United Airlines Holdings, Inc. (UAL) Q3 2017 Earnings Report, Transcript and Summary

Good morning and welcome to United Continental Holdings Earnings Conference Call for the Third 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 third quarter 2017 earnings conference call. Yesterday, we issued our earnings release and a separate investor update. Additionally this morning, we issued a presentation to accompany this call. All three of these documents are available on our web site at ir.united.com. Information in yesterday's release and investor update, the accompanying presentation and the remarks made during this conference call may contain forward-looking statements, which represent the company's current expectations or beliefs concerning future events and financial performance. All forward-looking statements are based upon information currently available to the company. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release, Form 10-K and other reports filed with the SEC by United Continental Holdings and United Airlines for a more thorough description of these factors. Also during the course of our call, we will discuss several non-GAAP financial measures. For a reconciliation of these non-GAAP measures to GAAP measures, please refer to the tables at the end of our earnings release and investor update, copies of which are available on our web site. 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 to assist with Q&A. And now, I'd like to turn the call over to Oscar.

Thank you, Julie. Good morning everyone. Thank you as always for joining us. Yesterday, we reported pre-tax earnings of $1 billion with a pre-tax margin of 10.4%, excluding special charges, as you can see on slide 4. Our earnings per share was $2.22 excluding those special charges. In the third quarter, we repurchased $556 million of stock at an average price of $67 per share, bringing our year-to-date repurchases to about $1.3 billion. Andrew Levy will provide a little more details of the financial results here shortly. In the quarter, we certainly faced a number of challenges, including a series of historic storms and natural disasters, coinciding with the usual busy summer travel season. I have to shout out to our employees, they all impressively overcame these challenges, delivering record setting operational performance. Not only did our employees manage to keep our operations moving through these three devastating storms, they really banded together to help one another and take part in one of the largest relief and recovery efforts in United history. So I want to thank all of them, for demonstrating the level of energy and teamwork and morale, that embodies the shared purpose that we have at United. As you know, a big driver of this new spirit at United is what we term an energized culture and really increased employee engagement around all areas, but evidenced specifically by this year's operational performance, which has been just simply outstanding. This can also be seen on how our employees are prioritizing and elevating the customer experience, and I want to highlight a few of those on slide 5 that are gaining traction. We continue to improve our mobile tool, such as in the moment care, the app that allows our employees to more quickly and effectively solve customer interruptions, such as the ones faced this quarter from the severe weather. Also to proactively address travel disruptions, we put together a team, dedicated to providing creative solutions to ensure customers reach their final destinations. They are available to all stations worldwide, 24/6, 365 days a year. Now evidence of progress on our customer service can be seen at the dramatic decline in the third quarter of our involuntary denied boarding or IDBs, which are down 92% over last year, and we also had a remarkable 28 days this quarter with zero IDBs. And for context prior to this year, United didn't have a single day with zero IDBs. Now if you look at the business more broadly, we do feel good about over accomplishing at United, but we also know that we have a long journey and a lot of hard work ahead of us to realize our potential. The third quarter was a challenging environment, probably due to macro events such as the storms I mentioned, as well as things like geopolitical tensions, causing softer demand out of Guam, but we have also made a strategic decision to compete aggressively with ultra low cost carriers, which is essential to the long term health of our business. So today -- earlier, we promised the investment community an update on our 2016 Investor Day initiatives, Scott will do that in a moment. At a high level, our Investor Day initiatives are on track, with the exception of segmentation, where incremental contribution was temporarily offset by broad competitive issues. And also, new issues have arisen this year, and our goal is to produce meaningful, absolute and relative margin improvement, that is something that remains steadfast in our focus. And as we continue on this journey, it's critical for us ensuring that we properly prepare for and mitigate the headwinds that we cannot control, which are often many, correct through the ones we can control and we have to be able to distinguish between both of those. And so, we know we can control how we implement our initiatives like basic economy. We know we can control how we control our new revenue management system, and we certainly have control over the pricing mix that we are doing right now with ULCC. And that is what we are doing. In addition, we are taking a very-very rigorous approach to reviewing our costs, as we look forward into 2018 beyond our planning process. So that's the general update of our quarter. With that, I will turn it over to Scott for some more details.

