United Airlines Holdings, Inc. (UAL) Q1 2018 Earnings Report, Transcript and Summary

Good morning and welcome to United Continental Holdings Earnings Conference Call for the First Quarter 2018. 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, Mike Leskinen, Managing Director of Investor Relations. You may begin, sir.

Thank you, Brandon. Good morning everyone and welcome to United’s first quarter 2018 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 of these documents are available on our website at ir.united.com. Information in yesterday’s release and investor update, the accompanied presentation and the remarks made during this conference call may contain forward-looking statements, which represent the Company’s current expectations or beliefs concerning future events and financial performance. All forward-looking statements are based upon information currently available to the Company. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release, Form 10-K and other reports filed with the SEC by United Continental Holdings and United Airlines for a more thorough description of these factors. Also during the course of our call, we will discuss several non-GAAP financial measures. For a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please refer to the tables at the end of our earnings release, investor update and presentation, copies of which are available on our website. Joining us here in Chicago to discuss our results and outlook, our Chief Executive Officer, Oscar Munoz; President, Scott Kirby; Executive Vice President and Chief Commercial Officer, Andrew Nocella; and Executive Vice President and Chief Financial Officer, Andrew Levy. In addition, we have Executive Vice President and Chief Operations Officer, Greg Hart, in the room, available to assist with Q&A. And now, I would like to turn the call over to Oscar.

Thank you, Mike. Good morning everybody and thank you for being on the call today. Before I go on to our first quarter results, I would like us to take a moment and just keep all the passengers and crew of Southwest Flight 1380 in our thoughts. I know that the entire United family stands shoulder to shoulder with our Southwest colleagues in this difficult time. As we turn to slide four, yesterday we reported adjusted pretax earnings of $179 million with pretax margin of 2% as adjusted. We achieved the top end of our guidance due to a strong demand environment and robust revenue trend, particularly in our international markets. Our earnings per share of $0.50 as adjusted, was 19% higher than our first quarter results of last year. Our first quarter reflects exceptional operational performance in the face of back-to-back winter storms in the Northeast, as well as other various weather events. And not only did our employees power through these challenges, they continue to deliver record-setting operational performance. I want to thank all 90,000 of our employees for their outstanding work and dedication to keep our airline running not only safe but on time. Every day, every flight, our team is focused on delivering a positive experience for our customers throughout their journey. We’re equipping our employees with the modern tools and support they need to provide our customers with best possible travel experience. As you can see on slide five, this quarter, we completed the rollout of 10,000 mobile devices for our airport agents who support gate functions such as rebooking during irregular operations, applying the upgrade, coordinating family seating and many other tasks. These tools not only help our employees and customers but help drive efficiency, something we are extremely focused on. During the quarter, we also began training our team on United’s customer service decision framework developed alongside our frontline employees, we call this the core4. It is a hierarchical framework based on principles of safe, caring, dependable and efficient. Biggest change is that caring is second only to safety. And what that means is giving our employees the flexibility and more importantly the ownership to take actions for our customers when our policies and procedures don’t fit the situation in hand. Early results evident in our customer satisfaction scores were very positive and we’re on track to have 80% of our employees complete this core4 training by the end of the year. As you know, improving customers service and experience is one of the top priorities for us here at United. At our January 23rd investor event, we laid out a three-year plan to deliver a CAGR and earnings per share of about 25%, as shown on slide six. To execute on this plan, we have two primary focus areas. First is strengthening and growing our domestic network; and second is driving asset efficiency and productivity, which is underpinned by our commitment to keep CASM-ex flat or better through 2020. We have tremendous network potential and have defined and aligned on the strategy design to unlock our opportunities to better leverage what we call our uniquely United strength. We’re very confident in our multiyear network growth strategy and remain committed to the long-term financial targets we laid out in January. In fact, we’ve seen early successes on many of our new routes. That said, we believe the strongest evidence that the plan is working is our march towards our adjusted EPS targets. Despite the recent increases in fuel, today, we’re tightening our full year 2018 adjusted EPS guidance range by $0.50 based on the combination of our first quarter results and our increased confidence in the remainder of the year. Our new adjusted EPS guidance range is now $7 to $8.50. We’re entering the second quarter with the momentum, encouraged by trends in the revenue environment and how our employees continue to raise the bar on operational performance and customer service. And so with that, I will turn it over to Scott.

