United Airlines Holdings, Inc. (UAL) Q2 2017 Earnings Report, Transcript and Summary

Good morning and welcome to United Continental Holdings Earnings Conference Call for the Second 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 second 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 our 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 Executive Vice President and Chief Financial Officer, Andrew Levy. In addition, we have Executive Vice President and Chief Operations Officer, Greg Hart, and Executive Vice President and Chief Commercial Officer, Andrew Nocella in the room available to assist with Q&A. And now I’d like to turn the call over to Oscar.

Thank you, Julie and good morning. Welcome to a terrific second quarter, strong financial results and even more incredible operational results. And these developments that we've seen today and frankly, I’ve seen over the past couple of quarters across the board are not only obviously the direct result of a lot of our great employees, but also the leadership in this room. And I think it is a direct result of the work we've done in so many areas to reengage the United family for both our customers and for our employees. And so as you think of our customers, I want to thank them for their continued loyalty and support. We continue to find new and better ways to service them and make them more comfortable on our airline. But we’re here about financials, so on the financial side, I’m turning to Slide 4. Our earnings per share excluding special charges was 5.4% higher than last year at $2.75. We reported pretax earnings of $1.3 billion, with a pre-tax margin of 13.2%. Both of those of course are excluding special charges. Total revenue was 6.4% in the second quarter. This is the highest level of quarterly revenue that we’ve had since the fourth quarter of 2013. Also in this quarter, we repurchased $422 million of stock at an average price of $74 per share. Secondly, on the operational side, we finished this quarter as the Number One airline amongst our largest competitors in completion, on-time departures and on-time arrival. This is the first quarter United’s operation has finished Number One among our peers since the merger and we look forward to continuing to build on this momentum in the second half of the year. We've also made meaningful strides and are executing on ten changes we announced in April on the customer service area and so to better serve those customers and really empower our employees, and so the initial results are very encouraging, specifically around the issue of involuntary denied boarding. Since we put different things into inception back a couple of months ago, we’ve achieved almost 85% reduction in involuntary denied boarding. So that's a good metric that we’re monitoring across the board. And it's important to make the point that these changes amount to a lot more than just a policy shift. Really is more of a, you know, I’m going to use the term paradigm shift in our culture and mindset of our employees and our management. So it’s about providing our people with tools, but also the imperative to solve problems kind of in the moment for our customers. And so we're excited about those developments and you’ll hear more coming from us soon. And during the quarter we also continued to execute on our strategic initiatives that we laid out at Investor Day last fall with a primary objective of improving our absolute and relative margin performance. We feel incredibly good that we're on the trajectory that we laid out at Investor Day and so it’s a solid path for us that we’re very excited about. So with that I'll turn it over Scott to discuss both ops and the revenue environment.