Thank you, Oscar, and thanks to everyone for joining us today. I am going to take a slightly different approach this quarter. We will start by providing the traditional brief revenue update and spend some time, talking about how the business has evolved over the last year. Turning to the revenue environment, our PRASM was 3.7 points lower year-over-year, and this included about a point of storm impact. Domestic unit revenues were weaker than our initial expectations due to the storms. More aggressive ULCC pricing in our hub markets, and temporary share loss during our initial basic economy roll out. PRASM performance in the Atlantic and Latin regions was in line with our expectations. The Pacific was a lot weaker than we initially expected and declined more than 10%, due to softer demand in China, Hong Kong and Guam. And while Guam is only around 1.5% of our ASOs, demand to Guam has seen a very sharp decline, and we are scaling back service between Guam and the markets in Asia. Looking forward, we anticipate fourth quarter PRASM to be down 1% to 3%. We expect October and November to be close to flat, which obviously implies a large forecast PRASM decline for December. For what it's worth and in some of the analyst reports, that doesn't imply that December will be down exactly minus 6, we'd say close to flat in October and November, doesn't mean it's exactly zero, and the midpoint of our guidance minus 2. There is a lot of rounding in all of those numbers. However, our forecast for December really is driven by the calendar, and in fact, the Christmas outbound starts a lot later this year. A lot of schools, including my own kid, don't get out until December 22nd. That means two things, first, the off peak period between thanksgiving and Christmas, which is the lowest RASM period of the year, that extended by a week. And second, much of the holiday return is pushed into January. So a lot of uncertainty around our December forecast, but our forecast PRASM decline really isn't about anything systemic, it's just the vagaries of the calendar. Now I'd take a step back and look at 2017, which has been a difficult year for United. We started the year focused on several key areas, improving the operations, which includes improving the culture for our employees and customers, rebuilding our network in a profit maximizing way, and executing on our Investor Day initiatives, as we work towards our goal of improving absolute and relevant margins. Turning to slide 9, our operations team continues to do a truly phenomenal job. This quarter was a great example and despite experiencing some devastating storms, our team and all the employees of United were able to rally together, keep the operation moving and deliver top tier operational performance. As challenging as the recovery efforts were, we continue to set new company records in the operation. We managed to set the best ever third quarter consolidated departures within zero, with the month of September having the best ever month in a consolidated D0. We also set a record for the best ever Star D0, which is the first flight to depart beginning of the day, and they set the stage for success throughout the day. Following second quarter's industry leading departure performance, third quarter D0 was second best in the industry among our peers. This type of operational performance is really outstanding, particularly given the four day closure at our Houston Hub. We have the lowest rate of consolidated airport operations and flight operations delays ever. These records show how committed we are to making United the best in class airline and how resilient our operation has become. A big driver of our operational improvement is the energized culture and increased employee engagement that Oscar talked about earlier. Operational performance is evidence that our employees are prioritizing, elevating the customer experience. On the network, we put some key faces -- some new faces and few leadership positions, and are really just getting started on our network improvement. Consistent with what we outlined this Investor Day, our top priority in the network is to strengthen our hub. We started over the summer by improving the competitiveness of our product and schedule, in October, later this month, we will re-bank Houston Hub, and in 2018 we expect to re-bank Chicago and Denver. Lastly, on Investor Day, all our initiatives are duly performing as expected, with the exception of segmentation, due to temporary competitive headwinds from the basic economy rollout. Our basic economy roll-out will dwell operationally, but from a revenue perspective, it started out right. Now that we are competing with similar projects from our large competitors, we are hopeful, segmentation will start to contribute, as we originally thought it would. We are in the early stages of our revenue management improvements, and we are encouraged by the initial results. We continue to optimize our yield management posture in our new system, which is called Gemini, is rolling out to plan. Initial results in test markets are encouraging, showing large improvements in forecast accuracy and a 1% projected improvement in RASM. Internally, we have a lot of work left to do on the yield management system, but I am really proud of the team, and look forward to doing a full deployment in 2018. Despite the momentum in these initiatives, as you can see in our results, they have been offset. Higher costs from labor and fuel, combined with revenue headwinds in the second half of the year, more than offset the value of our initiatives in 2017. Some of those headwinds we have talked about, include ULCT pricing, which is a strategic decision that we know is the right long term decision for United, as well as exogenous events like an unprecedented series of storms, softer demand in China, Hong Kong and tensions around Guam. In summary, we feel really good about things in our control. Many of our initiatives are long-tailed and we are headed in the right direction. As Andrew will mention shortly, we are also taking a very hard look at our cost base, which is an important driver of our ability to improve margins going forward. Turning around the operation, driving cultural change and improving our networking product and improving the customer experience, are all things that are important to our ability to build a great airline. While there have been some bumps in the road in 2017, we are on our path to achieve our financial goal, and we will work to navigate through unforeseen challenges along the way. I will turn it over to Andrew now for the financial results.

Thanks Scott. Yesterday afternoon, we released our third quarter 2017 earnings and our fourth quarter investor update. I will discuss both our results and outlook at a high level, and please refer to those documents for additional detail. Slide 12 is a summary of our GAAP financials and slide 13, shows our non-GAAP results. We reported earnings per share of $2.22, excluding special charges and pre-tax income of $1 billion, which represented a 10.4% pre-tax margin excluding special charges. Turning to slide 15, non-fuel unit costs increased 2.6% on a year-over-year basis, which was at the better end of our September 6 updated guidance, mostly due to the timing of certain maintenance events that will appear in the fourth quarter. We expect fourth quarter non-fuel CASM mix to be higher year-over-year by 2.5% to 3.5%, which brings projected full year 2017 non-fuel CASM mix to the high end of our prior guidance of between 2.5% to 3.5%. There are four principal drivers that have changed, since we issued that range. First is Harvey, where we continue to incur many costs including some additional costs, extraordinary costs, despite lost ASMs. Second is at our maintenance operation, where we experienced more high cost maintenance visits than we had forecast earlier this year. Third, is higher depreciation and amortization expense, which is mostly driven by changes made to our depreciable life assumptions for our fleet, to ensure consistency across some fleets, and changes to salvage values. It is also higher, because we continue to purchase aircraft off-lease, which has driven higher D&A expense, with the future offset in rent savings. Lastly, we had additional expense associated with new regional flying that started in September. While this additional 50 seat flying comes with additional ASM expense, it does enable us to execute our strategy of increasing [indiscernible] flying to smaller cities, from places like Chicago. We understand how critical cost control is to 2018 and the team is doing a ton of work to identify opportunities to improve cost performance, as part of the budgeting process. These range from flying the network in more cost efficient ways to reevaluating why we spend money in certain areas that have always been that way. At the same time, we know there are some headwinds in 2018. While we don't have the same pressure from new labor contracts that we had in 2016 and 2017, we do face some headwinds, such as a higher mix of 50 seat flying, rising medical and dental costs, higher pension expense and rising airport rates and charges, all of which we are working to overcome. Turning to slide 16, we ended the third quarter with $6.3 billion of unrestricted liquidity, which includes our $2 billion of untapped revolver. We are comfortable in excess of our stated liquidity target range of $5 billion to $6 billion and our balance sheet remains strong. During the quarter, we raised $400 million of unsecured debt, at an interest rate of 4.25%. We also contributed $160 million to our pension plans and that brings us to our expected contribution of $400 million for full year 2017. Turning to slide 17; during the quarter, we repurchased $556 million of our shares at an average price of just over $67, bringing our year-to-date repurchases through the third quarter of 2017 to $1.3 billion. Cumulatively, since we began repurchasing shares in the third quarter of 2014, we have invested $5.4 billion to buy back our stock, retiring 26% of our shares outstanding. As of the end of the quarter, we have $553 million remaining of repurchase authority. For 2017, we continue to expect adjusted capital expenditures to be between $4.6 billion and $4.8 billion. As we announced in early September, during the quarter, we finalized negotiations for our A350 order. We are pleased to have reached a great outcome for United-Airbus and [indiscernible]. There are three key changes; first, on timing. We have deferred deliveries by four years to begin in late 2022, and they will continue through 2027. Second, we will take the A350-900 instead of the larger A350-1000 variant. Third, we added 10 aircraft for a total order size of 45 aircraft. The delivery timing, model type and order size are all a better fit for our future wide body fleet needs, that allow these aircraft to have used for either growth or for a potential replacement for 777-200ER aircraft, as this subfleet will begin to approach retirement age, around the same time you start taking delivery of the A350s. Finally during the quarter, we finalized agreements to take two additional A320s in 2017 sourced from the used market. Slide 18 is a summary of our current guidance, including fourth quarter's projected fuel price range, using the October 12 curve. The range provided for capacity, revenue and costs imply a fourth quarter pre-tax margin between 3% and 5%. Looking forward, cost control is an integral component of our path to margin improvement, and as I mentioned earlier, we are in the middle of our 2018 budgeting process and taking a very rigorous approach to stem future cost inflation. With that, I will turn it back to Oscar.