Thank you, Oscar, and thanks everyone for joining us today. To begin, I would like to thank all of our employees for delivering another quarter of top tier operational performance. We set our best-ever first quarter consolidated D0 with March marking the seventh month in a row of being first amongst our primary competitors. We believe that D0 really is the best measure of an airline’s core operating performance and I’m proud to be a part of this leading team. And we are running a great operation, getting customers through their destination on time with their bags, with the minimum amount of hassle. The essential requirement to being a customer centric airline, it clearly isn’t enough. We at United have to do much more to run an on-time airline. Empowering our frontline to put customers first, use their judgment really is one of the keys to making United great in the long-term. That’s the reason why you hear all of us talk about the core4 training as such a critical element of our plans here at United. The core4 represents not just some flavor of the day corporate seat but a real necessity to change our DNA and put the customers first. Moving onto revenue environment. All regions performed above expectations for the quarter, both business and leisure bookings did well domestically and the front-cabin drove outperformance in our international business. [Ph] A healthy revenue environment coupled with the commercial initiatives, Andrew Nocella will touch on shortly, got 2018 off to a strong start. Running a great operation allows us to focus on executing our network strategy to strengthen and grow our hubs. On slide 10, we have tightened our full-year capacity guidance to 4.5% to 5.5% from the previous quarter’s 6%. In addition, it seems there may be some misunderstandings about scope relative to our three-year growth plan that I’d like to take a moment try to clear up. We believe changing scope and giving a regional product that is competitive is important to United’s long-term future. However, it takes time to negotiate a new agreement, then takes time to negotiate an aircraft deal, and then it takes 18 months or more before the first aircraft are built and start actually flying. So, while it is important to the long run competitive position at United, there really was never enough time for us to get all of that done and aircraft delivered to have a meaningful change in our regional fleet before 2020. So, our targets through 2020 were not and are not predicated on changes to scope. We have great confidence in our $11 to $13 adjusted EPS target but it is based on our existing fleet plan. We are pleased with how the year began, but as we look forward to the remainder of the year, we will continue to focus on running a great operation, executing the growth plans, and increasing our efficiency and productivity. We also know that we have more to do for the customer experience, which is represented by our core4. We feel really good about the demand environment overall and we more specifically for how that revenue outlook is shaping up here at United. And while we are doing everything we can to drive revenue performance, our cost base is the lever that we can most control. And doing so, it’s fundamental to improving our earnings profile. Andrew Levy will talk more about our cost performance and our opportunities going forward, and I’d like to thank him and the entire United team for their hard work in the first quarter to keep us in the middle of our guidance range despite the significant impact of storms. We feel encouraged about how the first quarter came in and are optimistic about the next couple of quarters that we have visibility on. It’s early but based on everything that we can see so far, gives us increasing confidence that we are on the right path with the growth plan. Before I turn it over, I’d also like to congratulate Mr. Leskinen who has a baby due tomorrow and assure his Melissa that we will rush into the airport after this call to make sure he gets home in time. And with that, I’ll turn it over to the Andrews.

Thanks, Scott. Turning to the revenue environment on slide 13. Our system PRASM was 2.7% higher year-over-year for the first quarter. As Scott mentioned, all regions exceeded initial expectations with close in strength materialize in the week before Easter holiday, which has been historically weak. We also had a 50 basis-point tailwind from foreign exchange in the quarter. Domestic unit revenue sequentially improved throughout the quarter with corporate revenues being up 9% year-over-year, led by the energy sector. This outpaced our top line growth of 6%. As a result of an intensified competitive landscape and corporate pricing, particularly in the small and medium enterprise segment, we invested in sales initiatives that have sharpened our competitive position across all sectors, geographies and the entire fare spectrum. The Atlantic region had our strongest year-over-year PRASM of any region in the quarter. We saw sequential improvement each month in the quarter and now have seen improvement for six consecutive quarters. This positive year-over-year PRASM momentum is driven by strong performance in the economy cabin and we continue to see strong revenue performance upfront, as well as a 2-point benefit from foreign exchange. Overall, forward-looking trends show the second quarter looks promising with anticipated continued strength in demand for both cabins. Latin followed in performance with the bulk of the strength driven by the Caribbean beach markets and Central America, both of which had double digit PRASM growth in the quarter. After 13 quarters of underperformance in the Pacific, PRASM inflected strongly positive in the month of March with demand catching up to supply. China PRASM improved throughout the quarter. Excluding Micronesia, our Transpac PRASM would have been positive in Q1. Looking ahead, we anticipate second quarter PRASM to be up 1% to 3% year-over-year. Moving to slide 14, I’d like to give an update on some of our commercial initiatives we outlined at our investor event earlier this year. At the end of the first quarter, Gemini, our new revenue management system is rolled out on all flights and we expect Gemini to be running in all cabins by the end of this month. Initial results are on plan and show better managed place as measured by a more optimal mix of medial [ph] fares. I’m really proud of the team and we believe these preliminary results are encouraging and represent the opportunity we can expect Gemini to drive moving forward. Our Basic Economy product continues to evolve and is currently available for purchasing about two thirds of our domestic non-stop markets. Now, that it’s begun to mature and is competing with similar products from our large competitors, Basic Economy is contributing as we hoped with 60% to 70% of our customers buying up to standard. While there is still room for further optimization, it’s been an effective competitive tool. In November, we began offering dynamic pricing for Everyday Awards for our MileagePlus members. Since making this announcement, we have seen a 16% increase in saver awards. This allows MileagePlus to offer lower price awards to members while at the same time optimizing award expense to United. On the MileagePlus card, new card acquisitions continue to build on strong fourth quarter performance, and we’ve reached an inflection point with the 7% increase in acquisitions in the quarter. This is the largest number of new accounts in the quarter since the second quarter of 2016. Card spend was up 3%, which we view as a significant opportunity for further growth. We will continue to work with Chase to grow card acquisitions and improve the programs to make it better for our joint customers. Another customer enhancement is WiFi. We’re bringing Viasat’s latest generation in-flight entertainment and connectivity system to the 70 air craft, including our Boeing 737 MAX. This system is designed to provide customers with fast, reliable internet connections and to be able to connect with key business applications such as corporate, VPN and secure email. Moving on to Polaris, on slide 15, we remain on track with our aircraft reconfiguration schedule. We plan to induct a Polaris-configured aircraft every 10 days through the end of 2020. We are very excited about Polaris and continue to invest and improve the soft product in response to customer and employee feedback. We’re currently on schedule to open four Polaris lounges this year with San Francisco opening in just a few days at the end of this month and New York and Houston in one more month and Los Angeles later this year. In summary, we feel the revenue environment is robust and as strong as we have seen in long time. Our commercial initiatives have taken off in the right direction. And with that, I’ll turn it over to Andrew.