Thank you Oscar and thanks everyone for joining us today. I'm going to start by talking about our operation. With all the decks and slides that we've created in the past year, for those of us at the United team, this is probably our favorite. You can clearly see that in the second quarter, United ran the very best operation amongst our largest competitors. It was true across the board, with great departure performance, on-time arrivals, completion factor and mishandled baggage rate. We just couldn’t be more proud and thankful to the United team for the incredibly reliable operation. And this improvement is coming from all parts of the company. It starts from getting blank to the gate, ready to fly on time and while we don't traditionally show you a lot of tech op statistics, our maintenance team is doing a great job with margin improvement in tech ops metrics that I recall seeing at any airline, anytime, anywhere during my career. At the airport, our agents and ramp team are turning airplanes and getting them out on time. You can see our industry leading departure performance, but dig a little deeper and you’d find an almost 100% improvement in quick turn performance and many other metrics showing huge year-over-year improvement. Globally, our ramp team has set new records for mishandled bags in 22 of the last 24 months. And once our customers get on the airplane, our flight attendants are just doing an incredible job. In fact we get more positive feedback on flight attendants then we get feedback on anything else. That’s an amazing statistic and a testament to our great flight attendants. Our pilots are the day to day leaders of the airline on the front line and without that front line leadership none of this would be possible. And finally, our network operation center has the most difficult job in the industry given our hubs are located and the airports most likely to experience air traffic ground delay program and they do a phenomenal job quarterbacking the entire operation and quickly recovering after air traffic control or weather events. I know some of the investors on this call are really more interested in what I’m going to talk about on revenue, intended to discount operational performance, but great operations are the foundation that a great financial airline is built on. First, over time we will win more customers by being the best operationally. And even in the short term, our CASM performance is much better when we run a good airline as evidenced this quarter by our strong CASM results. So thanks once again to the entire United team and to the operations and leadership led by Greg, who is here in the room with us today. Turning down to the revenue environment, demand was solid, we performed in line with our passenger unit revenue forecast during the quarter, despite softer than expected demand in the Pacific and despite higher year-over-year completion factor. Kudos also to the cargo team for a 22% increase in revenue in the quarter, with an assist to the operations because one of the keys to winning cargo business is running a good operation and delivering that cargo on time. Our consolidated PRASM was 2.1% higher year-over-year for the quarter, just above the midpoint of our guidance provided in April. All entities except the Pacific were PRASM positive in each month during the quarter. Domestic revenues were 2.4% year-over-year, a very solid result on 5.6% growth in ASMs. Atlantic performance of 3.3% was better than we forecasted, boosted by strong US point of sale and healthy front-cabin demand. Latin PRASM grew 7.8% year-over-year, driven by the timing of Easter and strength in Brazil, Caribbean, and Mexico beach markets, which more than offset weak performance in the Mexico business market. PRASM in the Pacific was weaker than we initially expected and declined 5.5% this year, worsening from the decline in the first quarter. This result was nearly 400 basis points worse than our initial expectations due to softer demand in China and Hong Kong. Looking forward, we anticipate third quarter consolidated PRASM to be about flat. Domestically, we expect PRASM to be also to be about flat given higher industry ASMs and shifts in holiday timing. The domestic market has absorbed our growth well and we’re pleased with the performance of our new summer flying from a revenue, operational, and financial perspective. The Atlantic PRASM is also expected to be flat as the demand pattern shifts to European point of sale in July and front-cabin demand is pressed by European vacations in July and August. So that’s being somewhat offset by stronger Europe. The Pacific remains our most challenging region and probably the only region that we’ve seen an actual slowdown in demand. But we are hopeful that a reduction in industry capacity growth by the fourth quarter will help future PRASM results. United capacity growth slowed in the Pacific from 6% in the first half of the year to just under 1 in the second half of the year. Additionally, we expect that retiring our 747 fleet which we’re excited to do, but it will help the second half profitability in the Pacific. Latin PRASM remains a bright spot, but second quarter growth was likely the peak growth rate for PRASM during the year given the Easter tailwind in 2Q. As we get into the back half of the year, comps will start to get a little bit tougher as we lap the start of the Brazil recovery. Turning to Slide 8, our capacity outlook for the third quarter is up approximately 4%. As it was in the second quarter, we expect that growth to be biased towards higher domestic with an increase of 5.5% to 6.5%. Our full-year outlook for system capacity growth stayed the same at 2.5% to 3% and is consistent with our guidance from March 15. I think everyone probably knows this, but our capacity guidance is based on scheduled capacity. In the first half of the year, our ASM growth ended up higher than we’d originally expected as a result of higher completion factor. We couldn’t be happier to see that because it means running a really good operation is good for our customers and our investors. If this trend does continue in the second half, our full-year capacity growth will be towards the higher end of the range. On Slide 9, we are delivering on our promises from Investor Day, which includes executing on all of our strategic initiatives. In addition to the great progress we’ve made improving the operational integrity of the airline, we’ve rolled out basic economy fares across our mainland US domestic system and we’re pleased with the initial results and operational manifest that come from fewer - having fewer gate checked bags. We continue to optimize our pricing strategies related to basic economy and we remain confident in the $1 billion contribution from segmentation by 2020. This summer we added new margin accretive flying in 15 domestic markets and we’ve up gauged five domestic markets from regional to mainland. We're growing faster than any of our major competitors, something that hasn't happened here in a very long time. We're doing this by adding efficient margin accretive flying this summer, 75% of our growth is being driven by gate, with 25% coming from improved fleet utilization. United has unique network opportunities and we are capitalizing on them. Another example of this is our plan to remake several of our hubs, which further improves connectivity in our domestic network. We’ll start with our Houston hub this fall by taking our bank structure from ten to eight. We expect connectivity in this hub will increase dramatically with 50% more connection opportunities in the largest bay on the same number departures per day. In 2018, we also plan to rebate our Chicago and Denver hubs. Rebating our hub, up gauging the airline, improving utilization during peak period, and adding [indiscernible] already achieved that's why these are unique opportunities for United. On revenue management, we continue to optimize our yield management posture and we’ll roll out the first phase of the Gemini yield management system in late August with a broad rollout in 2018 consistent with our Investor Day plan. We’re off to a great start on making United the best airline in the world. It's working really well so far and we’re optimistic about our opportunity ahead and our ability to continue to improve absolute and relative margin performance. We run the best large airline operation in the nation in the quarter. And we continue to close the margin gap this quarter as we’ve been doing for the past several quarters. United team is truly doing an outstanding job. With that I'll turn it over to Andrew to review the financial results.

