United Airlines Holdings, Inc. (UAL) Q2 2018 Earnings Report, Transcript and Summary

Good morning and welcome to United Continental Holdings Earnings Conference Call for the Second Quarter 2018. My name is Brandon and I’ll be your conference for 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 go ahead, sir.

Thank you, Brandon. Good morning everyone and welcome to United’s second quarter 2018 earnings conference call. Yesterday, we issued our earnings release and separate investor update. Additionally, this morning, we issued a presentation to accompany this call. All three documents are available on our Web site 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 Web site. Joining us here in Chicago to discuss our results and outlook are Chief Executive Officer, Oscar Munoz; President, Scott Kirby; Executive Vice President and Chief Commercial Officer, Andrew Nocella; and Senior Vice President Finance and Acting Chief Financial Officer, Gerry Laderman. And now, I’d like to turn over the call to Oscar.

Thank you, Mike. Good morning everybody and thank you for being on the call today. While we go over a great second quarter even in the face of some external headwinds that had an impact on our entire industry, our growth plan and our commitment to a high standard of operational performance has put us in a position and leaves us feeling very optimistic about the second half of the year. As you all know, three of the critical areas that we are focusing on in order to deliver on our strategic growth plan are; one, financial discipline, our operational reliability and of course customer service. In the second quarter, we continued to perform strongly and made strides forward on all those three fronts. Let me first start with the customer. We have a steady cadence of initiatives that we are rolling out that will elevate the United customer experience to a new level making us the airline that customers want to fly and return to time and again. We finished another quarter with industry leading on-time departures. Also we achieved the top end of our guidance range despite higher fuel prices due to both strong revenue and discipline cost management. I want to thank our more than 90,000 employees and tens of thousands of others who support us for their outstanding work and dedication to keep our airline running safe and on time. I’d like to turn to the financials on Slide 4. Yesterday, we reported adjusted pre-tax earnings of $1.1 billion with an adjusted pre-tax margin of 10.4%. Our adjusted earnings per share of $3.23 were 17% higher than our second quarter adjusted earnings per share last year. This performance reflects both the strong results we are already seeing from our revenue initiatives which are delivering ahead of expectations as well as our continued strong cost discipline. Next, on Slide 5, I want to focus on what we’re doing to elevate the United experience for both our employees and customers because that remains absolutely key to achieving our longer-term objectives. We are continuing to implement our core4 training which is empowering our employees to better care for our customers. Simply the core4 is about adding flexibility to a previously rigid and rule-based system. Across our airline we are continuing to put the customer at the center of everything that we do because as we all know in the long term that’s how we can make United the airline that customer choose to fly. On our newsworthy note by our next earnings call in October I’m excited to say that we will have completed the integration of our flight attendant groups and will be flying together on common metal, pause for applaud here, and serving our customers better than ever because we will truly be a united United airline. Now as we continue to invest in our people, we are also investing in our product. We have achieved what I would call an operational temple with the roll-out of United’s Polaris business class service and I’m pleased to say that a new Polaris equipped aircraft is entering service every 10 days on average through 2020. This new aircraft combined with our world-class Polaris lounges give our customers the industry leading international business class experience. Turning to Slide 6, our performance in financial outcome in the second quarter has further increased our confidence that we can offset the higher fuel prices that the entire industry is facing. Through the end of the second quarter, we’ve recaptured approximately 75% of the earning headway from higher fuel through higher yield and commercial and operational initiatives. We expect revenue to continue to be highly correlated with fuel prices but importantly we plan to manage the business to maximize profitability as we move forward in implementing our growth plan. Scott will address in more detail later in the presentation about our guardrails as the management team are our adjusted EPS guidance, not ASM growth. If the fuel environment shifts or for that matter anything else in the macro environment changes, we’ve demonstrated the ability to nimbly manage the challenges posed by the current environment. And so in putting all of this together, I’m pleased to say that we’re raising our adjusted EPS guidance for the full year. Our new guidance range is $7.25 to $8.75 and reflects the higher fuel prices that we expect will be more than offset by both revenue and continued cost discipline. This is the best evidence that our growth plan is working and adds to our confidence and our strategic plan to deliver $11.00 to $13.00 in adjusted EPS in 2020. Now before I turn the call over to Scott, I’d like to quickly update you on our CFO search. It is progressing quickly. We’re down to a very short list. We’re committed to recruiting an executive with airline experience who strikes the right balance as a business partner. Gerry Laderman is doing a phenomenal job in this role and our commitment to cost discipline remains as strong as ever. With that, here’s Scott.