Thanks, Andrew. Yesterday afternoon, we released our first quarter 2018 earnings and our second 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 17 is a summary of our GAAP financials and slide 18 shows our adjusted results. We are pleased to report adjusted earnings of $0.50 per share, which was 19% higher than the first quarter of 2017. Adjusted pre-tax income was $179 million and adjusted pre-tax margin was 2%. We were very pleased with how the quarter came in compared to initial expectations. Slide 19 shows our total cost per ASM for the first quarter of 2018 and our estimates for the second quarter and full year. Turning to slide 20, non-fuel unit costs in the first quarter increased 0.6% on a year over year basis, which is slightly above the middle of our initial guidance range despite the impact from weather events which cumulatively added 40 bps of non-fuel CASM ex-headwind in the quarter. We expect second quarter non-fuel CASM ex to be between flat to up 1% compared to the second quarter of 2017. The combination of higher regional capacity expense and increased airport costs represents almost 2 points of CASM ex pressure. But, we expect these will largely offset -- these will be largely offset year over year by lower unit costs in other line items. It’s important to note, these were known areas of cost pressure for the second quarter when we provided our 2018 cost guidance in January. We also expect to see a nice decline in CASM ex during the second half of the year which we get into on slide 21. During the third quarter of 2017, we started to ramp up our 50-seat flying, so as we get into the back half of the year, we start to lap these costs. This alone is expected to provide a half point of CASM ex tailwind compared with the first half of this year. Our capacity growth rate is also expected to be meaningfully higher in the last two quarters with much of the increased rate of growth driven by flying during off-peak periods. As we discussed in January, we believe increasing the productivity of our fixed costs will have a very positive effect on helping container growth of non-fuel unit costs in 2018. We’ve also launched several initiatives to drive increased cost savings as the year progresses. These include our supply chain excellence projects, which will improve the efficiency of our aircraft part supply chain, and several projects in our maintenance planning area which will improve our airframe heavy maintenance programs and further optimize our checks. Finally, we’re continuing to utilize our balance sheet by purchasing aircraft off lease, which optimizes our aircraft ownership costs. All in all, I’m very confident in reaffirming our non-fuel unit cost guidance of down 1% to flat for the full year 2018. Turning to slide 22, year to date through April 16th, we have purchased $747 million of our shares, which represents about 4% of the total shares outstanding at the end of 2017. That leaves us with $2.3 billion remaining of the $3 billion repurchase authority granted by our Board in December of 2017. We plan to continue to opportunistically return excess cash to shareholders through repurchases of our stock when it’s trading below our view of intrinsic value while maintaining appropriate liquidity. For 2018, we continue to expect adjusted CapEx to be between $3.6 billion and $3.8 billion. On fleet, we took delivery of two Boeing 777-300ERs and four Boeing 787-9s in the first quarter. We also continued to advantage of our balance sheet and purchased six mainline and 17 regional aircraft off of lease, which gives us greater flexibility and better economics for our fleet. Looking forward to the second quarter, we plan to take delivery of our first six Boeing 737 MAX 9 aircraft and are scheduled to being operating the aircraft in June. We’re very excited about the efficiency improvements and customer experience enhancements this aircraft will bring to our fleet. We also continue to be very active in the used aircraft market and recently secured a deal for 20 Airbus A319 aircraft scheduled to be delivered to us in 2020 and 2021. Used aircraft provide us an enhanced opportunity to maximize returns regardless of where we’re in the economic cycle. And we’re in discussions for more used widebody and narrowbody aircraft. Slide 23 includes the summary of our current guidance including second quarter’s projected fuel price range using the April 12th fuel curve. The range provided for capacity, revenue and costs imply the second quarter adjusted pretax margin between 9% and 11%. And as Oscar mentioned earlier, on slide 24, we are raising the bottom end of our full-year adjusted earnings per share guidance by $0.50 to a new range of $7 and $8.50. The momentum we’ve established in the first quarter has increased our confidence in our ability to deliver adjusted EPS in this tightened range. With that, I’ll turn it over to Mike to kick off the Q&A.

Thank you, Andrew. First, we will take questions from 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 the questions.

[Operator Instructions] From UBS, we have Darryl Genovesi. Please go ahead.

Hi, guys, thanks for the time, good quarter. Scott or Andrew Nocella, thanks for the color on the scope constraint. I guess, the other constraint to your growth that I’ve been wondering about is on airport asset. Do you have enough spare gate and runway availability to execute your growth plan at the Mid-Continent hub, or do you need to go on and get more?

For the most part, we have what we need. Really when you look at our schedule, the fact is the airline operated, bank structures where one or two of the banks were completely full through the day but the rest of the banks structures, the rest of the day had excess capacity. So, as we fill in the capacity in the other time today, really obviously very cost efficient, we don’t need incremental gates across most of our hubs and we’re able to grow there on.