Thanks Scott. Yesterday afternoon we released our second quarter 2017 earnings and our third quarter investor update. I'll discuss both our results and outlook at a high level, but please refer to those documents for additional detail. Slide 11 is the summary of our GAAP financials and Slide 12 shows our non-GAAP results. Adjusted earnings per share increased 5.4% to $2.75 and we reported pretax income of $1.3 billion which represented 13.2% pretax margin excluding special charges. Turning to Slide 14, nonfuel unit costs increased 3.1% on a year-over-year basis, which is better than our initial forecast of up 4% to 5% mostly due to improved operational performance, higher ASM growth, sustained cost reduction efforts and timing of certain expenses. We expect third quarter CASM x to be higher year-over-year by 2% to 3% and our projected full year 2017 CASM x increase remains unchanged between 2.5% and 3.5%. Turning to Slide 15, we ended the quarter with $6.6 billion of unrestricted liquidity which includes of $2 billion untapped revolver. We are comfortably in excess of our stated liquidity target range of $5 billion to $6 billion. During the second quarter, we generated $1.6 billion dollars of operating and $314 million of free cash flow. We also contributed $160 million to our pension plans and continue to forecast a total contribution of $400 million in the full year of 2017. During the quarter, we repurchased $422 million of our share at an average price for $74 bringing our repurchases in the first half of 2017 to $735 million at an average price of $72 a share. As of the end of the second quarter, we had approximately $1.1 billion remaining in repurchase authority. Turning to Slide 16, full-year 2017 CapEx is now projected to be between $4.6 billion and $4.8 billion which is $400 million higher at the midpoint than our prior guidance. The slide provided some details for this increase which includes higher non-aircraft CapEx, more free delivery deposits and used aircraft transaction. Let me give you a little bit of color on each of these categories. We will invest between $200 million and $300 million more than forecasted earlier this year in IT, ground service equipment, facilities and other critical areas of our business. Technology projects are the biggest area of non-aircraft CapEx and we are increasing investment in our digital platforms, applications development and strengthening our technology infrastructure. On the fleet side, there are two buckets driving higher CapEx. First $50 million more in PDPs, represent the net impact from a number of changes to our new aircraft order book. The deferral of the first four A350 aircraft out of 2018 to later periods is accounted for in our new projection. Please note that today we will have no further updates to provide about our A350 order. Second, $150 million is related to the purchase of 21 narrowbody aircraft off lease. These include 737NGs, A320 Series aircraft and 757s which have an average age of 21 years. We expect to reliably operate these aircraft for many years to come. The acquisition of used aircraft will be difficult to forecast since these transactions will most often times be opportunistic. We expect this will continue to be an important part of our fleet strategy and we’ll effectively reduce average fleet CapEx. We continue to expect 2017 to the high watermark for CapEx and expect 2018 CapEx to be approximately $1 billion lower. We will provide a more refined 2018 forecast later this year. Lastly, Slide 17 as the summary of our current guidance including third quarter’s projected fuel price range using the July 13 curve. The range provided for capacity, revenue and costs imply a third quarter pretax margin of between 12.5% and 14.5%. In conclusion, we are pleased with the results in the first half of 2017 and remain confident in our ability to continue to drive earnings improvement. We are managing the business to maximize margins and are focused on creating long-term value for our shareholders. With that, I’d like to thank you all for joining the call today. And I will now turn it back to Oscar.

Thanks, Andrew. And again, one just quick last shout out to the energy and enthusiasm of our employees who made such a strong quarter possible. And so with that let’s turn it back over to Julie and we’re happy to take your questions.

Thank you Oscar. 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 Julie, and the question-and-answer session will be conducted electronically. [Operator Instructions] And from Wolfe Research we have Hunter Keay in the line. Please go ahead.

So Scott, you said that Denver is your most profitable hub, obviously it looks like Frontier has announced a pretty big growth push there with the - I think they’ve called it natural share. I’d be curious to have sort of your early take away of what that means for you guys there and if you care to talk about how you might deploy basic economy that means just fee, that is just sort of the first sort of like production test of that product or just any broad thoughts would be appreciated. Thank you.

Sure, thanks Hunter. In the near to medium term, anytime we have capacity growth from anyone but particular a low cost carrier it’s going to lead to some pricing pressure. Over the longer term however I view this really having watched the ULCC growth over the last decade this is the best news that I’ve heard in the last ten years. I have known and look, what they said is, they’re going to run a connecting hub-and-spoke network in Denver. The model that they used to have which led them to bankruptcy, but they’re pivoting from what has been the most successful models, point to point ULCC strategy around the world to going back to trying to copy what the network carriers do and run it connecting business model. And the reason I view that is that best thing that has happened in the last decade is because I believe for many years that the ULCC business model can’t work when a network carrier decides to compete on price and particularly once we’ve been able to roll out based economy. And while I believe that for a long time this is the first I guess public validation that one of the ULCCs is throwing in the towel on the point-to-point business model and switching to a network model. And look that’s a lot more complicated. It's one thing to run a point-to-point network, but when you're trying to run connecting traffic, you got to slow down the aircraft utilization because you got to wait for passengers and employees to connect and airplanes to be timed correctly. You got to staff up, because you have peaks and valleys, you got to connect bags, which is one of the most operationally difficult thing we do. Today if Frontier has a flight from Orlando to Denver and it’s delayed by two hours, all they have to do is run the flight two hours, but the customers still get there and it’s not a good experience, but it’s not the end of the world. Tomorrow when they’d have half the people in that airplane that are connecting, if that flight is two hours late, their choice and they got one flight a day to all these markets, do we delay everything else for the rest of the day by two hours or do we have half the people on that airplane go to a hotel and spend the night or do we buy [indiscernible] half of the people in that airplane tickets on United to get them to their destination that day. It is exponentially more complex to run a connecting model. And for Frontier to publically acknowledge that the old business model has run out of growth opportunities in the middle of an IPO process I just view as a phenomenal validation of everything we've done has worked and our ability to compete and win against them. And I can promise you they’re not competing on our turf and trying to get a network carrier in Denver, that is a battle I guarantee United will win.

Thank you for that thorough answer Scott, I appreciate it. A question for either you or Andrew, I suppose on this whole zero based budgeting concept. I think you know there's some success and there's some failure - stories of failure out there around that concept. I think like Heinz for example one of the worst places where it didn't work like that was supposed to. So it’s not always the slam dunk. Can you talk to me about sort of lessons learned that you have seen from your own experience with it, what maybe you've learned from other industries and if it works does this represent incremental cost upsides to what you laid out at the Analyst Day or is that considered as a long-term guide? Thank you.

