Scott to give an update on operations and revenue.

Thank you, Oscar, and thanks, everyone, for joining us this morning. I echo Oscar's thoughts on last week's incident. Our entire leadership team and the entire airline is focused on learning from this terrible event and making United truly customer-focused in everything that we do. While we had a big failure last week, our 2017 operational and financial performance is off to a strong start. Building on a record 2016, we're already setting new operational records in 2017 and our performance improved as the quarter progressed. Demand is solid and we performed in line with our unit revenue forecast during the quarter despite better completion factor, which led to higher capacity. The positive momentum and the revenue environment that we saw late last year continued into the first quarter and our outlook for the second quarter unit revenue growth is stronger today on higher capacity growth than it was just a few months ago. We expect to return to positive system unit revenue growth in the second quarter, which will mark positive year-over-year growth in this key metric for the first time since early 2015, assuming the quarter plays out as we expect. On slide five, we show operational improvements in the quarter. We remain focused on continually improving our operational reliability. Our completion factor performance in the quarter improved from last year, helped by 25 days of 100% mainline completion, which surpassed our annual record set just last year and is more perfect days than all of 2011 through 2015 combined. Our mishandled baggage performance continues to improve. We achieved our best-ever consolidated on-time departure rate for February and any March, and year-to-date; each of our major competitors had canceled more than twice as many flights as has United. Slide six illustrates how changes to our yield management posture are also allowing us to drive better revenue results. As you can see for the past two years, United had a philosophy of never letting advance booked load factor get behind. For the past two years, our bookings 60 days in advance were never [indiscernible] 2% behind. And if your goal is to keep bookings high, the easiest way to do that is to lower the prices, and that's exactly what United was doing. In fact, if you look at slide seven in our deck, we're just industry PRASM in general due to the step function change in the fourth quarter, and I think this was primarily driven by United reducing its reliance on advance-purchase discounts. The second problem with this strategy was that we sold out too soon and spilled our natural market share of close-in business demand to our competitors. As you can see back on slide six, we changed that posture and are now willing to take much more risk that high-yield business customers are going to choose United if we just keep seats available for them. And it's working. In the first quarter, our close-in bookings were up around 12% year-over-year and our corporate revenue was up 11% year-over-year compared with an average of down 1% for the last three quarters. The Easter shift and the extra Friday in March did help, but we also think this is evident that United is restoring its natural market share. Despite starting well behind, you could see that we closed the load factor gap in both the fourth and first quarters and we expect and hope to do so again in the second quarter. This change leads to a better overall pricing environment and better mix and allows United to simply restore our natural close-in to business demand market share. While all of our competitors are lowering their unit revenue outlook from the first quarter, our forecast started just below our guided midpoint and improved to flat despite a one point higher completion factor. This phenomenon at our competitors wasn't about demand weakness. It was about United customers coming back to United, and we simply couldn't accommodate them in years past because we weren't leaving seats for the last minute bookings customers. In the past, we forced many of our best customers to fly with our competitors because we were sold out and our changes now mean that they can and are returning to United Airlines. While the whole industry is seeing strong close-in demand, United is better positioned to capitalize on it with more seats to sell close-in on a year-over-year basis. We expect the second quarter to be United's best PRASM performance in two years. Our consolidated PRASM was flat for the first quarter, right at the midpoint of our guidance provided in January despite running one point higher in completion factor. We saw strong close-in demand in March, and throughout the quarter, we saw improvement across the system, with Houston, Washington Dulles and Chicago all showing positive year-over-year improvement. Internationally, both the Atlantic and Pacific performance was better than forecasted. The strength in the Atlantic was boosted by strong results in Germany and a U.S. point-of-sale shift, while the Pacific was helped by positive PRASM in Japan. We anticipate second quarter consolidated PRASM to be up 1% to 2% -- 1% to 3%, 200 basis points better than at the midpoint from the first quarter. If the quarter plays out like we think, this will mark the fifth straight quarter of sequential improvement and the first quarter of positive unit revenue growth in two years. Moving to slide eight for an overview by region. During the second quarter, we expect sequential improvement in all geographies, except the Atlantic, which we expect will be approximately flat after surprising with positive growth in the first quarter. The Easter shift had a much more pronounced positive impact on yield in the Atlantic during March than we anticipated and we're now expecting an opposite impact in April. We're currently forecasting solid positive unit revenue growth in domestic and Latin markets. Latin remains a bright spot, and we look for the year-over-year increase to be in the mid-single-digits in the second quarter, driven by strength in Brazil and Argentina and a tailwind from the Easter shift. In the Pacific, declines are expected to moderate again in the second quarter. Our capacity outlook for the second quarter is up 3% to 4%. We expect that growth to be biased towards higher domestic growth with an increase of 4.5% to 5.5%. Our domestic year-over-year growth will peak in June and July, driven by improved utilization of our fleet this summer. Our full year outlook for system capacity growth remains up 2.5% to 3.5% and is consistent with our updated guidance from March 15. Our capacity growth is comprised of nearly a 5% increase in gauge, partially offset by fewer departures. We're delivering on our promises from Investor Day, which included restoring the domestic network to its natural share in our hubs. Everyone knows that United never should have been flying regional jets in markets like Chicago to Washington National or Newark to Atlanta. We're up-gauging where we should be flying larger planes, and that, by the way, is mostly in places where we historically did fly larger planes. And we're putting smaller planes in markets that will drive better connectivity to our hubs, places like Champaign, Illinois and Rochester, Minnesota. These [indiscernible] markets have better pricing structure than large markets and help to improve connectivity in our hubs. We'll continue to improve connectivity, and we will start re-banking later this fall, which will be the next step in our network optimization. We're even more excited about our opportunities today than we were at Investor Day five months ago, and we look forward to providing proof points that we're executing over the coming quarters and years. To close, I want to, again, say that we're committed to learning from last week's failure by becoming the most customer-centric airline we can be in everything that we do. Now, I'll turn it over to Andrew to review the financial results.