Okay, great. And then, I guess on kind of a similar topic. My sense is that you have some room to grow at Dulles perhaps more than anywhere else, but that wasn’t really a focus when you rolled out your network plan back in January. And so, I guess, I was just wondering if there is room to drive more connections over Dulles specifically, because my sense is that you’d like to refocus more towards the local market.

So, Dulles is a great hub. It operates four departure waves per day today and only one of those departure waves is full from a gate perspective. So, there is a lot of opportunity in Dulles. We continue to evaluate exactly how to take advantage of that but we are excited about all of our hubs and Dulles is one of those hubs, and I do think there is opportunity to grow Dulles in the future.

And then Andrew Levy, on the CASM guidance, it looks like you need about 200 basis points deceleration in the second half of the year to get to the full year midpoint. Can you just help us bucket what some of the big moving pieces are? If you could help quantify it, that would be helpful.

Well, I think, the big pieces are the ones I have referred to that are on slide 21. The 50-seater alone is 0.5 point improvement in the second half relative to the first. We are growing -- substantially more in the back half of the year, you can see that from our capacity and as we noted, the decent amount of that growth is coming during off-peak periods and that’s a very, very low marginal cost. So that’s a cost saving that we will see in the large number of our P&L, income statement line items. And then, as far as some of the things that I specifically mentioned, I don’t want to give you actual numbers on what the value of those are. However, they are accelerating as the year goes on. For instance, the supply chain excellence project is something we’re really excited about, spent a lot of time planning at the end of last year. And we are just beginning to ramp that up that’s going to deliver benefits to us we think more so as time goes on, including more in the next year. Aircraft rent expense is something that we continue to see some goodness there as we have shifted more airplanes on the balance sheet. So, we will continue to see some benefits there. So, beyond that, I’m not sure how much more detail we want to give you right now but we feel really confident that the combination of these items that I have mentioned as well as several others that are less impactful are going to help us drive our CASM ex meaningfully lower in the second half of the year. And that’s why we are so confident reaffirming the full year guidance.

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

So, my first question is this. When you think about the first quarter, historically that’s been your toughest quarter. And now you have two years in a row where you actually have profits in this year, I’d say it’s fairly significant. As you think about -- or as we I guess think about sequentially fourth quarter to first quarter going forward, is this the new bar, are we going to see more profit in that first quarter going forward than historically United has seen?

Helane, I think -- thank you for saying that. We felt really good about how the first quarter came in this year. The fourth and first quarters will always be seasonally the weakest for United and this is simply a fact that we don’t have as much service to Florida and Caribbean. And so, the big exit from the Northeast to Florida and the Caribbean during the winter is less impactful to United as two other airlines. You are seeing improvement in those quarters, I think you will continue to, but I think you are going to see improvement at United across all quarters. We think the kinds of improvement that we saw in the first quarter are going to continue to happen in each quarter. So, it happens in the first quarter but we would expect that to be happening in subsequent quarters as well, including our seasonal peaks, the second and third quarter.

Right. And so just to follow-up the holidays then our less impactful for you than it might have been in the past years or they might be for other carriers, is that sort of accurate?

I think there probably is similar level of impact that for us that they were in past years but we -- they are less impactful for United than they are for example with carrier that has less [ph] service in the Northeast to Florida, particularly the Easter holiday. It has an impact, certainly on our domestic network, the first quarter is helped by it and the second quarter will be a harder comparison but the magnitude is much smaller than other carriers.

And then, just for my follow-up real quick, I want to understand the Pacific, because I think Andrew Nocella, you said 1% to 3% after you talked about the Pacific, but you were talking about 1% to 3% unit revenue for the system, right, and not for the Pacific specifically in the second quarter?

That’s what I was referring to.

Yes, okay. And then, Pacific do you think will be positive on the full quarter basis than this quarter, is that what you said?

I think it will be; our outlook shows that right now.

From Sanford Bernstein, we have David Vernon. Please go ahead.

Scott, I was wondering if you might be able to add a little bit of color as to when kind of getting resolution on the scope issues is going to be important to executing the growth strategy and what the future might look like, if you can’t get the kind of negotiated agreement on that issue that you are looking for right now?

The long-term here at United, we are focused on making this the best airline in the world. And part of that is about having a competitive product and a competitive fleet. I also understand the reluctance our clients have historically had on scope because we were taking regional aircraft and lying them in big markets that appropriately should have been mainline markets, places like Newark, Atlanta, Chicago to Laguardia, Dallas to Chicago. And for the next several years -- for the timing reasons that I talked about or at least through 2020 we never anticipated a change in our fleet plan, it’s just not time to get it done. In the near term, we are funding our growth plan by taking the regional jets out of markets like Newark to Atlanta and moving them into appropriate regional markets. And it is important to making this best airline in the world that we ultimately get that done. There is no ticking clock or no urgent timeline. We are in and have actually started early negotiations with our pilots on number of issues. This is one that fortunately is a win-win as long as we are growing the airline and using regional aircraft in the right kinds of markets to support and feed the mainline with high yield traffic. It is something that also helps our pilots by creating more growth opportunities at the mainline. And I believe we will get something done, but there is no ticking time clock for getting it done. And just sourcing large regional jets out of the what should be mainline markets today, certainly gets us through pretty much as far as we have on our planning horizon. So, it’s really beyond if this opportunity occurs.