Sure, again hey Hunter, I think what you're alluding to is the fact that we're going to - we're starting a, we’re calling it a bottoms up budgeting process as we get ready to budget 2018. Look, I view this really simply as a way to understand the business at a greater depth of detail instead of just simply looking at changes year-over-year in terms of expenditures. We need to revisit the expenditures that we spend the year and make sure that everything we're spending money on continues to make sense. So it’s a big of a mind shift and it's a bit of a just a change in the way of thinking about the business. We're not approaching this with any particular cost savings target in mind. But I do believe that in scrutinizing our cost at a higher degree of detail throughout the organization that we will in fact find opportunities to save money along the way. But this is a journey, it’s going to take time and it's a different way of going through the budgeting process. So unlike Heinz or some of the other examples, where perhaps the goals were more short-term oriented and removing cost from the business, I think that will just simply be an output overtime as we get more proficient looking at our cost base and that process is going to start this fall. Actually we've already started that process now, so.

And Hunter, this is Oscar. With regards to experience in other industries and I’ve done it in telecom, I’ve done it in railroads, I’ve done in soft drinks. I just think it as Andrew outlined, this is a normal process that companies go through and now that we're running better, we’ve always talked about taking out some of the safety cushion in operations is one area. So we are very cognizant of both the great trust we’ve built with our employees and with our customers and we're not going to be silly about a cost structure there and just about making sure we do normal things that businesses do. So we’re excited about that possibility that Andrew will lead.

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

Scott, you mentioned, it’s in the slide deck and in your prepared remarks that the new summer capacity in efficient and performing well. Are there any metrics that you can provide to help us understand this because I think the point gets lost a bit given that that 3Q PRASM and margin guide would suggest otherwise.

Well, I guess I’d start with your back part of that. I don’t think that the pre-3Q PRASM or margin guidance suggest otherwise. And look as we move from -- what I guided really reflecting as we moved from 2Q to 3Q, one, on a sequential basis, there are a bunch of calendar things that are probably a point [indiscernible] just calendar issues. That of course is an industry issues but you know not have a or Easter being in the second quarter, with movement of the Jewish holidays in the third quarter, timing of the Easter, just even the day of the week there is extra Friday in the second quarter, extra Saturday in the third quarter, all those things are a point. And then we also got industry capacity ramping up particularly in the second half of August and into September at the off-peak period and so our guide is really reflecting those things. Our capacity increased, just started, I’m sure we’ll come up with some more things to share but only been flying for six to seven weeks it’s a little early to have anything definitive and share with you but I’m sure we can come up with something to talk about more in the future, but look you can just look at this quarter from a margin perspective, we’ll only got one airline to compare to, but at least stripping out the hedge losses, we have in fact [indiscernible]. It’s the fifth straight quarter that we’ve closed the margin gap that’s pretty good track record. And we just feel really good about how well this is going. I’m particularly proud of the ops team because switching from a slow growth or no growth mode to growth is not easy operationally and we've done that. At the same time our team is putting up absolute records in terms of operational performance. So really across the board we're excited about how things have played out so far and very optimistic about the future.

And just my second question, Andrew, I know our CapEx will be down to $1 billion next year. But I think it still implies a tick-off from your prior $3.3 billion to $3.5 billion guide. Is this just a change in the order book that you've announced over the past few months or is there something else in there to think about in 2018?

Andrew, it's really nothing to do with the order book. It's really more of an - well, first of all let me start out by saying that we want to give you directionally rough order of magnitude sense of ‘18 versus ‘17. And I think in the comments I made, I did state that we will give you a more refined estimate later this year. But it's just rough order of magnitude I think the main difference is just a higher level of non-aircraft CapEx expenditures, we think that some of the investments that I touched on as far as categories and investment that that will continue next year and that’s our expectations as we sit here right now. So it really doesn't tie into the new order book and I don't expect any changes in the new order book that would affect 2018 CapEx to occur between now and the end of the year.

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

Scott, does the guidance embed continued strength in operational performance or are you assuming that you normalize to something that you perhaps achieved over say a longer period of time versus the second quarter?

I not only made it explicit to something, either on RASM or CASM about continued operational performance. It’s sort of a continuation of the trends from a RASM perspective. So I guess that would implicitly assume that operations continued to run well. Really doing things on a sequential basis. And from a CASM perspective, I’ll let Andrew talk about anything on CASM.

I think we made some assumptions about how meetings certain targets would affect profit sharing or operational bonuses that are based on meeting certain targets. We do expect to continue to operate the airline at a similar high level that we’ve been as far as estimating a higher completion factor. We really haven't taken that into account on a go forward basis.

And any rough thoughts towards your 2018 capacity plan at this point?

Not yet.

I mean have you filled out all of the catchment area flying, the stuff that you weren’t already serving that you’ve added this year. Would you say that process is largely complete?

No, but you shouldn’t try read anything into that about 2018 capacity.

From Deutsche Bank we have Mike Linenberg. Please go ahead.

I just have a couple of fleet questions here. The four A350s, does that represent 100% of your A350 deliveries in ’18?

Yes, it does Mike.

And then just, the dozen MAX aircraft that are being accelerated into 2019, are those MAX 8. And then, if they are, are those types of airplanes in a two class or two plus class, with those airplanes makes sense Transatlantic for you.