Thank you. I just want to thank once again to our employees, our customers, and certainly our investors. I think as Scott mentioned, there have been some bumps in the road in 2017, but we are on a path to achieve our financial goals, and we will work hard to navigate through any unforeseen challenges that come along the way. But at the end of the day, we are excited about our path forward, and just try to reward all of you along the way. So with that, let me turn it over to Julie and we are 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 needed, one follow-up question. Brandon, please describe the procedure to ask a question.

[Operator Instructions]. And from Buckingham, we have Dan McKenzie. Please go ahead.

Hey, good morning guys. Thanks. Scott, I guess the first question really is for you. There is a lot of noise in the revenue trend for the third and fourth quarter, which makes it a little hard to think about core underlying revenue trends. And so, if we just go back and strip out acts of mother nature and other idiosyncratic stuff, how are you thinking about the true core steady state revenue trends sequentially? Are they getting better, worse or going sideways?

Yeah, I agree. Dan, it's really hard to strip out. There is so much that happened in third quarter this year, with the stuff that's happening in the fourth quarter this year, and stuff that happened last year in H1. So I think that the core trends are largely the same. The third quarter wasn't as bad as it appeared, is mostly what that means, and as you go into the fourth quarter, it's more representative of what the real demand trend is. The one thing that I think is improving, at least for United in particular, is we had in late of July, a huge change in the pricing philosophy at one of our ultra low-cost carrier competitors, that was a big shock to the system. Where walk-up fares wound up going down over the course of a week or two by 80% or 90%, and that takes little time to adjust to. While fares remain at those levels, we are better at managing in that environment, I think today, and will be in the fourth quarter than we were before. But if you sort through all the bad stuff that happened; I think, that the fourth quarter is a little bit better than the third quarter, even on core underlying trends. Mostly due to the changes we have made in being able to manage better, and the pricing that has remained consistent with the ULCC, and there is also less industry capacity in the fourth quarter than it was in the third quarter, particularly as Southwest is growing less.

I see. Thanks for that. And I guess, if I can go back to the ultra low cost carrier pricing just for a second; I know, at the time of our last earnings call, that was impacting 3% of our revenue. And I think that that stepped up and impacted a bigger percent in the quarter. How has that progressed? Is it still affecting a larger portion of the revenue base than it was at the time of our last earnings call, or how is that -- as we think about that heading into 2018?

Yeah, it is. At the last United earnings call, we didn't -- I don't think we talked about Spirit, at least at all, and really didn't think much of it. But of course, the day after their earnings call, fare has been down dramatically, and it continues to go down dramatically. And so it did spread. It has kind of been constant I would say, for the last six to eight weeks, where fares got down to -- walk-up fares as low as $10 and that $10 including the online convenience fee or whatever they call those fees, which are lower than ever seen, and including the time that we were engaged in stuff like this, like my prior employer. But they have been -- they haven't gone up, but they haven't gone down. If you want to get down to $10 at the walk-up fare, there is not much room to go down, particularly when that fare started at $170 two months ago. So really not much change. There is a higher percentage of markets that are involved in the really low fares. The percentage build out 17% of our revenue that comes from markets where ULCCs fly, but the amount that is exposed to this kind of pricing -- that's of the domestic system by the way. But the amount that's exposed to this pricing is obviously less than that, it's 100% right now.

Okay, thank you. Appreciate that.

From Macquarie Capital, we have Susan Donofrio. Please go ahead.

Yes, good morning. Thank you for taking my question. I just wanted a follow-up on Dan's question, and that is, you talked a little bit about better managing against ULCC pricing. I am just wondering, is that because you are getting more comfortable with some of your new pricing levers, to as far as fine tuning basic economy, and also, your new yield management system? I mean, how can we kind of think about that? Because I am looking at markets, and it definitely looks like you are not as widespread with respect to some of the pricing initiatives?