All right, I appreciate the color on that. And maybe Andrew, could you help us understand whether there is some additional headwind coming down the pike on the PRASM side if the growth in the back half of the year is about non-peak flying or is this something that you guys are kind of already anticipating and shouldn’t see a major headwind from by adding flights during non-peak hours?

It’s something we look at carefully. I think, the foundation for that needs to be though, we’ve changed the profile on how we fly and we’ve changed the profile of our connectivity. And that connectivity being in the hands of the airline really helped us most in the off-peak quarters than the peak quarters because of the way passengers flow through the system. We have more seats. So, in the off-peak time period, as we build this connectivity, we feel really good. Q1 came in the off-peak flying better than our expectations, and that’s given us a lot of good views as to what the fourth quarter will look like in a similar off-peak situation. So again, the fundamental change is the connectivity new to the airline is allowing us to absorb this capacity in off-peak periods and do very well with it.

So, you’re not seeing the big difference on the fares for the earlier or later departures?

Well, there is a difference in the fares but the marginal CASM and the RASMs are bringing in, we think it is margin accretive, then we’re managing the margin. And we think it’s working out well.

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

Hey, good morning, everyone. Thanks for taking my question. I guess, I want to piggyback off of David’s question there. I mean, you guys do have lots of moving pieces in the network right now like rebank in Chicago and adding connectivity in your Hawaiian expansion as well. But then, on the positive side, you have the Gemini and the revenue management systems flowing up. So, I guess I just want to ask, should we think about these expansion projects slowing up over time, driving incremental revenue as time progresses? And with like the revenue management initiative should investors expect that we start to see these accrue to unit revenues a few quarters out or is this more of a margin story?

Definitely managing the margin, but as we move forward, the new routes definitely have lower RASM in their first year than their second year. So, I think there’s a lot of different moving pieces and a lot of initiatives, some of which overlap with each other. But, we’re really hopeful that when we look at how a route will do in year two and how this capacity does in year two, it’ll be better than year one. Also with Gemini, we recently turned the system on. We think we have a long way to go with Gemini in terms of making it better and there are further enhancements coming. So, whether it’s that or many of the other initiatives we have in the pipeline, we think the pipeline’s pretty full with ideas that are going to drive margin and drive RASM in the long run.

Okay. I appreciate that. And on the international side, you did comment that I think you’re rolling out of Polaris equipped aircraft at some frequency now, so that product is actually hitting the market. And I think, you also launched a new economy or premium economy product as well. Can you speak of some of those initiatives and what you think that could actually add longer term?

Sure. As I said, we’re rolling out a Polaris plane every 10 days. We are going to be done by the end of 2020, and we’re really happy with that. Premium Plus is our new mid tier product in between Polaris and economy that is going to also be done on the same schedule as the Polaris aircraft. So, we have a little bit less than three years to go, just given how we do aircraft modifications, that’s what made the most sense. So, we have approximately three years to go on both products. We should start to sell Premium Plus sometime during late this year or early next year for our first flight in the first quarter, but we will have aircraft showing up into the system later this summer with the seat available for purchase with an upgrade. So, we’re very excited about all these initiatives. These are I think really important; it further pushes us down the road as segmentation, particularly with the mid tier cabin, it’s exactly where we want to go. And we’re really confident in its ability to deliver value for the airlines. So, a lot more some on that front but we’re on a way and we’re really proud of the product that we’re going to be putting there over the coming months and years.

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

Hi. Good morning, everyone. I guess, Scott or Andrew, staying on this theme of RASM, margin accretion from this new hub-spoke flying. I guess, when I do look at your domestic schedules, obviously regional ASM’s are up around 10% this year versus down last year, mainline not drastically different. With regional flying garnering nearly double the PRASM of mainline, shouldn’t this have a positive mix effect on your RASM? I’m thinking about this the right way? And if so, can you provide any color on what you think a potential tailwind from more of this line could be?

We have introduced number of 50 seaters and I would like to think we’re at our max in the number of 50 seaters that are flying for United. And those aircraft do come in with higher RASMs and they push higher RASM, higher yield traffic across the entire United system, both domestically and internationally, a lot of the flying is brand new. It is doing as expected. We’re happy with it. We will make tweaks as needed but this is going to be a tailwind to RASM as they go forward and we’re pretty pleased by it. I’m not sure what else to add to that.

Okay, thank you for that. And then, my second is maybe digging in a bit more on what you’re seeing on the corporate travel side. I know, your corporate revenues in the quarter were up I think 9% led by energy. But, this is a theme we’ve been hearing positive commentary not out of you guys and some of your peers but from hotel companies as well. Can you give us a sense of maybe where you are in the corporate pricing cycle, where does it stand today versus 2014, and have you seen any change in corporate behavior during any recent contract rate negotiation that you’ve had?

I wouldn’t say we’ve seen any recent changes. Overall, we see a very strong demand environment. And when you look at our international divisions, the premium cabin is leading the way across most of the entities. So, we’re pretty pleased by that. Our sales force has really just hit out park over the last few quarters as we’ve adjusted and made changes to all of our programs to make sure we’re competitive. And we’re really happy with how share is changing and we’re really happy to have a competitive product out there. So, this is going really well. Top line growth of 6%, corporate sale is of 9%, so this is a bigger portion of our aircraft and that’s exactly what we to see. And we don’t see any negative trends at this point in regards to this at all. And Q2 should be another great quarter for corporate business.