Thanks Scott. Before I turn to the numbers, I want to make it clear I share the sentiments expressed by Oscar and Scott about what occurred last week. Our entire team is working together to identify ways we can become a more customer-focused airline and are confident we will succeed in this goal. Yesterday afternoon, we released our first quarter 2017 earnings as well as our second quarter investor update. I will discuss both our results and outlook at a high level, but please refer to those documents for additional detail. Slide 10 is a summary of our GAAP financials and slide 11 shows our non-GAAP results. In the first quarter, we reported adjusted earnings per share of $0.41. We generated pretax income of $196 million, which represented a 2.3% pretax margin excluding special items. First quarter 2017 results were lower year-over-year mostly due to higher fuel expense and labor rate increases. Turning to slide 12, our first quarter non-fuel unit costs, excluding special items, profit-sharing and third-party expenses, increased 5% as compared with the first quarter 2016. 4.2 percentage points of this increase was due to new labor rates from the 2016 agreements. For the second quarter, we expect non-fuel unit costs, excluding special items, profit-sharing and third-party expenses, to increase between 4% and 5%, with approximately four percentage points of this increase due to the higher labor rates. Last month, we reduced our guidance for full year 2017 non-fuel unit costs to an increase of between 2.5% and 3.5%. We are affirming this guidance today despite elevated unit cost growth in the first quarter and our forecasted increase in the second quarter of 4.5% at the midpoint of the guided range. We expect the increase in nonfuel unit costs to slow appreciably during the last two quarters of the year. Turning to slide 13, we ended the first quarter with $6.4 billion of unrestricted liquidity, including our recently increased $2 billion revolver, which is comfortably in excess of our stated minimum liquidity target range. As of the end of the first quarter, our gross debt balance, including capitalized operating leases was $17.6 billion. During the quarter, we completed several financing transactions that improved our liquidity by $1.35 billion. This included raising $300 million of unsecured debt at a rate of 5%, increasing our term loan by $440 million to $1.5 billion with more favorable terms and rate, and also upsizing our revolver by $650 million to the $2 billion number I gave you a minute ago. In the quarter, we spent $313 million repurchasing shares at an average price of about $68 a share. We remain committed to returning excess cash to our shareholders and will continue to be opportunistic to take advantage of pullbacks in the stock. We currently have approximately $1.5 billion remaining of repurchase authority. Our 2017 guidance for CapEx remains between $4.2 billion and $4.4 billion. This is higher than 2016 due primarily to the delivery of 15 wide-body aircraft. Also during the quarter, we purchased 12 737NGs off lease. These are not incremental aircraft to the fleet, but rather aircraft we've operated since new. We expect to enter into many similar transactions when we can cost-effectively purchase leased aircraft that we expect to operate for many years instead of acquiring new aircraft to replace equipment at the end of the lease term. Additionally, we expect to grow the fleet by adding used aircraft. Growing with used aircraft is much less capital-intensive, provides us with greater balance sheet flexibility and therefore, de-risks our business at the margin. Lastly, regarding our fleet, we continue our comprehensive review of the fleet and order book. We continue our work and we will update you when we have new information to share. On slide 14, we show summary of our guidance, including second quarter projected fuel price range, which is using the April 12 curve. The ranges for capacity, revenue and costs imply a second quarter pretax margin between 10% and 12%. In conclusion, we're off to a solid start in 2017 and remain focused on maintaining a strong balance sheet and finding incremental cost-savings opportunities. With that, I'd like to thank you all for joining the call today, and I'll now turn it back to Julie to open it up for Q&A.

Thank you, Andrew. First, we will take questions from the analyst community, then we will take questions from the media. Please limit yourself to one question and if need one follow-up question. Brandon, please describe the procedure to ask a question.

Thank you. [Operator Instructions] And from Cowen, we have Helane Becker online. Please go ahead.

Thanks very much operator. Hi everybody. Thank you very much for your time. Just on the bookings over the past -- I mean, this is like very short-term-focused, but are you hearing from any of your corporate accounts about adjusting bookings or whatever for the -- given United's performance over the last couple of weeks with various incidences?

We had a lot of communication with our corporate accounts, and we've had appropriate questions and concerns, particularly with regard to our corporate accounts, with whom we have a good relationship and we've already communicated with. We feel pretty good about the communications that we've had so far and in our ability to reassure them and explain things like overbooking. Some of the steps that we will do with the broader public on our April 30 launch but some of that with our corporate accounts, we've been able to accelerate some of that -- some of their specific concerns. And our sales team has done a wonderful job of being out, talking to them if there has been a concern from corporate accounts, which has been totally appropriate. We feel like we've managed that pretty well. And our corporate accounts are largely supportive. They want us to fix this. They want us to do the right thing. But they believe in us and believe that we will get this fixed. And at the end of the day, we will be stronger, and we will have better customer service when we get through this.

And Helane, this is Oscar. I echo the same sentiments. I've had -- go ahead, Helane.

No. I was just actually -- I mean, I don't want to beat this up. I just was going to change the subject and actually ask you about regional -- regions in the domestic market. I know you were talking about improvement in various domestic markets, and I wonder if there are any specific areas of improvement that you would call out as being noteworthy. And that was all.