Yeah. There is a whole bunch of things, Susan, that are going on. One, basic economy is a great tool and we have been experimenting with the difference of price between basic economy and standard economy. It's not really the new yield management system yet, but it will be, and we have got some really cool stuff going on that we are experimenting with, that will roll into the new yield management system, that can be particularly targeted in these markets. One of the big things that changed is, for us, in this environment is, actually the impact on flow traffic. And so as the fares go down like this, we are selling a lot more local demand on some of these flights, and what happens is, we wind up spilling off connecting revenues. And that takes a little time to adjust to. What we do essentially is, we are going to be selling more seats in the local market, will continue and that maintains that competitive posture in the head-to-head local competitive markets. But we continued our yield management posture on the connecting flows, because essentially we have now fewer seats to sell in some of those connecting flows. But there is improvement in the local market with the connecting markets or places we can improve as well. And we have far more data today than we would have had a few years ago, to help us manage this and we also have, as you mentioned, the tools, basic economy, that's a real help. That in the very short term of things, when fares go down by 90% over the course of two weeks, that takes a little time to adjust it, but we are getting a lot more adjusted, as we go forward.

Okay, great. Well thank you.

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

Hey, good morning everybody. Scott, a question in the hypothetical, if you are given the chance to renegotiate one contract from scratch, but you were given a choice between the current Chase credit card agreement in the existing alliance contract with Air Canada and Lufthansa. Which would you pick? I am just thinking longer term, which of these two, unless you think there is a third more material option, might afford the greatest amount of potential margin upside, that sort of thing?

Yeah, you are trying to box me out. So I will say there is opportunities on both. In dollar value, the larger opportunity, and it's not necessarily renegotiation, but the larger opportunity is absolutely with our credit card partner, Chase. And we are working on that. This is my and Andrew Nocella's third or fourth time through one of these, and also on the people on the Chase side, not their first time going through something like this with a partner. We had great success in the past, getting to win-win situations with our bank partners, and I believe and hope that we will get there with Chase. On both sides, we are seeing all the right things. We are big organizations that don't move -- both big organizations that don't move overnight. That has been true everywhere else that I have been as well. And I think that we will get to, ultimately, a much better result. And it is certainly -- it's a great partnership, but it is a disadvantage, as we sit here today compared to our competitors, and one that has a lot of opportunity. We also have opportunity on the Alliance front, and it's not so much about renegotiation of JVs, it's about realizing the potential of the JVs and on that front, all of our partners are engaged and anxious, and we are making real progress, both in South America and across the Atlantic in particular. We today are getting better results in those geographies than we otherwise would, even though we haven't done a new deal, just because we are working much closer together, and we are [indiscernible] to the line and feel good on both of those fronts that we are going to have improvements. The credit card deal is obviously bigger.

Got it. And the second question, on the topic of 'natural share.' Is it possible to quantify the progress that you have made or that you expect to make by, I don't know, call it summer of next year. Are you going to be half way there, 10%, 90%? And also, does re-banking help contribute to natural share in your model, or is achieving natural share strictly exercising growth? Obviously, I am trying to back in to when your capacity might moderate back to something closer to the industry average?

So I am not going to be able to give you an answer today on what the ultimate end-game on capacity is. But re-banking does help with natural share -- when we talk about natural share. It means, not just our share at our hub, it actually frankly means more our share and all of the non-hub cities around the country, so at Des Moines or wherever. And winning your share in Des Moines is not about carrying people from Des Moines to Chicago, it's about carrying people from Des Moines to the world. And what we have, a less efficient hub structure in Chicago, when we fly those people to Des Moines and we miss 10 or 15 connecting markets, then we lose out on share in a place like Des Moines, that would just be natural if we had a hub structure that worked better. So some of what we are doing to regain that -- a huge part of what we are going to regain natural share, is re-banking the hubs and driving higher levels of connectivity, which will increase your share at a market like Des Moines, without having to increase capacity.

Makes sense. Thanks a lot Scott, appreciate it.

Yes

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

Yeah, thank you. So Scott, the 4Q guidance implies full year operating margin of about 9.5% if you adjust for the weather in 3Q. By my math, about 3.5 points to that is from selling miles to chase, so why shouldn't I be worried that at 3% GDP and $50, the core airline business is only earning at a 6% EBIT margin. Does that type of return require different strategy than what you are pursuing right now?

Well, one, you can't divorce those two things from each other.

Well, to be fair Scott, last quarter, when you said that you are -- you have about 0.5% margin gap versus American because of your deal?

Well, I am saying you can't divorce those two things from each other, because one of the disadvantages that we have and that Chase has, is that if you are living in Des Moines, Iowa, and you are picking a credit card, and we are the number three player in Des Moines, Iowa, you are more likely to pick one of the other two. And that is not incumbent just on a Chase fix, but on us to help address. So part of winning back natural share is not just about the core airline business, it is also about improving credit card business. And I think of those two as fundamentally tied together. It is true that a big part of our earnings, and I am not agreeing necessarily with your numbers. But a big part of our earnings comes from selling miles. But that is a core part of the business, and you can't say strip that out, and then watch your growth fee at the airline. That said, we do think that there is opportunity to improve that part of the business, and it's one of the big areas that we are focused on. We can't do a -- well there are some things that we can do unilaterally. But we are working with our partners, but Chase is by far the biggest, and working with them to get results that look like our competitors. And I think both of us agree, actually both United Airlines and Chase believe that we can do that and that we can get to a world that's good for Chase and good for United Airlines that generates the same kind of results and we are marching towards that. It will not happen overnight, but we are moving in that direction, and I think we will eventually get there.