Mike, let me handle the first part and then maybe Andrew or Scott can talk about the network use of that. First of all, their MAX 9 aircraft, so they are not 8s. [indiscernible] but those MAX 9 aircraft and those 12 aircraft as you recall we deferred 65, well we deferred 61 737-700 airplanes that was about a year ago, we did that less than a year ago. Four of the 65 became 800s, 737-800s which we’re delivering this year. And the balance of the 61 positions had been kind of put out there in the future - in different way out in the future with Boeing. And what we're doing here is that these 12 aircraft are kind of first 12 of those 61 that we've identified a delivery slot and they’re coming in in 2019 as we indicated in the release. So as far as the suitability of the MAX 8 for Transatlantic, I think Andrew is probably going to take that one.

Yeah. I think right now, Mike, we have plenty of 757s in our European configuration that are flying around in the domestic system. So I don’t think we have any rush to move into flying 737s across the Atlantic. But it’s something we’re going to look at for the medium to long term. But it’s not something we plan to do in the short term at all.

From Cowen and Company, we have Helane Becker. Please go ahead.

I just have a couple of questions. One, I think one of the things that you're doing to improve consumer relations has to do and denied boardings and I think, Oscar, you may have mentioned this as well with the program to encourage passengers to change their flights a few days in advance. And I'm kind of wondering how that’s growing the acceptance of it, whether that's driving more, knowing that they won't be bumped, driving more passengers your way.

Helane, this is Andrew Nocella. We are working on that pilot that does, what you described, we have not implemented it as yet and I would say it’s a pilot. So it’s really small. This is something that we continue to evaluate. We think it’s a great idea for our customers and for United Airlines. So more to come on this if it becomes something substantial, but at this point, we’ll likely launch the pilot in the next few weeks and the total number of passengers being moved in this pilot, you know, if they so desire to move, will probably be in the neighborhood of 50. So it’s really small scale, but we think it’s a great idea and if it works and our customers appreciate it a lot more to come.

Okay. Great. So we'll look out for that. And then I just have a question on CapEx and IT spend. Airlines were really early adopters of technology and haven't been able to keep pace in part because obviously there were financial issues in the last decade, but I'm kind of wondering as you think about IT spend over the next three or four years, can you just -- of your CapEx budget, should we think about that as being like 10% of the budget? Should we think about it as being a combination of new website, new retail to cut customer outreach in terms of the mobile app and so on as well as system redundancies, so that you don't get caught out with technology issues? Thank you.

Sure, Helane. Our technology spend, both this year and going forward I think will be all of the above, everything you mentioned. It’s application development, both customer facing as well as operationally beneficial applications, its infrastructure investments, including disaster recovery. That’s a big part of our spend this year. It is bringing in automation in parts of the business where we’ve had very little of that, including for instance, in our warehouses. We have a project this year we launched where we’re going to start to automate our warehouse, our warehouses in terms of our spare parts inventory. And there, I think you’re right, there is a big opportunity to bring technology into the business and allow us to increase our efficiency as a result of taking advantage of that opportunity. I think you’re also right that there are many, many years where we didn’t have the balance sheet or the wherewithal to be able to make these types of investments and we’re fortunate to be in a position where we can change that and that’s what we’re doing and that is, in large measure, why we’re spending more money this year in non-aircraft CapEx projects. As far as the pace of spend, I would assume it will probably be -- probably about a third of aircraft or non-aircraft CapEx will be in the IT arena, as far as capital expenditures, obviously more of it hits the OpEx line.

From Citi, we have Kevin Crissey. Please go ahead.

Maybe Scott, could you talk about corporate, whether it be share or performance relative to leisure in general.

Corporate was strong in this quarter with quarter that was – it was up 6%, our corporate business. That’s not the best metric, I mean, I’ll give it to you, but we can always make corporate going up by just signing more corporate accounts, but we also need the quality of our corporate accounts, but business demand is, I think, certainly, internationally stronger than leisure demand, but corporate demand was strong throughout the quarter.

From Raymond James, we have Savanthi Syth. Please go ahead.

Scott, maybe I can ask you, again, just how should we think about when you start to see the benefits to PRASM from three items. Like one is the kind of the increased amount of market presence. The second one is the basic economy which you just rolled out and then eventually, this Gemini rollout in late August, like when should we think of that showing up in unit revenue or maybe your unit revenue doesn’t perform in line with what you would expect, given comps or capacity?

So I’ll make one overarching point that our initiatives, the initiatives you talked about, some of those are, like Gemini is rather specific, but many of those are about margin. And you’re already seeing that, besides the second quarter, you’re going to continue to see it going forward. And I think so those are showing up in PRASM performance, I mean if you look at our second quarter, I mean domestically, bringing up one competitor compared to, but given our growth rate, but then given some of the issues in Delta last year, to be that close I think is really good about the result already. On those things, new markets was the first line you mentioned. Those aren’t on day one RASM accretive. You start flying to a new city, takes some time, around, but we typically think of that as about, on a domestic city, 6 to 12 month ramp-up for you to kind of get to full benefit. Gemini, [indiscernible], we already have some yield management benefits, but they’re not really in the system. I think they really just started in the first quarter this year. On the system, we’re going to have to rollout the first part of the new system in end of August, but I wouldn’t expect meaningful changes to revenue for a little while. And even when we do let out to the full system, those kinds of changes, yield management system, with the kind of changes and sometimes they take one step back to take two steps forward, because you turn off an old system that’s [indiscernible]. That process is going to start in August and in basic economy, we’ve got basic economy rolled out across the system, but we’ve been for the last couple of months, one of our big competitors essentially has it rolled out. They’ve done it in less than 1% of their system and there is a bunch of places that we’ve been uncompetitive from a pricing perspective. We haven’t been -- normally, we worry a lot about pricing competitiveness in the near term, we’ve been willing to be uncompetitive on price in the short term, as we try to get this sorted out for what it’s going to look like for the next 20 years instead of worrying about the next two months. But I think by the end of the year, we’ll have a position where everyone of the big network fares presumably will have rolled out basic economy around their system and at that point, I think basic economy will be more of a tailwind. It’s less of a tailwind right now, because on some of our competitors, the standard, you can get the standard product on our competitors for the same products that we get the basic product on United Airlines. That won’t be the case in the long run, but in the near term, we get benefits from selling up more customers, but I’m sure we lose some share as a result of that as well.