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

If I could just more broadly on the regional perspective, I know you mentioned Pacific obviously inflected in the third -- in March and should be positive here as we go into second quarter. Could you talk about the other entities and maybe kind of sequentially what you might be anticipating there?

Well, I think Atlantic is going to lead the way. Atlantic has seen really good demand in both cabins. So, we’re really pleased by that. So, Atlantic should be our strongest international entity, followed by Pacific. In the quarter, we’ve made the appropriate changes in Guam. So that’s no longer RASM negative for us; in fact, it’s RASM positive going forward. China looks very good. China has been good for the last two quarters. Prior to that, we had a number of negative quarters and China looks good going forward. Latin America is fine, but it’s the weakest of the three international entities. And that really is I think a big part about the holiday shift. The holiday shift for Easter I think has a bigger impact in the United work on the Latin American division than the Pacific division, for example. So, I’d expect while Latin had a great Q1 driven by the holiday shift sequentially, it will be lower in Q2 as we have expected to be because of that. So overall, Atlantic first; Pacific second; Latin third.

And how does domestic fall within that?

Domestic falls just fine. I mean, I’m not going to break out the numbers but it’s -- given where we are and what we are doing and the corporate strength we see, we are really happy with all of our entities as we go forward in the Q2.

And if I may follow-up just a little bit on the connecting traffic question. Could you remind me again, as you execute on that strategy, what the timing is on the build-up and moving things around, and like long that takes? And also, maybe follow-up to that, I know Moody’s was questioning of the competitiveness of Chicago from a airport cost standpoint. How important is airport cost in your calculus of connecting traffic?

Yes. On the hub restructures, we spent a lot of time on this and we did Houston late last year. Unfortunately, we did it exactly when there was a hurricane that came through the region. So, it manipulated the numbers a lot. But, we are really happy with what we see so far in Huston, which is an increase in our mix of higher yielding business, which is what we are hoping for. But, we continue to monitor and we continue to tweaks to the flight schedule as we normally would, and the hub structure schedule as appropriate. Chicago, we just implemented in February. So, we really don’t have any results at this point as to how we are doing there. I mean overall, given our outlook for the next quarter, we think things are positive but we will measure that thoroughly in the coming months and figure out how to make tweaks to make it even better. And it’s not something that you on day one, it is something that evolves over time as we learn what works and what needs to be changed optimize it better. But so far so good, and we have Denver planned for either late this year early next year depending on a number circumstances to make that structure even better. So, great so far, good so far, but we still need to measure this a lot more and make tweaks as appropriate.

And I’m guessing the airport costs are not a big driver as the profitability when you think about the connecting traffic?

Well, I mean, airport costs are something we monitor closely and it has been a recent headwind. So, it’s something we negotiate with airports and we want to make sure that all of our hubs have competitive costs and the features, so we are able to do what we need to do from a network perspective. And we have that all baked in our plan. We know what it is, we know what it isn’t and we are moving forward.

From JP Morgan we have Jamie Baker. Please go ahead.

I have got four questions with five follow-ups. First one for Scott or Andrew Nocella. Has the better corporate environment domestically led you to decrease the inventory allocated to Basic Economy or is your competitive positioning in ultra-low cost carrier over that market is sort of business as usual, any changes there?

There is no -- well, I’ll take one step back and say, our inventory for Basic Economy is not a strategic decision, I think it’s made -- here is how much we’re going to put out. It really is driven by the yield management system and the yield management system is trying to maximize the expected value of each seat. And so, to the extent demand is stronger, the yield management system will make your Basic Economy fares available because they are lowest fares. And when demand is weaker, it will have more. So, yes, it’s a strong demand environment. So, that probably means there are fewer Basic Economy seats available but it’s -- there is nothing strategic about it or -- and it is really very much at the margins.

And second and final question actually for Greg Hart, obviously in the early innings right now but if the FAA does order widespread inspection in CFM56-7Bs, how should we think about that in terms of time and expense for United? Is that a fairly simple exercise or does it require aircraft to be pulled from service?

Hey, Jamie. Thanks for the question. Obviously, we don’t want to get ahead of NTSB on this and their investigation. But, there was an event time on another airline back in August of 2016, which actually drove a service bulletin that was issued last week. And we have started work on that service bulletin and are well underway with that process and expect to complete it as quickly as possible. Obviously safety is paramount in everything we do here at airlines and this event or this issue is not different and we’re fully focused on making sure that we complete as quickly as we can.

On the cost question, I think this service bulletin was on board. We are going to do it and that’s embedded in our cost forecast for the future, so, no incremental cost. But again, safety is paramount important.

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

Just following up on domestic as we measure the recovery in domestic PRASM, and appreciate seasonal moves from month-to-month, but there was a time when we’d sort of enter a month behind on advance book yields and kind of make it up close in. Can you just talk to advance book yields now for kind of April, May, June?

Advance book yield, the short answer is advance book yields are good. It’s a strong demand environment. So, that means, not only can you have good close-in demand and reserved seats for close-in demand, you -- the same happens when you are further out, you can be -- have opportunities to be more aggressive there as well. So, we feel good, really good about the demand environment across all entities. We’re trying to contain our enthusiasm, but we feel really good about that demand environment.