Well, we saw improvement -- we saw PRASM up, actually, the most in Houston. To some degree, that's -- we have less capacity in Houston. We're looking forward to actually re-banking Houston starting later this year, which will allow us the platform to grow Houston and actually improve PRASM even more. The energy sector in Houston, while still down significantly compared to where it was historically, is starting to at least recover from a very low base. Our energy accounts have [rounding up] [ph] 13% during the quarter. We also saw strength in Dulles and Chicago, and the rest of the hubs, while down a little bit, were all down pretty marginally. So really, I would say for the most part, across the board, we're starting to see an improved revenue environment, and we really feel good about the revenue environment, really, across the board.

Great. Thank you very much.

From Citigroup, we have Kevin Crissey online. Please go ahead.

Good morning. Thanks for the time. Can we talk about the international partners maybe in a big picture, the evolution of the international partnerships, their importance overall, where your strengths and opportunities exist, maybe just a big picture on where international partnerships and alliances and JVs, as you see it, are heading? Thank you.

Well, international JV and partnerships are incredibly important to our customers. They are a way to give a seamless experience to our customers, to get them around the world. This is one of those rare events that if they win, win, win; it's a win for United Airlines. It could be a win for our partners, and it's absolutely a win for our customers. I think we -- and Star Alliance, we all believe that we have an opportunity to do better. We can be more seamlessly integrated with one another and that includes on the commercial front, but to a large degree, that includes the customer experience, where we can make the experience more seamless. And we have a new CEO at Star Alliance, and that is his number one mission. I'll actually be going to the Star Alliance meeting on Mother's Day, which my wife doesn't appreciate, but it's in Germany. And the focus of the meeting is to talk about how we can create a more seamless experience for our customers and really have the focus to be on customers. And we think there's a big opportunity there, and that's something that we'll be working on over the coming years. But our partnerships are really important, and we're looking forward to expanding partnerships, particularly in Latin America with Avianca and Copa, and we think there's a real opportunity. But we have strong partnerships across the Atlantic and Pacific. Adding Avianca, Copa and Azul to those relationships is going to give us the ability to give the American and LatAm a run for their money in Latin America.

So Scott, would you say that that's the region where you have the biggest opportunity for improvement is in the Latin America region?

Well, we have opportunity for improvement everywhere, but it's the least developed region for us. So yes, it's the area with the most opportunity for improvement.

Thank you for your time.

We have Michael Linenberg on the line. Please standby for just a moment. Michael Linenberg is on the line, please go ahead sir.

Yes, hey thanks. Two questions here. Hey, Scott, I just want to go back to -- you mentioned Houston, Dulles and Chicago seeing PRASM improvement. Just specifically looking at Newark, if it weren't for the fact that Newark-Florida fares were somewhat depressed, if we were to exclude that, would have Newark's PRASM been up?

Newark what fares?

If you were to exclude -- to Florida.

Excluding Florida. I mean, Newark was down 1%, and so I don't know. And actually, what's happened in Newark is there was a flood of low-cost carrier capacity, and for a long time, United Airlines did not match the prices. We started matching the prices and I think our revenues, while down in those markets, is down less than it was before. So, we feel really good about that strategy. At least our incremental change in strategy and competing more aggressively with the low-cost carriers in Newark, I think, is revenue positive. To be clear, with all the capacity in Florida, PRASM is certainly down, but it was down even more before we decided to start competing aggressively.

Well. And then just my second question, Andrew, you talked about growing the fleet with used aircraft. And I guess up until this point, you've -- predominantly, it's -- well, I shouldn't say predominantly, it's all been narrow-body. And I'm curious about your thoughts about used wide-bodies. I think the view out in the marketplace is that reconfiguration costs are too high. Hence, we don't see airlines really look at used wide-bodies. I mean, what are your thoughts on that? Are there opportunities there for you, if you can elaborate?

Yes. Hey, Mike.

Hey.

The wide-body market is severely depressed across the board. There's tremendous opportunities in the used market. There's a lot of really good high-quality aircraft available at very, very attractive low rates. So you're right that the reconfiguration costs are certainly more significant, and it's, perhaps, a little bit tougher to make the economics work in a normal situation. Certainly, with the -- today, I think we're in a different period in the market, and so we are actively looking at wide-bodies and narrow-bodies and we'll see. I think obviously, the weakness in demand for that sector has been well documented. It's nothing new. And I know the OEMs are feeling it as well. So, we'll see if we can take advantage of the dislocations that we believe is there and will continue to be there for quite some time.

Great. Thanks Andrew.

Thanks.

From Wolfe Research, we have Hunter Keay on the line. Please go ahead.

Hey good morning. Scott, at the Analyst Day in November, you said that historically, inflections in RASM usually involve a couple months of nail-biting, where you're behind on advance bookings, which is exactly what's happening, obviously, in slide six. So we're obviously more than a couple months into it at this point. So I guess the question is, are you deep enough into this point where you can say that you're seeing that big turn, which is what you described it as in November, in the revenue environment? Or do you need a couple more months to go before you can safely say that we have had that big turn, which are your words that you said in November?

Well, Hunter, you've followed me long enough to know that I'm an optimist by nature, so take what I'm going to say with a grain of salt. But yes, I think we had a great turn in revenue in the fourth quarter. If you can just look at that graph, I think it was slide, what, six or seven for us and you can see going from RASM that is down 7.4%, down 6.6%, down 5.8%, all of a sudden to down 1.6%. That's a big step function change and there really wasn't a big change in industry capacity at that point, not a flat, not up to -- something changed in the fourth quarter. And my hypothesis is that what changed in the fourth quarter was United's revenue management philosophy, which leads to a pricing philosophy change and that has changed and we expect things to continue to grow. What's not even in these numbers which will bear in the second half of the year is Basic Economy, which we think is going to be really big, predictably by the time we get it at steady state. But I think there was inflection point in the fourth quarter and I feel pretty good that that has happened.