Thank you, Oscar, and thanks everyone for joining us today. I’d like to start by thanking the entire United team for delivering another quarter of top tier operational performance. Our growth plan and our commitment to customers is all built on the foundation of running a great operation. We were number one among our primary competitors for D0 [ph] for the quarter. We’re continuing to build momentum in operational performance and I’m proud to be a member of the United team that’s delivering these excellent results. Moving on to the revenue environment, we continue to see broad-based strength across all regions with the exception of Latin America. Andrew will provide a more detail. We’re very happy that early returns from our commercial, operational and growth plan initiatives are already showing up in our results. I’d also like to recommend our cargo team for an excellent start to the year. They continue to run several years of improving results with first half revenue up 19% year-over-year. They’ve also done a terrific job in providing specialized product and services to our customers and their efforts are reflected in our results and strong operational performance. Reliability is particularly important to cargo customers, so our operational improvement gives the cargo team a fantastic product to sell to customers. I’m sure that you’ve all seen that we also lowered our full year capacity outlook to the lower end of the range. While the growth plan in our commercial and operational initiatives are exceeding our expectations at this admittedly early stage, this capacity reduction is just the expected result of higher fuel prices. As Oscar said, we’re currently recovering about 75% of the fuel price increase but that’s not 100% yet. And as a result, our scheduling team simply trims back some flights at the margin. One of the questions we’re hearing from investors lately is what happens if the economy tips into a recession or a trade war impact demands. To address that, I’ll take a minute to describe our guiding principles and our flexibility to respond to adverse macroeconomic conditions. To start, our guiding financial principle is hitting our adjusted earnings per share targets both this year and through 2020. The capacity plan that we announced in January are a means to that end that we believe will allow us to maximize profitability. But if fuel, the economy or anything else disrupts that, we have significant flexibility to respond with capacity reductions even without deferring deliveries or reducing aircraft utilization which are always available and are generally not the best option. In the event of a downturn, we can easily return a leased aircraft at lease expiration and/or retire our older aircraft and use these retired aircraft to support the rest of the operation. When an older aircraft comes due for engine and airframe overhaul, we can either complete the overhauls and continue flying it or alternatively we can ground the aircraft and essentially use many of the parts from these aircraft as spare and replacement parts for the remaining fleet. The economic impact of retiring the aircraft is actually positive to the P&L because we both avoid the expense of the overhauls and save on inventory costs since using the parts from our retired aircraft and is less expensive than sourcing new parts from third parties. That’s one of the key reasons we have been and remain active in the used aircraft market. It gives us valuable flexibility to respond to a downturn if that is needed. While it would obviously require a pretty severe downturn to use all of our flexibility, we have the flexibility to reduce the fleet by up to double-digit percentages per year if that was required. We’ve built the fleet plan that allows us to capitalize on these opportunities, inherit in the growth plan, but while still maintaining the flexibility to quickly respond to adverse conditions. That, however, is not what we expect to have to do because everything we see today says that demand is strong. We at the management team are focused on delivering our $7.25 to $8.75 in adjusted EPS this year and $11.00 to $13.00 in adjusted EPS in 2020. We acknowledge that we can’t predict the macro environment but we’re prepared to adjust our strategy as we march towards those EPS goals. To try and wrap up, we’re pleased with how the first half of the year has gone but know that we have plenty of work to do in the second half and in the years to come. You can see that our team is running a reliable operation and we’re committed to growing it efficiently and productively as we expand our Mid-Continent connecting us. We also know that none of that matters or not also in an airline that customers want to fly. I’m happy to say that the core4 is showing early signs of success as customer satisfaction scores are moving in the right direction and that’s because we’re letting our people do what they do best; take care of our customers and each other. We realize we have a lot of work to do to regain customer confidence into core4 along with our other investments and initiatives are designed to trigger a permanent shift in our culture as we become the United we all want to be. We’ve just started unlocking United’s full potential. We’ve seen some of our best results in our Mid-Continent hubs as we’ve increased overall connectivity and productivity. We’re optimistic that the second half will continue that momentum and it’s with these results in our early bookings for the third quarter that we felt comfortable increasing our full year 2018 EPS guidance again today. With that, I’ll turn it over to Andrew.