That’s helpful. Thank you. And if I may, just really quick. I wonder if there is an update on -- earlier this year, there was an announcement about kind of investing in Avianca, in Avianca Brasil, and kind of deepening the partnerships there. Is there any kind of progress on the investment or any kind of strategic initiatives related to that?

There is lots of progress, but none of them which we can talk about on the call today. We are fitting in to work with partners and we appreciate the, all of our Latin American partnerships and we hope to be able to have something to announce in the not-too-distant future.

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

Scott, actually a question for you, a higher level one, there have been quite a few developments since your Investor Day last year, can you just talk about some of the pluses and minuses since then that make it easier or harder for you to narrow the margin gap and meet some of the other commitments.

I’ll give it a shot. We, on the plus side, feel like we’re executing really well on all the initiatives that we talked about. We’ve done more work in yield management than we initially intended. We’ve grown more confident on basic economy, particularly when it rolled out everywhere. We -- the network stuff is a little, some of the rebanking is a little delayed as we got through the operational, making sure we can handle it operationally. As for the plus side, the operation is running better than it ever has in history and as I said earlier on, it’s the thing we’re probably the most proud of that really is a great foundation to build on the rest of the airlines. In the near term, so most of the things are going on plan or a little bit better than plan. In the near term, if there has been a headwind, geography is a headwind for us, that has nothing to do with margin gap closure. But for example, in the second quarter, if we just had applied our RASM performance to the Delta geography, that’s what we know right now, our RASM would have been seven-tenths of a point better. I mean that really is, we have big exposure to China and less exposure to domestic. And so with China doing worse, and domestic is doing better, we’re going to underperform on the system private level, not because we’re performing, but just because we have bad geography. Those things ebb and flow, so we don’t really think of those as margin gap one way or another, because one quarter [indiscernible] pretty good about the trajectory that we’re on.

Okay. And then actually Scott on the international front, as we move beyond the next quarter or two and I think you’re kind of alluding to this, where do you think the best opportunity is and how sustainable was some of the flattish PRASM we’ve seen, just given how much we’ve already improved over the last year or two?

Well, for United, we have more modest growth plans internationally. Our international network is fantastic. We are the best international network in the business. I think we have the most, highest profit margins in the business. Latin America is obviously recovering quickly. We’ve added some capacity there. We’re going to start our service. We’ve added a little bit in Europe. Obviously, Asia is the most challenged. I suspect we’ll continue to grow, but not grow quickly on the international line and our growth will kind of depend on what’s happening geography by geography. So it’s hard to predict this more in advance what Asia is going to be doing two years from now versus what the Americas is going to be doing two years from now. But I would anticipate modest growth at a much lower rate than the domestic growth.

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

Scott, just given the partnership that you guys have with Chase, I’m wondering if you could just talk to what you guys are seeing in terms of an impact from their rollout of higher reserve card, what that’s meant for your business in terms of spend and card acquisitions and maybe what you’re doing to make sure that the value your card offers consumers remains competitive?

Look, we’re having an awful lot of discussions with Chase. And we appreciate the partnership with Chase. We’ve gotten more engaged at a high level. So I have now a quarterly meeting with Gordon who runs the card portfolio at Chase and I believe that this should be upside in the future for us. It is one of the areas where we are currently underperforming, both Delta and American is probably a full margin point, it’s not a point and a half, the kind of performance that they’re getting. But this is about partnership and about making, getting to the world that’s a win for Chase and a win for United Airlines. We have done that before, we’re fortunate to have the management sitting next to me, Andrew Nocella who led those efforts at my last airlines and American has got a huge tailwind right now from the deal with the city and they have a great partnership with them. I believe we’re going to get, didn’t happen overnight and I believe we’re going to get there and I believe that Chase is committed to that and that we’re going to get to a win with them. But I’m not sure when we’re going to be able to have the kind of tailwinds that American and Delta have had, but I’m optimistic that we’ll get there, this is one thing that we haven’t spent a lot of time talking about, because we can’t do it alone, but I think the motivation is in the right place with our partners and that we will ultimately get a much better result out of the card, which will be good for United, good for Chase and good for our customers.

And then maybe just switching gears a little bit, I think there have been a number of things that have kind of improved the cyclicality of the business, but maybe one thing working against it is this, what seems to be a shift towards more corporate traffic away from leisure. I’m just wondering Scott or Andrew, if you could talk about historically, how, what the share of corporate traffic now is versus ten years ago and what that means for cyclicality?

I don’t think it’s dramatically different. It’s focused on these earnings calls, more than anywhere else. I don’t think it’s dramatically different. If you look at the places where it’s important like across Atlantic, but then you got leisure markets like Hawaii that are gaining more. And so there are puts and takes.