Okay. Andrew, it looks like you guys recently made some changes to mileage plus award valuations, you had increased the price on some saver awards, added a fee to cancel. It seems like those decisions benefit the airline business, because the miles flow through at a better rate, but they effectively devalue the currency for consumers. So how far can you push that, before people stop signing up for the card, and why shouldn't I be worried that, unless your disclosures improve and the transparency gets better, the marketing company won't continue to subsidize the airlines?

We have made some changes. We have gone through a dynamic type of pricing environment. But we have been really careful on how we do that, to make sure that our customers still see a great value. And I don't think that has changed here. There were a few price points that went up. But there are not many price points that are actually lower, as they reflect the true availability on particular flights. So I don't think what we did over the last two weeks is going to change the dynamics at all.

From Deutsche Bank, we have Michael Linenberg. Please go ahead.

Oh yeah. Hey everyone, good morning. Just I guess, two quick ones here. Andrew, you talked about pension expense being a headwind in 2018. How does the expense in 2018 at this point, how does that compare to 2017 and then how does the expense compare to what your anticipated contribution will be in 2018? Do you have a sense on that?

Yeah Mike, it's about $70 million of inflation that we are expecting at this point in time. Some of that is based on a forecasted discount rate, which we can only forecast at this point or actuaries can only forecast. That will get kind of locked down at the end of the year. So at the moment, a little over half of that is due to forecasted lower discount rate applied, and the balance would be lower mortality and expenses associated with that.

And then just the contribution, I guess it was what, $400 million this year. For next year, what should we expect?

Mike, historically, we are kind of hesitant to give anything on 2018 just yet. But we will certainly talk about $400 million a year, and at this point, I don't see any reason to expect that number will be much different next year. It will depend on a number of factors. I think it's safe to assume, it will be similar to what we did this year.

Okay, great. And then just to Scott, the PRASM forecast for the fourth quarter. How much of it is FX? Is there an FX boost in there that we should see?

It's pretty small, a quarter -- about 25 basis points of tailwind.

Okay, great. Thanks Scott.

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

Thanks. Good morning. I think I have two questions for Oscar. Oscar, if we put aside any relative comparisons to your competitors, for your margins to go up next year, with current fuel, your RASM has to be something like 40 or 50 basis points better than your CASM ex-fuel. So I am asking you now, will that happen? And if you want to put that -- answer a different question, would you say United is a RASM or CASM story in 2018, and I would encourage you not to say both?

Well I appreciate the encouragement Hunter. I think we are a margin company, as we happen for -- I think focused on that for quite some time. You know, I think it is a good opportunity for us to just discuss the broad advancements that we made as a company, with a strategy and a management team and a focus that, I think, holds for a very bright future. I think the interim periods are difficult to discuss, because we are making investments. We are -- I think the way I said it earlier is, we have dug ourselves historically in a little bit of a competitive hole as a company. And in order to get ourselves out of it, we have to do something a little bit extraordinary than others. And so, that's what we are focused on. We are focused on doing that, but at the same time, from a long term perspective, on margin capability. So as we head into 2018, one of the reasons we are not talking too much about it, we are deep, deep at work with regards to that. How do we get the kind of growth that has good margin, and how do we get into the bowels [ph] of our cost structure and ensure that we make that. And so it is about the net margin number. And so it's a difficult period for us, as we work through all this information. This team has only been in place really for a year, and we are just getting our mojo working. And again, I think Scott said it from -- with regards to our initiatives are long tailed, and what you see, vis-à-vis our competitors, is that they have been together as a team and with their focus and their initiatives for quite some time, and they are beginning to see the benefits of that. We just have a little bit more work to do, and we will continue to ask for a little bit more patience. But there is no change with regards to where we think our relative and absolute margin improvement need to be, to compete in this industry.

Okay. All right. But I think people are really trying to buy into this story, because they believe there is a CASM story here, at least I was. And the excess capacity growth has not translated in a better CASM ex, despite the fact that your ops are better. Higher completion factor drove a lot of the CASMB or the ASMB. And yes there were some onetime items in 1Q, I get that. But how can we have any confidence in the 2018 CASM ex story, particularly given the headwind that you guys went out of your way to lay out on this call? So can you at least may be bracket in like a high end of CASM ex for us, so we have some sense how to think about you guys in this next year?

Not today. And trust me, we are not telling you because we don't want to; we are, as Andrew Levy talked about, deep in the middle of this stuff. In fact, I just saw the thick book that was on Scott's desk that I went through briefly yesterday, we are taking a very different approach that Andrew Levy has taken us through, with regards to some of this. And again, we need to ensure that we [indiscernible] through the detail before we probably can tell you anything at this point. So let us keep working through this, I just need a little bit more time. We have always been about proof, not promise, and so right now, it's going to look a little more promising and the proof will come, as we get more into the details of this.

Thank you.

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

Thanks operator. I appreciate the time. Hi guys. So here is my two questions; one is, I think, relatively easy question. When you think about Scott, the ultra low cost carriers that you are competing against, are you just talking about domestic or are you including international in there, so that if you look at like Newark-Athens as an example, I think Emirates is in there, and they would be considered a low fare airline, maybe not low cost. So can you parse out what the impact of something like that would be on your business?

So we have the same approach to all competitors, low cost or not. Emirates is a unique example, we feel really good about our ability to compete with ultra low cost carriers domestically or with the ex-Air Berlin or Norwegian or anyone like that, that has a -- that is not subsidized by the government. Emirates is a completely different story, because they are subsidized by their government. And we can compete, and think we can compete effectively and win against anyone, but we can't compete against governments. So our best approach to competition is the same everywhere we fly, but you have brought up a unique example of a subsidized carrier, that is unfair competition.