Okay. And this is actually sort of a related question. You mentioned Basic Economy. I want to get back to a question asked a few months ago about distribution as well. In an ideal world, if you're able to get the distribution paradigm sort of adjusted to exactly how you want it to be. Is there more of an opportunity to drive incremental revenues at the really, really low end like through things like Basic Economy or at the really, really high end by turning airlines into -- dynamically, you're competing on things like product and schedule, with price way at the bottom of the list. So, the question is, low-end or high-end opportunity as it relates to the distribution changes that you expect over the next couple of years.

Well, I think that there's opportunity on both. At United, and I said this at my previous airline, roughly half of our revenue is coming from infrequent customers and half is coming from premium customers, customers that fly as often. And it's a little over simplistic to say that, that half of revenue coming from infrequent customers just cares about price because a lot them care about more than that. It's also -- the flip side is true that some of our frequent customers are really shopping on price as well. But at a high level, you can think of it simplistically as half and half and we need to fuel both. And that's the wonderful thing about Basic Economy. It is giving our customers choice. So, for those customers who do care about price -- and by the way, at launch this morning, we had a couple of flights go out and smooth and we're encouraged with the initial launch from Minneapolis today. But for our customers who want a lower price, it's fantastic that we can give them that. And for customers who want a higher level of service and who are willing to pay for a higher level of service and a better product, we can give them that as well. This is all about giving our customers' choice, and I think it will happen on both ends. It will make our product more attractive to customers. We are focused on getting the absolute lowest rock-bottom price, and it will also attract customers who would like to have a better level of service and a better product and are willing to pay for that.

Thank you, Scott.

From Raymond James, we have Savi Syth online. Please go ahead.

Good morning. Just on the regional space, Scott, it sounds like you're putting these aircraft in kind of mission-appropriate markets. And now that you've had a chance to review the network and maybe adoption rates to increase connectivity, are you still thinking that the regional fleet will be flattish after the year-end 2017 levels? And on that -- the Air Wisconsin deal, I was wondering how big that deal is and if that puts cost pressure or if it's cost neutral.

So conceptually, if there were no constraints, meaning particularly no pilot constraints, we would probably be growing the regional fleet and adding more of those regional markets. To be clear, we wouldn't be flying them in places like Dulles to Chicago or Newark to Atlanta. We will be flying them in places like Rochester, Minnesota, where they're more appropriate. So our regional fleet is less about -- our regional lift is going to be less about our optimal network strategy and much more about our regional partners' ability to source aircraft and pilots, in particular. We -- as a general rule, most of those deals are trading down over time, and we are losing aircraft. That's one of the great things about the Air Wisconsin deal is we were able to go get aircraft that are going to come in at a price that's kind of right in the middle of our prices on other deals, so it's attractive economics and to a large degree, will offset some of the shrinking that we expect to occur at our other regional partners. And we're hoping that our other regional partners can actually keep flying some of those aircraft longer. In fact, SkyWest, [Indiscernible], our numbers have gone up for aircraft at the end of the year because it turns out they're going to be able to fly some of those aircraft a little longer than we thought. But at the end of the day, it's going to be driven -- our regional count -- aircraft count is going to be driven much more by the pilot availability than it is by our optimal fleet plan.

Got it. Thank you. And Andrew if I might ask a quick question. You might have mentioned this in the opening remarks, but now that you've upped the credit facility, is the cash target, is that unchanged? Or are you changing that as well?

Our cash target remains between $5 billion and $6 billion. That's a range we're comfortable with. And as you can tell, we're well above that at the current time. So, no, we don't expect to change that target range at all.

Got it. All right, thanks guys.

From UBS, we have Darryl Genovesi. Please go ahead.

Hi, thanks for the time. Scott, when you were at American, you embarked on a hub rebanking effort, which I think, in general, leads to a slightly higher-cost operation exchanged -- in exchange for higher revenue. And I wondered if you could use some of the lessons that you learned there to tell us what you think the CASM hit might be over the next couple of years as you try to re-bank the United network.

Look, it does cost more to run a banked operation than otherwise. I think it's pretty small. It was a rounding error at American. It worked really well. It will work really well here. I would point at American to Dulles, which had all the craziness going on with the Wright Amendment and the growth of Spirit, all that just huge headwinds, and yet Dulles was outperforming consistently on PRASM quarter after quarter because of the higher levels of connectivity. So, I'm not sure what the CASM number will be, but I'm highly confident that the increase in revenue will more than offset the PRASM hit.

Great. Thank you very much.

From JPMorgan, we have Jamie Baker online. Please go ahead.

Andrew, can you give some more color on what's in the other expense category these days? If we look at that as a total -- as a percentage of total operating expense or as a percentage of revenue, there's clearly some growth going on. It's a line item that now has overtaken consolidated fuel expense, for example. What's in there? And what's driving the growth?

Well, there's a lot of items in there, as you noted, Jamie. What we're seeing that's driving the growth in this particular quarter is IT, contracted labor, legal, timing of legal [Indiscernible], which is part of the increase year-over-year; maintenance services, which should be a variety of things, including software support. And also, food is in that line item, and that's also elevated significantly year-over-year, partly driven by the Polaris service launch that occurred at fourth quarter -- late fourth quarter of last year.

Okay, that's helpful. And second question for Scott. As we think about your normal market share in your hubs, and I recognize every hub is going to be different, but how does the -- I mean, does your 2020 margin goals specifically require a level of pricing power that's unattainable unless you increase share by, I don't know, more than 5%, 10%? I mean, basically, can you achieve your margin goal with domestic hub share below 50%, with the exception of Houston?