The only thing I will add is, I think we’re seeing strong premium performance across the globe other than Asia at this point.

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

Well, nice segue from Chase. First question for, that wasn’t deliberate, was it? First question, I know it’s in my wallet. First question for Andrew, look, the third quarter guide, I mean, it’s being met with disappointment by the market. My assumption is that if we set fuel to decide, your 2017 earnings plan is coming in a bit below what the ’17 plan was last November. My first question is whether or not that is the case, but more importantly assuming the things are coming in a bit below plan, can you point to what adjustments you’ve made in order to potentially get back on track? I mean, two, three, four initiatives that are incremental?

Well, Jamie, I guess, we start by maybe that we don’t agree with that view. I don’t think any of us feel that we’re off track in 2017 at all, even if you exclude the fact that fuel is indeed lower than what we thought it would be at the beginning of the year. I think the biggest difference we’ve seen on the revenue side is what’s been discussed already, which is weakness in the Pacific, China specifically, that fleet was not expected. That’s the only thing so far that we’ve seen that is a surprise. On the cost side, everything is progressing as expected. So no, I think we’re kind of hitting on all cylinders and doing everything we thought we’d do.

Okay. A question for Scott and I guess this builds a little bit on the theme of Savanthi’s question, but I’m curious what the basic economy RASM contribution is as it relates to the third quarter guide for flat domestic RASM. We were assure the basic economy was going to be immediately accretive, at least I think that’s what you said. So I’m wondering if that has proven to be the case, it would suggest that absent basic economy, your domestic RASM would actually be going down and I’m not sure that I understand what that would be?

So, on basic economy, I do expect it will be RASM accretive and immediately RASM accretive with its competitive product. And we said that exactly in the past, but that would have been the underlying assumption that it was going to be competitive and expected our competitors to get the full workout, but currently, they have taken longer. I still think they’re going to get there, but in the near term, you know, the upside that we get from upsell is offset, it’s impossible for us to make sure, but I’m sure it’s offset to a larger, maybe a complete degree by share shift. And so if we’ve been through any of the forecast, it’s probably what our competitors are going to do. We don’t know that. We can’t control that. And we’ll get bigger benefits once we roll that everywhere.

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

Hey, good morning everyone and thanks for taking my question. And sorry if it comes off as critical, but we’re trying to be constructive here. So I guess we might disagree because you guys have been talking about a lot of margin accretive capacity additions, economy basic rollout, yield management. Yet, margins sequentially are looking about flat. Your competitors are up a little bit. So when we think about those initiatives that you guys laid out back in November, with 1.8 billion of incremental earnings expected this year, how can investors start to measure when that’s actually going to gain traction when you guys can really start showing some improvement on the profitability of the business?

Look, I think we’re five quarters in a row of closing the margin gap. Your forward-looking, I guess I am going to assume you’re comparing to one airline, which has given the guidance for the third quarter, which is Delta. And we knew and could have known and everyone could have known all along that the third quarter was likely to be a year-over-year headwind. I mean, Delta that self described, hit the RASM in last year’s third quarter from IT, there are IT meltdowns and related other issues. And so pricing issue at Delta last year, which I don’t know for sure what the number was, I would guess it’s another 50 basis points and so those things are uniquely third quarter year over year comp issues that are nothing about the trend line, nothing about margin gap closure. We’ve had five straight quarters of closing the margin gap and we feel really good about that. That’s a metric you should look at us on. It’s not going to be every quarter. Sometimes, it’s going to be quarter-over-quarter things that happened this year or last year. Sometimes, it’s going to be geographical changes. If China goes gangbusters all of a sudden, we’ll outperform more. If China is bad, that kind of widens the gap. It goes on to the kind of initiatives we talked about at the Investor Day, so we feel really good about what’s happened in the last year and the trajectory going forward.

Okay. I appreciate that Scott. I mean, you guys have these initiatives ramping to 3.2 billion of incremental earnings improvement, I mean, how do we think about those numbers relative to your earnings down here and I get it, that’s -- those were not net of cost inflation and some labor deals, but your investors are looking for that earnings improvement, when should we expect it and I guess just coming back to the earlier question, what are some things that could change in the future if that traction doesn’t develop?

Well, I think kind of, I guess to answer the question, when we say 3.2 billion of earnings improvement, we’ve been saying compared to what it would have been without the initiatives. That’s not and never said, 3.2 billion compared to whatever the baseline was, 2015 or anything else. And so, things like fuel price changes, things like new labor deals, things like industry revenue conditions change that baseline. It really is about being on a trajectory to close relative margin gap as much as anything. It’s probably the best way to measure those things and absolutely margin gap. And we’ve been doing that and we expect to continue doing that going forward. That’s the best way to measure it though.

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

Can you talk about the linkage if there is any between planned growth at United and margin expansion for the company, not anything relative, but just getting your margins back to a trajectory of up year over year? I mean obviously, growth makes unit cost look a little bit better and makes employees happy, but what is the point of growing faster than GDP, faster than your peers while your margins are still declining?

Well, look, it sounds a broken record, but we continue to close the margin gap on each quarter. We did this quarter as well. And yeah, we had big pay increases for our people year-over-year, something we’re really proud of, really happy, something that they deserve. That was the right thing to do. And implicit in your question is somehow growth, I don’t think growth is going to either overcome that and if growth wasn’t overcoming that, it shouldn’t have grown. We were more profitable. We had a higher margin this quarter than we would have absent growth, and so we feel really good about where we are, not sure what’s going to happen with the macro environment from a revenue perspective or from a fuel price perspective, we do know that the big pay increases which were great are in the past and so we’re starting to overlap those things. But we’re still going to be subject to what happens from exactly just macroeconomic stuff.