But is it -- aren't China Easter and China Southern subsidized as well?

I don't know. It's really not the same extent, and certainly they are not allowed to do things like fly from Newark to Athens.

Okay, fair enough. Okay, that's great. Okay, I think that was it. One question, one follow-up. Thank you.

Thank you, Helane.

And from UBS, we have Darryl Genovesi. Please go ahead.

Hi guys. Thanks for the time. Scott, when you rolled out basic economy, you would have been forced to choose some spreads between how you price basic economy and how you price your regular economy product. I would imagine that early on, that spread is somewhat of a guess, and as you gain more experience with this, I mean, I guess, would you expect to be revenue managing that spread over time, and could you envision a scenario where it's much different than it is today?

Yes, is the short answer, and we are already doing that in a number of markets. So we do think that there is an opportunity there, and we are experimenting with that, as we sit here today.

Okay. And then I guess on some of your longer term initiatives, I think you said the only one that was behind, was the segmentation initiative. I guess, if I looked at the chart that you showed in November, I think you showed about an incremental $1.4 billion from these initiatives ticking in next year. Should we be thinking of that number as still largely representative of your view of how these initiatives sort of play out altogether in total?

Well, we are trying to get away from being quite that prescriptive. But we do think that we are largely on track with the exception of segmentation, that we are largely on track with those initiatives. It's also important I think to point out that, the Investor Day initiatives, while we felt we went out of our way to say that these are -- versus what would have happened, had we not done them, but that they were not absolute increases compared to the prior year numbers. A lot of people interpreted that in a different way. And what that means is, there are other things that could be headwinds or at least, it could be tailwinds. This year we have more headwinds, things like Asia. I am hopeful that Asia next year, will actually be a tailwind, because those kinds of geography driven issues ebb and flow around the world. But we do believe that we are -- basically, with the exception of segmentation on track or everything that we talked about, timing maybe a little earlier or a little later on different ones, we had some of that this year, although they are largely balanced out, with the exception of segmentation. But we think that we are on track for these initiatives.

Okay. I think that's an interesting perspective about what you just said about, people sort of taking these to meet -- to be something absolute versus something incremental, what you otherwise would have done. If I look at the 2018 consensus, earnings before tax number, it's about $3.1 billion, which is actually below the $3.2 billion that you have in this presentation from initiatives, which you would imply that the three kind of things that you would be breakeven or even at operating at a modest loss, without these initiatives?

Yeah. You got a bunch of numbers that are kind of apples or oranges that we neither endorse nor don't endorse. So yeah, you did the analysis, but I am not sure I'd agree with the conclusion, because I am not sure I agree with all the input numbers.

Okay. Thank you.

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

Hey, thank you for the time. I am going to follow-up on Darryl's because that was essentially the question I was going to go with. If we are not going to use those specific numbers, and I understood. I think we tried to understand at the time that those numbers were relative to what you would have otherwise done. And I think Darryl's point is fair, that given the results and being on track mostly, it implies that the company was going to have some tough times, were it not for these initiatives. What I am hoping to do is, maybe give you guys an opportunity to tell us, reframe this in a different way. Coming and saying we are on track for these initiatives, but don't mind these numbers, doesn't feel right. It feels like you need to like reset expectations, whether it'd be not giving specific numbers for individual initiatives, or somehow saying, resetting a bar here for these initiatives; because I don't think those numbers mean very much to anyone anymore, they seem very optimistic, and there must have been some significant headwinds that we were unaware of. So maybe I am hoping for you to give us an opportunity to come up with more specific reason, how are these initiatives going to play out? You got the gist of my question I guess?

I am not sure I actually do understand the questions, but it sounds like you want to give a new set of numbers that you believe?

Well yeah, I mean, those numbers are -- [indiscernible], it's like $1.4 billion between 2017 and 2018, and we will back out segmentation entirely and call it $1 billion. I don't know what $1 billion headwind year-over-year should be there, that we shouldn't be able to attack those on. So if you are on track with these initiatives, why aren't we adding $1 billion? And I don't think that's the right number. So therefore, these numbers are not terribly useful. So what I am looking for is kind of more useful numbers.

Okay. Look, we are not going to redo the Investor Day numbers on this call today. As I think through what the Investor Day initiatives are, the network initiatives, we feel good about; we are going to redo Houston Banking, a lot of this is about the re-banking structures, we are doing Houston on October 29. Chicago and Denver are going to be a little bit later than we originally planned, just as we work through all the operational stuff on that. The fleeting is going to be a little bit different next year, because we just have changes in the fleet plans with 50 seaters. MileagePlus should go up, we had a hit this year from MileagePlus that was related in the old deal, we are paying back, essentially it's a loan. Not to classify it as a loan, but it was essentially a loan. We are paying back miles at a lower rate, that was pretty straightforward. Should happen. I talked about the revenue management stuff in my opening commentary, we feel pretty good about that, got it delivered, and there is a lot of water that still has to go under the bridge on that. We feel good about that one. And we are doing a lot of work on the cost stuff. I think that we will do well there. Headwinds remain, the overall macro environment that applies to everyone. The ULCC environment, and they are talking about some of the cost headwinds. We don't know for sure what the Pacific will do next year. But we kind of walk through each one of those. I am not sure the -- I don't have an exact number to update on today, but on those initiatives, we feel pretty good about, because they bring on those initiatives.

And Kevin, this is Oscar, I think you raise a great point, and we understand it completely. And I think the conundrum is, how do we give you a sense of the results of these long tailed initiatives and provide you a little bit better transparency. And so, it's a good point. It is what we are in the middle of today, trying to understand -- not only understand, trying to better understand these issues and how they play out. Given all the things that have changed since we have given those things. So we need to package all that together, and that's what we are doing, as we put together our plan. But again, I just want to make sure, I understand your point completely as of the rest of the team, and thank you for that admonition. Appreciate it.