Well, look, I don't think of it as market share driving pricing power. I think of it more as 2 things: one, driving higher levels of connectivity. When we don't have these higher levels, we have lower levels of connectivity that's high yield [Technical Difficulty] that's completely missing from the network and just giving to your competitors. And second, places like -- let's just take Newark because I talk about it a lot. We have a Newark-based global services or 1K customer, and we started flying the regional jet to Atlanta and regional jets to Dulles and regional jets to Detroit. We pushed that global services customer, who is a high-yield customer, who booked at the last minute to fly on Delta and American in those markets. And beyond that, that customer used to just be a Newark-based customer that was on American -- or United Airlines' frequent flyer program and flew exclusively on United. But now, all of a sudden, anywhere they flew, they decided to go shop because we forced them to carry free frequent flyer cards in their wallet, and because of that, they're no longer global services because they didn't fly on United all the time. We lost those customers. So it's not about pricing power. It's about winning back the loyalty and giving a better product to our best customers so that they choose and want to fly United Airlines. And so -- go ahead.

No, go ahead, sorry. Sorry.

I was just going to say restoring is not about gaining pricing power or anything like that. It's about creating the best product for our customers in those markets so that they'd want to choose to fly United exclusively.

All right. So, it's more about the quality of the ASMs that you add in your hub than just attaining a share number, in other words.

Absolutely.

Okay. Because I think that point is lost in a lot of investors, so I appreciate you clarifying it. I'm sorry. Did I cut you off, Oscar?

No. I just wanted to -- I will go back a little bit to your question to Andrew with regards to the other expense category. I think it's important to note that Andrew specifically is leading an initiative to bring down cost in the company across the board, and we had some success in that, and that's what we'd committed. Additionally, with some of the components that we mentioned, I think we have to recognize that they're investments for the customer, right, what do you think of Polaris, what you think of the IT organization. Some of the tools that we rolled out already this year have had a significant level of improvement how we treat our customers. So, we'll continue to manage that and talk a little bit more of that specifically because you will see that cost trend potentially continue. But again, there's initiatives to offset it, plus it's getting a return with regards to our revenue and passenger loads.

Three thoughtful answers. Thank you very much.

From Stifel, we have Joseph DeNardi. Please go ahead.

Just two questions on the loyalty program, which hasn't gotten a lot of love today. So Scott, based on the disclosures that United provides around the economics of MileagePlus, it appears that the program is considerably less valuable than American. So American disclosed $1.9 billion marketing revenue in 2016, United disclosed $1.2 billion, American is expecting an incremental $800 million in EBIT by 2018 from the new credit card deal. You're expecting only 8 -- only $300 million. So structurally, is there a reason why United's business of selling miles to third parties is less valuable than American's? Or your disclosures understate the value you received?

I do think that we have different disclosure policies, and this is something we are going to work on. Andrew Levy is nodding his head at me. It's a big initiative for Andrew to figure out how we disclose this better. It's something that we are going to do -- or at least intent to. I think your simplistic analysis -- it would be hard for you to know because we put it in other lines, but isn't right. One thing it is right is that at the moment, Americas' growth rate is much higher. Delta's growth rate also is much higher from today's date. That's the bad news. The good news is, I believe that our partner -- partners at JPMorgan Chase understand that and understand how important it is to get us on the same growth trajectory. We've kind of had a reset of the relationship here in the past few months, and they've committed to getting us to have the same kind of growth rates. And look, we are actually to be growing faster. We're growing faster as an airline. We're growing our capacity faster and so we frankly, ought to be growing faster than those guys. That's not at all on JPMorgan Chase, a lot of that is at United, things like we weren't allowing them to offer the credit card to customers onboard. That's the best acquisition channel that American Airlines had. It was -- I've been told best acquisition channel with Delta and United wasn't doing. So, there are things that we can do to get our growth rates up. We're going need to do it in combination with Chase, but we look forward to getting that accelerated in the months and years to come.

So Scott, does that add some upside to what you laid out that Investor Day then?

There's nothing about that in the Investor -- assuming we're successful in that regard it would be upside.

Okay. And then Andrew, I guess, what we have done is really just value the business you guys have of -- and other airlines of selling miles to third parties. But I'm just wondering if just bigger picture you can address the opportunity you see for the company just being able to better monetize the 90 million members you have in MileagePlus beyond just selling them air travel? I mean, this is a marketing company essentially. How much is each of those customers worth to you longer term beyond just selling them tickets?

Hey, Joe, let me go back to the first answer by the way. I think Scott hit the nail right on the head. We don't disclose the same way. If we did, the difference in valuation would be much -- or the difference in the numbers that you cited would be much smaller. And so as we mentioned, we're going to work to find a way to disclose this really valuable business in a way that people can understand better because it is unique and very attractive. I think the question you asked about driving incremental revenue, I don't think that's limited to simply MileagePlus members. We communicate with a lot of customers, we carry a lot of customers, we have a lot of this on the website. And we've talked a lot about different ways we can monetize or do a better job of monetizing the eyeballs that reach our website and the members of our mileage program and how to enhance our mileage program. So, I think that, that hasn't been the first priority. We're focused on the things we talked about at Investor Day, which were kind of foundational. But it is the focus of ours, and we've had a number of discussions and at some point, we will really put a lot more time and effort into backsliding the opportunity there, which we do agree with you it exist and is quite substantial but really hard to quantify it.

Thank you very much.

From Barclays, we have Brandon Oglenski. Please go ahead.