Thanks, Scott. Taking a look at the revenue environment on Slide 15, we reported a 3% increase in system PRASM year-over-year for the second quarter at the high end of our expectations. Domestic PRASM improved 1.7% year-over-year in the quarter. We saw growing strength as we moved through the quarter with overall demand and increased market share well ahead of our expectations. Strong performance from our revenue management team and Gemini, our new yield revenue management system, combined with an improving pricing environment allowed us to drive higher domestic PRASM even in tough industry conditions. Additionally, our pure domestic revenues actually outperformed the domestic portion of international journey or DPIJ in the year-over-year growth as our rebanking and other initiatives really began to take hold. Corporate revenues were up double digit year-over-year, well outpaced in our top line growth. We continue to look for sales opportunities to better position ourselves across all channels and products. Once again the Atlantic region had the strongest year-over-year PRASM of any region in the quarter, increasing 7.9%. We saw revenue trends each month in the quarter and now have seen improvements for six consecutive quarters. This positive year-over-year PRASM momentum is driven by strong load factor performance in both cabins, up over 5 percentage points on a year-over-year as well as 2 points PRASM benefit from foreign exchange. Our Transatlantic joint venture with Lufthansa and Air Canada is working better than ever and all our new planes are ahead of our financial projections. While the Atlantic had our strongest PRASM performance, it actually made the most progress in the Pacific. PRASM was up 3.4 points year-over-year, the first positive quarter in the region since the third quarter of 2014. Guam has rebounded nicely and our outlook shows improved results for the remainder of the year as well. With demand recovered in Guam, we plan to begin to restore capacity later this year in Guam as we schedule widebody jets on flights to Tokyo in place of our 737s. Overall, forward-looking trends for this summer look very promising for both the Atlantic and Pacific with the anticipated continued trends in demand for both cabins. Our Latin entity trailed the Atlantic and Pacific in performance and was the only region with negative revenue performance being down 2.9% in the quarter. While the region is more challenged than others, flights to Mexico, these destinations in particular had pretty severe demand weakness due to increased supply and travel warnings. We made adjustments to capacity in this region and we continue to monitor our capacity levels in the region going forward. We expect that Latin performance will trail other regions for the remainder of 2018. Looking ahead, we anticipate third quarter PRASM to be up between 4% and 6% year-over-year with strong performance in all regions other than Latin America. Moving to Slide 16, I’d like to give an update on some of our commercial initiatives. We’re excited to have a long list of initiatives still ahead of us that we expect to drive better revenue and margin performance. Our commercial initiatives are also focused on raising the bar and delivering better experience to our employees and customers on every flight and in every touch point. We’ve only just begun. There’s a lot of runway and a lot of incremental improvements for years to come. As of the end of the first quarter, Gemini, our new revenue management system was rolled out on all flights. We quickly had it run on all cabins in the second quarter to compete the rollout and results have exceeded our expectations. I’m really proud of the whole team involved in the rollout and we believe our second quarter results and third quarter outlook reflect the power of Gemini in action. We continue to make enhancements to Gemini and we believe will drive incremental value for years. In the quarter, we expanded Basic Economy to parts of Latin America and introduced a Basic Economy-like fare to Europe. And so far the roll ahead has gone as planned. While there’s still room for further optimization, it has been an effective competitive tool and we plan to continue to expand its use in the U.S. and abroad. In the second quarter, we observed strong results following our rebank initiatives in Houston and Chicago. One of the goals with rebank was to give customers in short-haul cities more options when connected. In Houston and Chicago combined we saw over a 10% increase in both big medium to small city revenue and almost a 20% increase in small to small city revenue. We’re very pleased by these results in these markets and are seeing nearly double-digit RASM improvements in small Houston markets. We intend to use these learnings to drive better results in other hubs and are on track to rebank Denver as promised in early 2019. On the co-brand card, we launched a new United Explorer card in the beginning of June. Along with Chase we’ve invested in a new marketing campaign that highlights the card’s appealing new benefits that are tailored to our travel-savvy customers and provide additional value to both new and existing card members. Even though this rollout didn’t occur until June, during the quarter we saw a record low attrition, over 10% card growth acquisitions and about a 3% increase in spend. This is the fastest rate year-over-year of card acquisition growth we’ve seen since the third quarter of 2015. We expect year-over-year growth in card acquisitions to grow faster in the third and fourth quarter. Moving to Polaris on Slide 17, as Oscar mentioned, we continue to be on track with our aircraft reconfiguration schedule and currently have 29 aircraft flying with the new seat. In the quarter, we also opened three new Polaris lounges in San Francisco, Newark and Houston. Early feedback on the lounges have been extremely positive. We plan to open the Los Angeles lounge later this year and Washington-Dulles by the end of 2019. So in summary, we feel the revenue environment is robust and that we are set up for strong third quarter. Our growth in commercial initiatives have taken off in the right direction and we feel confident that those initiatives will offset increases in fuel and enable us to reach our long-term adjusted EPS targets. And with that, I’ll turn it over to Gerry to review our financial results.