And our last question from Stephens, we have Jack Atkins. Please go ahead.

So I guess looking forward for a moment, Scott, in reference to your comment around comps getting more challenging in the back half of the year, and certainly some of the internal revenue initiatives that I think may take a little bit longer to gain traction than initially expected, but given the state of the overall market, would you expect you guys be able to see positive unit revenues in the fourth quarter, given that comps are materially are more difficult in the 4Q versus the 3Q or is the really weakness in Asia and the difficult comparisons going to make that more difficult to see, unless we see a stepup in industry fundamentals?

Yeah. So look, we’re not -- we don’t have any real data for the fourth quarter. So our forecast can really be no better than yours. You’re right, comps get more difficult, but at the same time, this one point calendar headwind, at least, I don’t actually know for sure what the Christmas and New Year’s holidays are, but at least the Jewish holiday are a tailwind for the fourth quarter. So the calendar does get better for the fourth quarter and we also know that Southwest growth and Southwest Florida’s domestic, it could be a lot slower in the fourth quarter as they retire all their process. So those are two things that are tailwind and the only thing that I can really think of is incremental, I don’t know if I’d call headwind, but the cost to yield more difficult. So your guess is as good as mine, how those combination of things balance out.

And just for a follow-up and it’s kind of going back to the earlier statements around natural share, we can think about sort of the long term capacity growth plans, I guess just conceptually, how do you guys weigh the desire to take back what you view as your natural market share versus the potential for market disruption that that could cause. Clearly, you need to do what’s in the best interest of your company and what you believe to be in the best interest of the company, but in cases where share has been seeded over the years and it could be highly disruptive to gain that back, how do you balance that internally.

Look, really a network, it’s different than point to point and the kind of growth we’re doing, it hasn’t been either highly disruptive, I don’t think it will be highly disruptive. We’re not going in and trying to start flying from Miami to Milwaukee and competing head to head with someone. We’re growing in our hubs where we can have the majority of the people on the airplane or connecting traffic and connecting revenues and in few places, we’re going back to having just competitive service in a market like New York to Atlanta where our competitor Delta flies mainland and we’ve downgrades, jets and now we’re back to mainland. I don’t view those things as disruptive, they haven’t been disruptive. And I don’t expect them to be.

Thank you. This concludes the analyst and investor portion of our call today. We will now take questions from the media. [Operator Instructions] From The Street, we have Ted Reed. Please go ahead.

Thank you. I’d like to ask about the Pacific, Scott. Delta just announced moving to Atlanta, Shanghai. And I just wondered how they’re downsizing in Narita, it affects your overall in Asia?

I don’t know. I read that announcement. I wasn’t sure whether, although we speculated it was -- Narita Shanghai as you’re confirming that. I don’t think I have anything to -- I just read it before I came in here. So I don’t really have anything to say about it.

But in general, as Narita becomes less important, does that impact you in Asia and in China?

Well, I think we have a great operation in Narita. This is Andrew, Ted. How are you doing? I think we have a great operation in Narita. We have a great partner with ANA and I think I’m really optimistic about Japan over the long run. Right now, the Pacific over the short run is troubled process in terms of RASM as we said over and over again. So we’re going to be really careful, particularly in Shanghai and Beijing over the next 12 months in terms of our capacity deployment to make sure we can move those markets in the right trajectory for a positive RASM outlook. But we’re really confident where we are in the Pacific partners and our hubs and we think we have these leading franchises.

From Houston Chronicle, we have Andrea Rumbaugh. Please go ahead.

Thanks for taking my question guys. United reported a strong financial and operational quarter, but this can get overshadowed by some of the incidents that have gone viral on social media. And so I just wanted to know how you guys are working to showcase airlines improvement in the era of social media right now?

Andrea, it’s Oscar. I think it’s a continuing task. The advent of social media in our space is particularly notable and I think the best thing that we can do and continue to do is to refine our customer service experience models, training and people and move from there. I think you will see something from us in the next quarter or so as we revamp our social media team by how we respond and just we need to be a little more agile. We’re a big large company and sometimes, we are stuck in past and I think we need to evolve forward, so that we can handle those events fairly quickly. Not just from a management of the media, and its imprint, but of the individuals involved and if we can stick to the issues. So I think it’s an important distinction between just managing or spinning an issue versus actually you know preventing it and solving for it.

And from FlightGlobal, we have Edward Russell. Please go ahead.

Yes. I was wondering if you could breakdown your deliveries for 2018, 19 aircraft, could you confirm that and when we take your first Max and your first 787-10?

Let’s see. The first 787-10 I believe is 2019, at the end of ’18, so it will be in service in 2019. The first Max is 20 -- well, the first Max 10 is 2020, I’m not sure if you’re asking about Max 10 or just Max in general.

Just first Max in general?

2018 is first Max in general. As far as number of deliveries next year, I’m looking at Gerry Laderman here to keep me honest. We may be able to get back to you with an actual number there.

Thank you. We will now turn it back to our speakers for concluding remarks.

Thank you all for joining the call today. Please contact investor or media relations if you have any further questions and we look forward to talking to you next quarter.