Hey good morning and thanks for taking my questions and Oscar, appreciate the comments. Accidents happen and I think your hard-working frontline in place probably deserve a little bit more credit than all the negative media attention. So hopefully, we can put this behind us. But from an investor perspective, I think, Scott, what folks are worried about here is that we saw the capacity increase domestically in the past month, one and a half. The concern here is that maybe we're a little bit more focused on market share than margins. You've benchmarked to Delta publicly. Their guidance for 2Q is a good bit ahead of you here although you are showing a lot of sequential improvement in 2Q as well. So, how can you re-ensure your investor base here that this capacity addition indeed is restructuring the network to help you capture that margin Delta and that we should be thinking this is going to be quite accretive as we move into 2018?

Well, look, we used the term -- I try to avoid actually market share and try to say natural share more often than market share because this is not a play to go get market share. This is really about restoring United to its natural share. And United get a lot -- took a lot of accidents in the past three to four years, which caused it to lose its natural share and which hurt its financials. And you guys used to get on this earnings call and beat them up about why aren't your financials good. And you gave them a cure for that, which was cut capacity, cut capacity, cut capacity and it just made the problem worse. And despite taking the same medicine quarter-after-quarter as the numbers got worse and worse and worse that was part of the problem when the airline was cutting capacity and taking regional jets out of places that set the network like Rochester, Minnesota and redeploying them in places like Newark to Atlanta, in order to keep capacity low. That was driving margins lower. And so I'm trying to be careful to say what we're doing is restoring United to its natural market share, to a position it was in the past, and it's working so far. I mean, it's actually working faster even than I would have thought, the fact that our guidance with this cutting capacity is for RASM up 1% to 3%. And by the way, we've got number of issues that are driving about -- our flown PRASM is actually higher than that. We've got some accounting issues that are going to be 50 to 70 basis points headwind in this quarter. Those are just the things that happened, but our core performance is even stronger. I mean, we just -- early on, we feel really good about how well this is working. It's logical. This is not trying to go invade someone's hub. This is about restoring United to where it should've been and we had some unforced errors. And we were double faulting and giving points to the competitors, and we've stopped double faulting and that, I think, is just going to be getting us back to our natural market share. I don't think it's disruptive. I wouldn't describe the reason that we're doing as disruptive. We're just returning to where United's natural market shares. We're going to be very careful to calibrate how it's working and how we're doing. We're only a few months into this, but I tell you, we're off to a really good start. We won't be perfect, we'll stumble. I mean we had a stumble last week in operations. We'll have stumbles on the commercial side, but we feel really good about the trajectory that we're on.

And I would just add, Brandon, and reiterate what I think I said a couple of times publicly. This is a thoughtful approach with lots of team members involved. Andrew Nocella has just joined us, and joined the team and is really in charge of most of that day in and day out. So really thoughtful, but at the same time opportunistic because it is a unique opportunity as Scott outlined that we have and the list of opportunities continues to be a fairly large one, how we do it in a thoughtful balanced way is sort of the course of the day. But I can tell you that market share is not a conversation we have in this room or with our board, it is all about margin. And so, again, I just want to reiterate that point.

Okay. Oscar, I appreciate that. But I think you even said it publicly before this is a not a shift in long-term strategy that United is about to grow capacity now at or above GDP. This is, indeed, a shift in the network, is that incorrect?

I'm sorry?

Yes, I think that's probably correct. I'm not sure I'd say exactly that. This is not an attempt to go build an empire and go win the market share. It is an attempt to restore United to its natural position. And once there, I would anticipate we will be growing in line with GDP.

All right. Appreciate it.

From Bank of America, we have Andrew Didora online. Please go ahead.

Hi good morning everyone. Thank you for question. I guess, Scott, asking the capacity question another way, we can see there's a three to four percentage point pick up in your main line utilization in the back half of the year from June through December. This does put you ahead of where the other legacies are and kind of closer to your big LCC competition. Is there the ability to push this even -- is there the ability to push this even higher or you've kind of maxed out with where you are on the current fleet?

Okay, you're just talking about our utilization?

Yes, main line.

Yes, certainly in the back half of the year, if we wanted to, we could push utilization higher. The utilization is lower in the first and fourth quarters because demand is lower. And so we could push it higher, but -- and not -- to guarantee that we won't change it at all, but it's a much bigger hurdle. It's operationally easy to push it higher, it's financially harder to justify pushing it higher in off peak periods.

Got it. And then just -- haven't had much discussion on Trans-Atlantic, the numbers in 1Q and the 2Q guidance was actually much better than I was expecting given all the -- low-cost competition coming on. What have you -- what are some of the actions you've taken on the Trans-Atlantic to help offset some of this kind of new flying that's coming in?

So, at least for the Star Alliance and so forth, United and flying to the Star Alliance countries, we have not restructured pricing in those markets. And the Sky Team and Oneworld Alliance, pricing has been restructured and lowered. We keep track of the lowest published fares by AP across our whole system, and those aren't always selling fares because yield management bucket sell out at different airlines. But the Sky Team and Oneworld markets fares -- advance purchase fares are down, call it 20% to 30%. They're down about 10% in the Star Alliance markets because there are growth of low-cost carriers and other things that drive those down, but our pricing is much better in those markets than in the other markets. Now, of course, we carry a lot of revenue to those countries, we carry a lot of revenues in the U.K. and to Paris, so we're impacted by that. But we are less impacted by that. Also, at least, in this portion of the year, we're disproportionately selling U.S. point of sale and U.S. point of sale is really strong. I will caution you that as we move to the back half of the summer, the normal demand pattern shifts to European point-of-sale. And so I would expect RASM to be still be high-capacity. RASM to be under more pressure in the back half because once people starts going back to school here in the U.S., the second half of that peak summer season is really much more about Europeans coming to the U.S. and so I'd anticipate in the third quarter a little more weakness just given the European point-of-sale was weak -- was strong.