Thanks, Andrew. Before getting the numbers, I just want to say how happy I am to be back for a return engagement. I can honestly say that it’s a lot more fun this time around. As you’ve heard, there’s terrific momentum at United. In addition, I have the pleasure of working with the great group of colleagues on the executive team and the best financial organization in the business. And for those of you wondering, you can be assured that we continue to execute on our cost initiatives and our disciplined capital allocation strategy. Yesterday afternoon, we released our second quarter 2018 earnings and our third quarter investor update. You can refer to those documents for the details. But for the highlights, Slide 19 is a summary of our GAAP financials and Slide 20 shows our adjusted results. We reported adjusted earnings per share of $3.23. That’s 17% higher than the second quarter of 2017. Adjusted pre-tax income was $1.1 billion and adjusted pre-tax margin was 10.4%. Slide 21 shows our total unit costs for the second quarter 2018 and our estimates for the third quarter and full year. Turning now to Slide 22. Non-fuel unit cost for the second quarter decreased 0.4% on a year-over-year basis versus our original expectation of flat to up 1%. This dip on cost performance was due to several factors, including the timing of certain maintenance and IT expenses moving into the second half of the year, early results on our initiatives to drive increased cost savings through efficiencies and our supply chain and optimizing our maintenance program checks. I want to thank everyone at United for continuing our efforts to manage cost effectively. This is particularly important in a higher fuel price environment. We expect third quarter non-fuel unit cost to be flat to down 1% compared to the third quarter of 2017. This guidance is consistent with our prior commentary for second half cost performance as we lap the ramp up of the 50-seat plan that began a year ago and continue to see the benefits of our cost savings initiatives. Also, our capacity growth rate is expected to be higher in the second half with much of the increased rate of growth driven by flying during off-peak periods that had low marginal unit costs. Overall, we remain confident in our non-fuel unit cost guidance of down 1% to flat for the full year 2018. As described on Slide 23, we have purchased just under $1 billion of our shares in the first half of 2018. This represents about 5% of total shares outstanding at the end of 2017. We currently have $2 billion remaining in share repurchase authority and plan to continue to opportunistically return excess cash to shareholders to repurchases of our stock. At the same time, we will ensure that our balance sheet remains strong with debt levels that are manageable throughout the economic cycle. For 2018, we continue to expect adjusted capital expenditures to be between $3.6 billion and $3.8 billion. On freight, we took delivery of one Boeing 777-300ER and six Boeing 737 MAX 9 aircraft in the second quarter. We are the first North American carrier to operate the MAX 9 which began schedule flying in early June. The performance of the aircraft has been excellent so far and we look forward to taking four additional aircraft this year. In addition, yesterday we took delivery of the first of three used Boeing 767-300 aircraft we expect to receive this year and we also expect to welcome the Boeing 787-10 into our fleet with three scheduled to arrive in the fourth quarter. As we announced on Monday, we’ve agreed to purchase four more Boeing 787 and 24 more Embraer E175 aircraft. The 787s will enter into service in 2020 and replace older international widebody aircraft. The E175s will deliver next year and replace aging CRJ700s. Like the aircraft they’re replacing, these E175s are expected to be configured with 70 seats. We are also actively looking for additional used aircraft to provide flexibility, as Scott mentioned, and to ensure that as we grow we do so in a capital efficient way. At the moment, we are focusing on a number of potentially attractive opportunities to supplement our new aircraft order book. Slide 24 includes a summary of our current guidance including third quarter’s projected fuel price range using the July 13 fuel curve. The range provided for capital, revenue and cost implies a third quarter adjusted pre-tax margin between 8% and 10%. And as Oscar and Scott mentioned earlier, on Slide 25 we are raising our full year adjusted earnings per share guidance by $0.25 to a new range of $7.25 to $8.75. The results we have delivered in the first half of the year have increased our confidence in our ability to deliver adjusted EPS in this new range. With that, I will now turn it to Mike to begin the Q&A.