Thanks. Maybe it's for Scott, can you talk about -- I know you are probably not going to give specific capacity guidance for 2018, but how do you think about it and the need to -- how do you think about capacity growth for 2018 overall?

Look, we are still going through it, and it's driven by a view of what's going to maximize our margin performance. And every day we are just trying to do that. And so we look at anything either additive or subtractive, it's about what the margin of RASM is going to be and what the margin of CASM is going to be.

Okay. Thank you.

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

Hey, good morning. Scott, I might have missed this, did you talk about what you expect regional trends to be that's kind of embedded in the 4Q guidance?

We didn't talk about it, but we -- essentially, there are some onetime things that happened last year, that are going to cause our reported results to differ slightly from what I am going to say. But the core performance is going to be that, Domestic and Atlantic are our two best regions we think and do better. Pacific will probably have the largest improvement, despite the fact that Guam is terrible. For core Pacific, we are at least forecasting it's going to improve. And Latin will continue to be strong, but as it overlaps the recovery and the sharp improvements in RASM last year, on a year-over-year basis, we expect it to be less strong.

Okay, got it. That's helpful. Thank you. And Andrew, if I might quickly ask you, I know you realized on -- your focus on liquidity targets, but could you share your thinking on, how you think about debt levels and the use of cash here?

Well, you know Savi, our view on the balance sheet is unchanged. We certainly like to see a higher rating of our debt. But we feel very comfortable with where we are. We have not decided to try for investment grade. We may decide one day, that that is something that's worth doing. But at the moment, we are very comfortable with our debt levels. We are able to raise capital at extremely attractive rates, and we are very comfortable with where we are in the balance sheet, which is taking into account, not just debt levels but also the liquidity and the active capital that we have.

All right. Thank you.

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

Hi, good morning everyone. Scott, there is obviously a lot of seasonality in your business, but the pre-tax margins in 4Q and 1Q, that can -- significantly below 2Q and 3Q, yet much more so than some many other airlines out there. Is there anything you are doing or can do to help mitigate this? Has it been something in terms of how you focus new capacity or maybe even the re-banking of the hubs? Or anything that you are doing in order to kind of fix this seasonality?

Well we are going to have higher seasonality than the others. Driven by the fact that we are a more business oriented airline and we have less exposure to Florida and the Caribbean, which for the less exposure of Florida and the Caribbean, means that our first quarters are relatively weaker. Our seasonality is going to be higher. We are working on -- another thing that we do that's unique, our peaks are higher and our valleys are lower, and should we change those two variables to help with costs. That drives higher CASM at United. But it's easy to say that, and it's harder to go through all the analysis and some work to address it. But I do think over the coming years, you will see us with less variability in our seasonal scheduling, which should be a cost benefit. But we are in the early stages of figuring that out. But we will always have higher seasonality, because we have lower exposure to Florida and the Caribbean.

Understood. Look I know, in terms of 2018 CASM, you are obviously not prepared to talk about that right now. But just at Investor Day, you did speak about 2018 to 2020 unit cost CAGR of sub-1% on just 1.5% capacity. I would say, you grew much faster than this in 2018. But with the headwinds Andrew that you kind of outlined in your prepared remarks, do you think this CASM outlook that you provided last November is at risk right now?

So we are just not prepared to talk about 2018. Look, there is a lot that's happened, a lot of changes that have happened since we provided that forecast over a year ago. We are working through it right now, and it's not as simple as you grow more CASM-ex goes down. I mean, on an Excel spreadsheet it does, but there is a lot of inputs. Some of them have nothing to do with, whether you grow fast or not. I mentioned one of them, airport rates. When airport rental rates go up, it doesn't matter how much you fly, you just pay more, and there is a ton of other costs then, some of which do go down when you fly more. As you fly more with aircraft utilization, it drives down your membership cost on a PRASM basis. But there is a ton of inputs. We are going through all that, and we are just not ready to give detailed commentary on 2018 for costs. We are in the middle of our budget process, we are going at it in a very-very detailed way in trying to get to the best answer we can get to, that's going to maximize margin for United, and we will comment on that further when we are ready to.

This is Oscar again; again I just -- and I know this won't help matters much, but I know everybody is getting scared about the fact that we are not going to give these numbers, because of some ominous reason. I cannot fully express to you, how much in the middle of things that we are. We historically have had a lot of talented people with a lot of experience in this industry, who know their relationships and how they are supposed to work, and we also have a very-very large company, with a lot of places that we are digging into. And so, let us do a little bit more of that work, and when we come out of it, we will be able to sort of provide you some better information around what we are thinking.

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

Hey, good morning everyone and thank you for taking my question. And look, I try not to be too critical on these things, but I have just heard a lot of conflicting comments today, so I do want to poise my question this way. So Oscar, you have been in the transportation business for quite some time now, you know a lot of the investors here probably more than a decade. And you know that, when you point out public statements about earnings improvement or efficiency targets, people are going to measure you against those. And so, when you put in your slide today, that Investor Day initiatives are generally performing as expected. But then we hear on the call, we don't really want to focus on those numbers. You guys are drawing the focus there and then saying, we shouldn't be focused on it. So I guess, I just want to focus on your comments that, you said on the call, I am focused on absolute and relative earnings performance. When I look at your absolute earnings, they are down more than your competitors. Your relative margin gap is widening, not narrowing, and more importantly for the investors on this call, the stock is now down, call it 20% to 25% versus the market this year. So from an investor perspective, what is it that happened this year, that we didn't anticipate at the Investor Day last year? We knew a lot of the labor costs are going to be here? And what is going to incrementally drive positive change for your shareholders, where we can start to address some of these absolute and relative gaps? And can you commit to driving higher margins in 2018, barring some sort of change in the macro?