Great. Thank you.

From Morgan Stanley, we have Rajeev Lalwani. Please go ahead.

Scott, a couple of quick questions for you. Just first, on your comments on restoring natural market share. What's the timeline to actually get that? Is that a one, two-year thing, a 10-year thing? How are you envisioning it?

I think we don't know yet, that's for TBD. And I don't think we can --- even if we could do a complete analysis and it just depends on what -- on how the markets evolving and how the new flying and new routes are going to be doing. It's really bottoms up analysis, We're not trying to do a top down and say, here's where we're going to be X years from now, we're doing bottoms up one by one, we're watching the performance of those routes as we up-guage them, or as we add new routes. And it's going to be a judgment that's based on how those things are doing when we get to the point where we're adding flying, and it's not margin accretive, then we'll know probably reach that point. But that's probably going to be the metric where we've decided we've reached that point.

Okay. And post your decision to adjust your capacity for the year, what kind of response have you seen from some of your peers and some of the markets where you're at, or have you not seen any real response?

Look, it's -- we're trying to do it what's right for United Airlines. And because what I think we're doing is really about -- we're not trying to invade someone's market, or do -- we're not trying to create a competitive battle, we are trying to compete that I wouldn't have expected and haven't seen much response. I mean, look, take a market like Newark to Atlanta where 5 years ago, we flew 8 mainline flights or call it 150 seats per flight, and so we had 1,200 seats a day in that market. Delta flew 12 mainlines so you can call it 12x150, so they had 1,800 seats. We were 40% of the market; they were 60% of the market. We shot that down to 6 50-seat regional jets, so were down to 300. And so we were -- and Delta stayed at 1,800 that whole time. And so we were one seventh of the market from 40%. We've now quadrupled our capacity and gone back to 1,200 seats today. And we're back -- right back to where we were before. We're at 40% of the market. I think that's probably the natural share between Newark to Atlanta. Atlanta is a bigger hub with more connectivity and that 40-60 ratio is probably about right. Is it possible that Delta is going to decide to quadruple capacity and go for flying -- in every bank, they're already flying every bank, 12 flights today, are they going to try to fly 48 flights today? I doubt it. That hasn't happened. It wouldn't be rational. So I guess I'd say because of the kind of capacity that we're adding or we're re-upgauging, some of those hub-to-hub markets, and we're adding competitive capacity or adding capacity in places like Chicago to Rochester, Minnesota, we didn't anticipate a respond and we certainly don't think we've seen one. And that's about all we said now.

If I could sneak in one quick one. Scott, you've provided some good color on the Trans-Atlantic market. How are you thinking about Asia?

Well, Asia has been the region under the most pressure because the capacity -- incredibly high growth in capacity. As we get to the second half of this year, we're through the bilateral, particularly to Beijing and Shanghai so capacity growth will moderate in those cities. There are still awful lot of capacity coming from secondary cities. So United is one of the first -- well, the only U.S. airlines -- one of the first airlines to the party and flying to those secondary cities. But it's -- that's going to continue to be a challenge, particularly with the kind of subsidies that people are getting to open up new routes out of China from secondary cities. But the core of China, which is really about Beijing and Shanghai looks like capacity will moderate in the back half of the year. So, we're hopeful that the Pacific PRASM will start to improve in the back half.

Thank you.

From Evercore ISI, we have Duane Pfennigwerth. Please go ahead.

Hey, thanks. I was hoping to hear from Greg Hart. Is he on the line?

Yes.

Hey Greg. As you're thinking about this plan to grow domestic capacity, nearly 6% in the June quarter, it would be great to hear from you, your level of involvement in that aggressive plans, what preparations you've made, what lead times look like for staffing and training. And then what gives you confidence that United historically more careful approach to utilization flying is now able to change?

Yes, thanks for the question, Duane. I would say that we've been working on our capability to do this sort of thing for years, and this isn't something we started working on over the past couple of months. We've been focused on developing systems processes, the health of our fleet and lots of other things to make sure that we had the capability to do this. My team has been involved, along with the finance team and Scott's team in every step of the way here and in fact, I feel really comfortable as does the rest of the team that we're going to be able to deliver on what we've committed to and our performance here before would suggest that we've got a great structure in place to allow us to do that. And of course, our employees are really excited about the opportunity to grow the airline again.

Okay, I appreciate that comment and that it was years in the making. It's -- it is keen to surprise your finance team for what it's worth when this first started to show up in the schedules. With respect to calibration which, I think, is the most interesting word I heard on this call, United has low relative margins. Those margins are still declining and the company's proposed solution to correcting that is a higher growth rate. So going back to Rajeev's question, how will you measure if that proposed solution is working? And I think investors deserve more than kind of a 4-year goal. What is the timeframe by which you'll measure if it's working that would lead to potential calibration?

Look, we're measuring today and our principal metrics are going to be absolute and relative margin. That doesn't mean quarter-to-quarter because there's going to be fuel price spikes and there's going to be fuel price decline and there's going to be timing of labor deals at our airline or other airlines. But we look at our relative and absolute margins, and we look at it over kind of a trailing 12-month period, and it adjust for things like fuel hedge losses. And those numbers look like we're doing a good job today, and we feel pretty confident. We believe that, that's going to work going forward. I mean, you look at least relative to Delta. In the first quarter, we had higher RASM, better CASM performance, so a lot of other moving pieces in that hedge losses and things that make the numbers a little hard to look at. But that would imply that we're closing the margin gap. Expect we will do so; continue to do so as we move through the rest of the year. And we just -- we feel really good about the path that we're on. We think we are moving towards sustainably closing both the absolute improvement in margins and relative to RASM gap, but that's what we're going to look at and we're not waiting for you to look at that, we're looking at that every day.