Thanks, Gerry. 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.

Thank you. [Operator Instructions]. From UBS we have Darryl Genovesi, please go ahead.

Hi, guys. Thanks for the time. Good quarter. I guess Scott can you – I know you’re not ready to explicitly guide Q4 yet, but the last couple of years fourth quarter RASM has meaningfully exceeded expectations and it’s not entirely clear to me why. Could you just comment qualitatively on what factors you think drove Q4 sequential RASM improvement in 2016 and '17 and whether you think those factors are in place again this year?

I’ll try and I’ll look to Andrew to add to it if he wants to. Last year we obviously had a lot of one-time issues in the third quarter that would have made the third quarter to fourth quarter sequentials look better, things like Guam and the hurricane that would have made them look better. And I’m not sure if there was anything specific into '16 but we’re hoping particularly if you strip out the one-time stuff that happened last year to actually see strong sequential performance again in the fourth quarter. And as we just look at the overall demand environment, it continues to strengthen if anything as we’ve gone through the first half of the year. Every month seems to just get better and better. So we’re cautiously optimistic that we can wind up doing better in the fourth quarter even though we currently expect.

Thank you. Just another question that I had on the fuel recovery. You’re saying you’re recovering 70% of the fuel move. How do you – I guess how do you measure that? How do you separate the fuel impact on revenue from what may have originally been a forecasting error? And I guess the reason I ask is because you say you’re recovering 70% of the fuel move but your EPS guidance has moved up which could be characterized as more than 100% fuel recovery.

Hi, Darryl. It’s Gerry. My mother was a math professor and the one thing she taught me was arithmetic and this is simply arithmetic. So if you take our fuel guidance and the forward curve, we’re looking at about let’s say a $2 billion increase in fuel expense. So the question is, how much of that 2 billion do we see – we recover? If you take the midpoint of the EPS guidance and kind of use that to calculate pre-tax, basically that’s the math that gets you up to 75% of that 2 billion being recovered.

Okay. And what’s the difference that takes you to from your guidance point to beginning of the year to where it is today, because it would seem that should be an additional increment? If you’re following me, I mean fuel went up, right, revenue went up and EPS went up.

Darryl, we can take that offline and I’ll follow up with you. But you can see what we’ve done with PRASM and revenue improving as fuels improved. But that’s a separate question than our calculation.

Okay. Thank you.

And from JPMorgan we have Jamie Baker, please go ahead.

Hi. Good morning, everybody. First question I suppose for Scott or Andrew and it’s a question on pricing but I’ll try to ask it in a way that you can answer it. So we’re seeing considerably more time channel pricing in many of your markets while at the same time we’re not really seeing any substantive broad-based change in domestic fares. So what I’m trying to sort out is if the former is material and to what extent it may be contributing to your RASM momentum, largely because I doubt it was something that was originally in your plan at the start of the year?

I think the industry continues to get wiser on how to price and sell. We at United work it really hard. We obviously have a new revenue management system that has allowed us to perform even better. So I would say that there is more use of time verified fares in the marketplace today and I think – I don’t want to go into a lot of details around it but that’s just an evolution of pricing and that’s kind of where we are and I think we’re happy with our progress in our quarter.

Would you characterize it as sort of fully rolled out at the industry level at this point or potentially more to come in that regard?

I have no idea.

Okay, all right. That’s fair. And second and probably for Oscar and look, I hate sounding like a broken record this earning season but the industry is clearly working. United is clearly working and showing momentum. But the message is just not getting through to the market. Earnings multiples are a joke and it’s probably kind of the kindest four letter word that I can think of to describe them. So the question is, what else is needed at the industry level? Is there something structural that still needs to be addressed? Is there something that you, Oscar, personally could draw on given your experience outside the airline industry? What’s it going to take to get the derisking message through to investors so that multiples that better reflect the current industry output?

Yes, Jamie, I think it’s – I’d use the term [Technical Difficulty] and the railroad industry was one of very high, very high capacity, very low demand, no possibility of yield. It’s all about stripping out costs and the rebating aspect took time. It took a couple cycles, downward cycles where we lived through it; cash return, dividends, everything came back in. So I think from my perspective and I’m sure Scott and I’d ask him to add in, but proof not promise is my broader umbrella terminology. And Scott, you probably want to add to that a little bit.