Okay. And then, just on Basic Economy and the implementation last year, you launched it fairly aggressively across the fare ladder. And if memory serves, you actually lost some share because of that in the early innings. As we think about a 2Q and in the comp, can you just remind us how much that was worth? Is that maybe worth a point in the comp?

It’s really more of a third quarter than a second quarter issue. And I’m not sure what the number was, we never said a number. Obviously our third quarter comps get -- we kind of had the perfect storm of stuff happening, last year storms, Guam in the third quarter. So, our comps hopefully should be easier in the third quarter, in particular. There really was not much of an impact in the second quarter -- I don’t think into May.

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

Hey, just two quick ones here. This is probably Andrew or Scott. We’ve heard a lot about increased competition on the West Coast. you guys are big in LA, you guys are big in San Fran, what are you guys seeing in that marketplace?

Sure, it’s Andrew. Overall, I think particularly from a San Francisco centric point of view, things are looking good. In fact, we had positive PRASM in our San Francisco hub in the quarter, and we’re really pleased to see that given it’s a pretty competitive environment. But, we’re really confident what we’re doing in San Francisco. We have a great product, great schedule and all the above and the new Polaris lounge about to open in a few weeks as well. So, we feel really good about San Francisco and what’s going on in the West Coast at this point.

Okay. Then, just second question, this is probably for you Andrew Nocella as well. When we look at passengers flying on domestic segments who are connecting to international, what percentage or what amount of load factor points, however you can express that, what would be that domestic leg, where the O&D involves in international destination or origination?

I don’t think we have the exact number. We’ll get it to you. But for United Airlines, it is a pretty significant number going across the whole system. So, it is -- it does impact results. When international results get better, our domestic, we call it DPIJ, our domestic portion of the international journey also gets better, and I’ll have Mike get you the exact load factor number after the call.

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

Hey, good morning. Hey, Scott, do you know what percentage of your business travelers never fly internationally? Is that something you track and do you have a target around where you want that to be?

I don’t know which also means we don’t have a target.

Okay. And then, back to scope real quick. Are you comfortable taking advantage of the 1.25 to 1 ratio language in the existing CBA without a new CBA or would you consider sort of an amended CBA as a gating item to take advantage of that ratio clause even in the event that that clause doesn’t change in the new contract, if you’re understanding the question?

Yes. Look, I’m not even going to get ahead of the discussions we’re having with all the stakeholders, pilots and aircraft manufacturers at the same time. Obviously that’s a backstop but we’re talking to them and would like to get to a road where we have something that everyone is on board with, agrees with and agrees that it’s good for United Airlines and our entire workforce as well.

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

Hi. Good morning. Thanks for the time. Scott, a question for you. As far as rolling out the retail strategy, what surprises have you come across so far? And specifically I’m referring to are planes filling up quicker than you’re expecting, are you not getting a competitor spot? Just some color so we could keep track of how things are going.

I think, it’s going largely as we anticipated. There are some operational bumps along the road, but we anticipated those, you never know which ones are going to occur exactly but we anticipated that there’d be some operational issues. But, I think, actually team has done a remarkable job for the amount of change that we have had to implement as well as they have. Look, I mean the fact that United has been number one in D0 for seven months in a row with all the growth and all the change and all the regional changes is a testaments to Greg Hart and his entire leadership team because it’s hard enough to do that, to produce great results, particularly when we’re in the most challenged geographies, but to do it at the same time that we got -- managing a lot of change is really incredible. But, it is performing largely as we expected.

And then, a quick question for Andrew Nocella. You talked about traction on the corporate side, you threw out some impressive numbers. Can you just talk more about what’s driving that, like what is the proposition that you are giving at corporate that’s making them come to United, is it price, is it something else?

Sure. I really think it is a sales force that has just gotten so excited about the United and what we’re doing. And we talked about all the tools that they need to be competitive in the marketplace, and we’ve armed them, and they are out there promoting the United in a way that I think has really helped us and has shifted some demand to us. Although we still have a strong underlying marketplace out there for premium demand as well. So, it’s all kind of working together. But, I really will give credit to our sales force for making a huge difference in the quarter and we’re really proud of them. And we think Q2 to see even more of that.

From Citi, we Kevin Crissey. Please go ahead.

Thanks for the time. So, looking at the domestic RASM and I think that others have alluded to it, the pure -- what I call, pure domestic origin to a domestic destination, given the strength of international RASM would be lower than the 1.6% that you posted. So, when I think about your future growth and beyond what is scheduled, when I think about 2019 and 2020 growth, how much of those flights are going to be designed for international connecting itineraries versus primarily for domestic origins and domestic destinations. So, I think about flights to Orlando as being primarily domestic focused as opposed to maybe some of the small connections.

I’m not sure I think of it that way. Our network all works together. All of our hubs are significant international getaways and even Denver has a growing international presence. We just started Denver to London Heathrow. So, as that all works together, I don’t think I would separate it that way. And we’re bullish across all the different segments we have and the new connectivity we’re generating, particularly as we said in January, the connectivity we’re creating in the small to small or small to medium type of cities that have I think really n ice yield environment. So overall, we feel really good about it and we don’t have the distinction.

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

Scott, does the importance of regional feed to your growth strategy over the next few years changed the way you think about the need to have a wholly-owned regional sub?