And I would just cap it off with that that is big component of our long-term compensation plan.

Thank you. Ladies and gentlemen, this concludes the analyst and investor portion of our call today. We will now take questions from the media. [Operator Instructions] From the Associated Press, we have David Koenig. Please go ahead.

Yes, good morning. This is for Oscar. I know you're talking about April 30, but I wonder if you could give any more light on what you're thinking about, and specifically are you considering in response to what happened last week on United Express, are you considering simply ending involuntary denied boardings with all the sales policy changes that, that entails.

Hey David. We are looking at a broad array of issues that affected not only that situation or our broader customer experience. And so we are hard at work at that and have been for the last few days and I'll ask all of you to wait until that time when we talk about it.

You can't rule that in or out?

I think I would rather wait until we've done the full work and then we'll report on it next week.

From Bloomberg News, we have Michael Sasso. Please go ahead.

Yes. There's certainly was some conjecture that somebody could lose his job over the situation last week. Can you say at the board level or in the management level, was there any of that founded? Was there ever talk of anyone losing their job within management, lower down?

This is Oscar. Michael, the buck stops here, and I'm sure, there was lots of conjecture about me personally. I think I've met with the board and the board has met independently and we've had fulsome conversations that I'll be involved in some of that work that we're doing, going forward as well as they always have been. I have issued the letter of support, but to your specific question, again, it was a system failure across various areas. So no, there was never a consideration for firing an employee or anyone around it.

From THE STREET, we have Ted Reed. Please go ahead.

Thank you. Speaking about changes comparisons with Delta. Delta always says they have a revenue premium. This could -- they said 108%. Do you have a revenue premium to the airline industry?

Well, Ted, I hate that metric because if we calculate the numbers here at United, yes, we have a revenue premium and yes, it's higher even than Delta. American also, by the way, when I got there said they had a revenue premium. Because everyone makes all these adjustments to the numbers on stage length and density and a whole bunch of other stuff and so with all the caveats everyone calculates that they have a revenue premium. I think margin is what matters. You can make your revenue premium go up by taking a row of seats off airplanes, for example, and that makes your RASM get higher. You could fly only first class seats on airplanes, and that will make your RASM higher and we give you a revenue premium and have a real cost problem. And so I think looking at margin, we are focused on margin, in closing the margin gap and improving our absolute and relative margin.

All right. I would also like to ask there was this reaction in China to the incident. Have you seen any impact on China bookings because of that incident last week?

We've only had a few days and it's a small numbers problem. There's a lot of volatility in bookings for point-of-sale China, so it's really too early for us to say anything about it.

And Ted, it's Oscar. I would add that there certainly has been some sentiment and I did visit with the Chinese Consulate here locally to discuss that with them. And I will be heading out there in a couple weeks to have further conversations with customers and related governmental officials.

You mean in reaction to this, you're going to make a China trip?

No, it's been a trip that was planned for some time. There was a lot of other activities going on. It's just a normal travel that I'll do as we run a fairly global airline and we have lots of occasions and employees out there as well as customers.

All right. Thank you.

And from CNN, we have John (inaudible).

Hey good morning. A question about -- you just spoke about corporate customers earlier. How are you seeing an effect at all on leisure customers and in the overall trends in the wake of last week's incident?

Again, it's really too early for us to tell anything about bookings and in particular last week because it was the week before Easter, that's normally a very low booking period, so we just really don't have any quantifiable data. Our forecast for the quarter didn't change at all. We do a weekly forecast that stays to the tenth of a percent exactly the same as it was before, but it's just really hard for us to look at data in the week before Easter and have a good view of whether there was a measurable bookings impact or not?

And John, I would just add that I've sent out a personal note to a person who is legit, intimate things you can sent to hundreds of thousands of people but to our -- at least at this point, to our most loyal customers and the response rate has been pretty high and positive. Obviously, a lot of people have ideas and thoughts about how we can make things better. But in that particular segment of our highest end customers, there's been a lot of support.

And Oscar, in that same vein, I mean, your rival in September 2015 really focused on a creating more employee-focused culture. I'm curious just kind of to go back to the early parts of last week and your comments about emphatically supporting employees. And that statement seems to rile people up more in regards to the characterization around Dr. Dao's behavior. I just want to kind of go back and kind of get inside your head for how you were trying to walk a line between your relations with your employees and your relations with your customer, and if you feel you got that balance right early in the week and how you kind of felt you need to make a pivot later in the week?

Thanks. Listen, customers have always been first, but I think the evolution of our company, we needed to regain the trust of our employees first before they can do that. And if you think about -- your question about what's in my head and why it was important to support our employees as well as keep customer focus is that customer service at the end of the day, is not about a policy or a procedure or a tool, it's about values, human values, and that we cannot lose because if I lost that with that many thousands -- tens of thousands of employees, we'd be in a very much more difficult situation. So as far as I look at it, it's about values, not protocol.

And finally from Flightglobal, we have Edward Russell. Please go ahead.

Andrew, I wanted to ask a bit more about the 12 737 that are purchased off lease. I was wondering if you can break down with the variants are 700, 800, 900 and who the lessors were that you purchased this from?

The aircraft were split evenly between 737-700s and 737-800s and the seller was GECAS.

Great. Thank you very much.

Thanks.

All right, thanks to all for joining the call today. Please contact Media Relations if you have any further questions and we look forward to talking to you next quarter.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.