Sure. Jamie, as somebody who has followed not just airlines I’ve worked at but all of my competitors over the year pretty intensely, I think one being that as an industry we’ve done a poor job of is meeting our long-term targets. And there have been a number of airlines over the years who have given whether it was EPS targets, margin targets, CASM-ex targets, absolute earnings ranges and as I just think of it off the top of my head I only think of one airline that I remember that actually met those targets and that was Southwest made a heroic target back in 2012, 2014 and they met their number and they followed through on that commitment. They happen to have a premium multiple compared to the rest. That’s not obviously the only reason. But I think if we as an industry have had a history of putting out targets that we don’t meet, how can we expect investors to take those at face value and to trust them. So United, that’s all we can control of course, but we have adopted a no-excuses-sir mentality. We’ve made commitments to everyone on this call that we are going to hit $11.00, $13.00 in earnings per share by 2020 and that we’re going to have a CASM that’s down over that time period. And in the short term we will have time as we mis-forecast because things happen that you just can’t adjust quickly enough. When we look out over the longer-term horizon whether it’s a full year, even a full year can be where things can happen. But certainly when we look out to three years, there are going to be unexpected bad things happen. Instead of using those as excuses and coming back to you and saying, well, fuel went up or we decided to make a fleet order or whatever it is, we’re going to meet our numbers. We’re going to move heaven and earth and sometimes that means making hard decisions, but we take those as real commitments. And we’re going to do everything in our power to hit those numbers, including making changes and making hard decisions when we have to because we view those as commitments that we’ve got to hit. And that I think is a different philosophy. It’s been what I’m used to in the industry. It’s the same as Oscar’s proof not promise, a lot more words. And I think that at United Airlines if we do that and we intend to do that, our multiple will change.

Yes, and I would just punctuate all of that with the fact that it isn’t easy, right. If we have to balance this with our customers, with our employees and obviously with our investors and I think that’s what causes the difficulty. But as we’ve proven at least for a short period of time we’ve been able to do that and that’s going to be our continued focus.

Gentlemen, that’s great feedback. Thanks for taking the time today. Take care.

From Buckingham Research we have Dan McKenzie, please go ahead.

Hi. Good morning, guys. Corporate revenue up double digits. That seems to be a share shift that maybe you can clarify. And the question here really is, how is corporate revenue tracking relative to your initial expectation this year? And what kind of share shift is factored in to the EPS targets? And I really appreciate the prior commentary and I think that investors are going to find that very helpful.

We had a really good quarter on corporate revenue, up double digits and we’re really proud again of the sales team for doing that. I looked back last week and there was another airline that reported pretty strong corporate results as well and revenue. So I’m not sure that our numbers imply any significant share shift. Our teams are there every day promoting a great product on United Airlines. It’s getting better every day. And hopefully more customers will choose United and I think they already are. It shows up in our numbers. But there’s no specified share shift number in our EPS target and we’re really proud of the team and we’re really proud of our performance in the quarter. And energy in particular was strong that uniquely I think benefits United Airlines given where our hubs are. And so that of course isn’t a share shift story; that is an energy story. And technology was also strong and again that uniquely benefits I think United Airlines.

Okay. And I guess a greater expansion of Basic Economy internationally, I’m just wondering if you can talk about sort of what kind of revenue impact you’re seeing at the system level from not having that and how that might be an incremental benefit as we look ahead?

The rollout continues. I’m very happy with it and there is more to come both here in the United States and globally. We added some of our Latin beach destinations in the quarter and we also put a basic-like fare across the Atlantic to many of our destinations in Europe. Those things are going well. It is about segmentation. It is about customer choice. And they’re all adding up to exactly what we hoped to do. It’s a great competitive tool and we’re going to use it even more and more. And I think that’s my answer.

Okay. Thanks. I appreciate it, guys.

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

Hi. Good morning everyone and great results here. Maybe first one for Oscar or Scott. One of your large peers spoke about returning to margin growth at some point in 4Q. On my math the way you get good [ph] margins for all of 4Q is at the high end of your EPS guide. I know EPS is kind of your guiding post right now but maybe can you talk a little bit about, one, how important are margins to you? And two, what are you focused on to get margins back on an upward trajectory?