I don’t think so. We’re diagnostic about how we see the airline. And we’ve spent a lot of time on these calls, we’ve sort of spent a lot of time talking about regional feed. It’s not just regional feed, regional feed is you just want to understand the higher yield but a lot of that is also mainline. And as you grow regional feed you also wind up-gauging regional markets to mainline. But, we are agnostic as to whether or not the best way to do that is through a wholly owned or through a third-party, whatever is most efficient, the best operator at cost is who we will use.

And then, Scott or maybe Andrew, you guys are both pretty bullish on demand. Just trying to reconcile, I guess your exuberance with the second quarter guide. I know, there is a lot of capacity growth. But, maybe can you help us like with the same store PRASM number, just any way to reconcile your bullishness around demand with the unit revenue.

Well, I think we have always said, there is a shift in the holiday. So, we knew March would be strong and sequentially that April would be more difficult, and that in fact has happened. So I don’t have a same store type of analysis for you. But the holiday shift is causing a sequential decline, particularly in Latin America is a great example of that. But it’s not unexpected. I’ll say that even with that decline if we look across the Atlantic, I think our outlook across the Atlantic doesn’t show that. So right now, we are really -- I think we’ve said we are bullish across the Atlantic and we are because of the numbers we are seeing over the next 30 or 45 days, particularly in the business class cabin. Right now, obviously we’re lapping Easter last year and we are seeing good results across the Atlantic as we do that.

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

So, given the tragedy that happened yesterday on the Southwest flight, I’m wondering if United is planning to look into or speed up any inspections of engines in its 737 model jets and any others with the CFM engines.

Alana, hi. This is Oscar. As Greg mentioned earlier, a service bulletin was issued just last week regarding an event that had happened previously on another airline. And so, as a result, we did kick off the program to address the bulletin and we’ll be fully compliant. And again, that started just recently. So, yes, we will follow the same program.

And do you have any idea of the time table of completion and how many engines or how many of these engines are actually in United fleet?

Not really. This will be ongoing through the course of the year.

This is Greg Hart. We have about 698 of these engines in our fleet.

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

Could you comment on the fleet plan going out through 2020? I mean how many -- do you have any mainline aircraft coming off lease in that period and do you plan to extend the leases or buy them off -- can you give a little idea on what the mainline fleet is going to look like over this period?

This is Andrew. I don’t have the numbers at my fingertips as to how many aircraft coming off operating lease in the next few years. But the number of aircraft on operating lease continues to shrink as we bring more aircraft out of the balance sheet. The reason we do that is we are agnostic about financing but often times it is just simply better cash economics to have -- to purchase those airplanes rather than continue to lease them. And so that’s we are doing a lot of that. As far as on a go forward basis, we look at each individual deal on a case-by-case basis. And I suspect that there are many that we will look to acquire or extend. And there are others that we will simply give back to the less. So, we’ve provided some information on the 2018 fleet plan in the investor update. And we’re not really compared to go into a whole lot more detail other than the specific callouts we have today on a few expected deliveries and we expect to see including the airbus used A319 transaction that we discussed earlier.

Okay. Is it right to generally assume that the mainline fleet will grow -- likely grow in 2019 and 2020, without going to specifics?

Yes. I think clearly, yes, we definitely have that expectation that we will see growth in order to execute on the long-term growth plan that we’ve provided information on through 2020. Certainly part of that is dependent on adding additional aircraft into the mainline. So, we absolutely will be growing mainline.

From Wall Street Journal we have Dough Cameron. Please go ahead.

Oscar and Scott have talked about this before, just kind of deepening the alliance front and putting yourself in a place with some of your rivals who perhaps had alliances a bit longer have done. I just wonder, if you could comment a little bit on what that actually practically entails. And I guess, just as a side line, was there a bit of a credibility gap because of its operational problems which kind of made some deeper alliances more problematic? That’s maybe putting the cart before the horse but any comments on what you can practically do to deepen the alliances would be useful.

So, first actually Star Alliance and United as founding member is the oldest of the alliances. That’s a…

You shouldn’t be behind then.

That said, we had opportunities to work more closely together than we had historically. We got some nominal alliance partners. We’ve spent a lot of time working with them. Andrew Nocella and myself personally meet with them frequently. And having that kind of high level of engagement has already led the changes. They are not going to be some big bang and press release talking about, but we everyday get better. If you look across the Atlantic, our impressive results are partially because our partnerships with Air Canada and Lufthansa, and how we are working more closely together as a team. And we think that there is continuing opportunities to improve that going forward. But, we are very pleased with our partners and how…

But to be honest, I’m sorry that’s all a very vague. I’d just [Indiscernible] because you have brought this up before, the need to deepen the alliances and obviously Delta and American will show it from rooftops about the money they are making from their partnership. So, really interested in digging a little bit better than that you have great partners.

Yes. Unfortunately, that’s all confidential and it’s stuff that we keep behind the curtains on what exactly we’re doing tactically with our partners.

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

Yes. Can you give maybe a little more information on these 20 used A319s? We’ve been hearing that easyJet may be the source of those. Can you talk about where these are coming from and in fact are they coming from easyJet?

Hey, Mike. So, they’re midlife aircraft that we’re acquiring. As far as where they’re coming from, we’re not able to disclose that information due to provisions in the purchase agreement. So, as much as I’d love to tell you that I’m just unable to do so.

Mike, the seller asked us not to disclose yet.

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

Thanks to all for joining the call today. Please contact media relations, if you have any further questions. And we look forward to talking to you next quarter. Thanks.