Hey Brandon. Again, the things that I have changed, I think we have noted and discussed, A. B, it's hard to prove to you how well some of our initiatives have worked. The fact that they are working, and the headwinds have been significant. The inconsistencies that I think you are picking up, are just a function of time and structure. We are in the middle of planning process. It is a quarter that we just had and a quarter that follows, and we are really getting to the bottom of all these things. So I wish I had more information to share with you at this point. We are committed to the things that we've said, the absolute relative margin growth. It's just in this interim period, we are having some difficulties explaining this to you clearly, and we get that. That is still a little bit more work, and as we get better clarity on the things that we are doing, we will do what's required to make sure that we regain the trust. But more importantly, beyond the communication and quarterly update, I think the execution of all these initiatives is something we have to continue to focus on. And so, I appreciate your concern and your pointed question and appreciate your sentiment. And we will just move forward.

Well if you don't mind, I just want to follow-up; because you did mention you are going to control what you can. And in your opening comments, I think you mentioned revenue management, your role of economy basic, mention of the fair structure of ULCCs. But notably absent from that -- and now listen, I live in an Excel spreadsheet, right? I don't run errands, I am not trying to say, I know better than you guys. But at a simplistic level, we see domestic revenue growing, let's call it 4% this year. You guys chose to grow your capacity, let's call it 5%. From our perspective, we'd say that's going to be dilutive growth. So why was not capacity part of that discussion of what you can control, and is that something you are looking towards in 2018, to maybe rethink it?

It's not. We have dug ourselves in a hole, from a competitive perspective, and the team that we got in together here, is about regaining that competitive advantage, and we have that focus on margin, but at the end of the day, we feel that the moves we made in the marketplace are creating a more positive potential for revenue increases in the future. And so it is a focus of ours and it's one that we are committed to.

Thank you.

Thank you. Ladies and gentlemen, this concludes our Analyst and Investor portion of our call today. We will now take questions from the media. [Operator Instructions]. From Bloomberg, we have Michael Sasso. Please go ahead.

Hey, good morning. I will open and this is up to whoever wants to take it. I have been interested in the Polaris international cabin. There has been a lot of blog posts in the last few weeks, suggesting that you are delayed in your lounges. At least, there was some delay early on with seats. It has been really hard from my perspective to kind of assess how it's doing. I have not seen much guidance or input into whether it's helping you win over customers on these international routes. Can you just talk about one, how is it -- one, did you maybe announce this too early, there is some sense that maybe people are confused, why can't they see it? Should you have been a little -- been more restrictive or whatever in how you went about announcing this? And number two, just give us a sense, how is it doing? Is it winning over any customers?

Sure, this is Andrew Nocella. The way I'd describe it is, first of all, whenever you change out -- see employers, there are many -- owner/suppliers that sees one of the -- for an airline the size of United, it takes a number of years. So the airline announced the new seat and has launched it, and by all of our measurements, where we are flying, it's doing very well. We are serving our customers all the time about the time about the cabin, comfort, their overall experience and all those things are going really well onboard our 777-300s and we just got our first 767 out there. We'd like it to go much faster, and we are looking at ways to do that all the time. But when there is hundreds of aircraft involved, it's just going to take a few years to roll out, and we are well on our way, at this point. But we also remember, there is many other components to Polaris. There is a new refined food offering, there is new amenities, blankets, and all of those things are available on all United Intercontinental flights, and are being well received by our customers. So we are well along the way. We'd like to go faster. But the feedback we have gotten in two days, I think has been fantastic, about the seat we have put on board and the changes we have made, and you will look for more and more of it over time, as we get more aircraft converted to include the seat, as well as all the other Polaris experiences.

And then, is there any -- how would we know, how it's doing? I mean, I guess it wouldn't be broken, I am sure it would be broken out and the results or whatever. But is there -- how could observers tell how it's doing financially, and if it's helping you financially?

Yeah. We wouldn't release that type of individual data. And you are talking about, at this point, a small number of flights across the global system, it would be hard to -- even internally for United to estimate how one or two routes are doing, relative to the whole system. So that's something we wouldn't release. But look, we serve our customers all the time, and we are trying to understand what they like about the service, and we have made incredible headway. And our performance on those aircraft that have the Polaris seat as well as the overall Polaris experience is better than the experience on an aircraft that don't. So we know we are moving in the right direction.

From The Street, we have Ted Reed. Please go ahead.

Thank you. I'd like to ask Scott a couple of questions about the ultra low cost carriers. Mainly, in the current quarter, are they doing anything different or are you going to do stuff differently? And also, I'd just like you to explain to me a little bit, the impact on connecting traffic?

So not much has changed in the last six to eight weeks in the ultra low cost carriers, and I don't know if things will change going forward. The impact on connecting traffic is, if we are flying between Chicago and Fort Lauderdale, and they are now lower fare. We carry more local traffic between Chicago and Fort Lauderdale. That means, we have fewer seats available to carry from Fort Lauderdale to Des Moines, actually, because we are more likely to be sold out in the local market, because we sold more seats in the local market. So that's how we have changed our yield management posture, with regard to connecting revenues, recognizing that essentially there are fewer seats available for connecting traffic than there were before.

Thanks. And last thing, what are the hubs where they have the most impact?

We have probably the most flights in Chicago, it's number one for us.

All right. Thank you, Scott.

Yes.

All right. Thank you 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. You may now disconnect.