Thanks. Margins are incredibly important to us. The only way we’re going to hit our EPS target is to grow our margins. As we look out at the balance of the year if you just do the math, our full year EPS guidance as you’ve done at the midpoint implies margins are still down a little bit in the fourth quarter. But we are certainly within shouting distance having margins grow. And we are hopeful that we will actually have margins growing by the fourth quarter of this year. At the midpoint of our guidance it would imply that they’re going to be down a little bit but it is close enough that we are hopeful that we will have margins growing by the end of the year.

Okay. And then just second, Scott or maybe Gerry here. I know your unit cost growth has been – it’s been coming in every quarter since I think early 2017 which really coincided with a more significant improvement in your on-time performance. I guess how much of this cost improvement do you think is attributable to the better operation? And then maybe to use a baseball analogy, what inning do you think you’re in, in terms of this improving in on-time? Thanks a lot.

I’ll try. I wish Greg Hart was here. He’s our Chief Operating Officer. He’s not with us today. He could brag on the operating team. I’ll look at Gerry to talk about the numbers specifically. But running a great operation is incredibly important for customer service and it also has the side benefit of helping on cost. There’s nothing more expensive than running a bad operation.

If you remember a few years ago when there were some buffers in the business, we’ve been able to reduce those buffers and that goes right to cost. And being able to run that operation, I spoke to people and giving them the tools to be able to really turn an aircraft faster and just run that great operation. At the same time, we are able to look beyond that to other parts of the business where we can really drive those costs, particularly let’s say on the tech op side where we’re able to create more efficient maintenance cycles, more efficient engine maintenance, things like that that continue to bring savings. That’s why we’re comfortable with our full year cost guidance.

Andrew, this is Oscar and I just would jump right in on something that again very similar industry in my history. One thing I’ve learned there as CFO and as an operating guy, running better is running cheaper and that is a huge fundamental benefit to the overall P&L when you do what you’re supposed to do in a good and efficient way. And so I think it’s all contributing to our success.

That’s great. Thanks everyone.

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

Hi. Good morning. Thank you. Gerry, you said it’s a lot more fun this time around in your second iteration as acting CFO. I’d like to talk about that for a second. As I’ve seen United – we’ve all seen United have some runs where the market gets really excited about extrapolating some momentum into long-term success and that under earning arguments starts to gain momentum, and then something happens. Not some PR fiasco but like a real financial earnings setback. So in your view, someone who’s been here, what are some of the things that you’re seeing that feel stickier this time around that you can maybe quantify or a little more tangible nature than maybe last time where it didn’t really take?

Hunter, it’s those things you talked about. I’ll start with the plan. We saw where we were missing opportunities. We now have a plan where we are capturing those opportunities. The whole domestic network strategy that Andrew’s team is implementing, that’s new, that’s different, that’s going to stick. The cost initiatives, we’ve been good at that over the years but with that long-term focus on EPS, it means it’s becoming embedded in the way we think. The entire leadership team is on board, understands that to meet Scott’s target you got to look at the cost side. So there’s terrific cost discipline and that’s a culture shift in the company that I think is here to stay. And that’s if we get to where I think the biggest change which is just the way people feel about coming to work. I saw this before at a company I used to work for 20 years ago that you start listening to your employees. Look what Oscar has done over the last two years with all that. We’ve seen that before and we’ve seen that fit. So you take all that together that’s terrific. What worries me are those things [indiscernible] fuel’s a little more volatile than it’s been but we’re managing that I think just fine. And then you always have those geopolitical events that affect everybody and I keep my fingers crossed that those will be avoided for a while.

It’s Oscar. Let me just add just a quick – at least from a long-term perspective having been a Board member and you’ve seen me in both roles. I think one of the fundamental differences is indeed and I’ve said this before especially in January the plan that we have build is as solid, is as detailed, is as thoughtful and structured and with the support of our operational reliability and our people behind it, I think that’s what’s making the difference. They’re a very committed group and it’s nice to see and it’s well deserved recognition here for these two quarters. But we’ll continue on.

Great. Thanks. And then a question for Scott. What are some of the advantages and disadvantages of operating large gauge RJs in-house with your own pilots as opposed to third-party agreements?

Well, it’s simple. It’s economics. The issue is all about economics. And one of the things that all of us here at United and I personally am proud of over the last five or six years is what we’ve been able to do with pay for our employees. And they went through an awful lot in the decade or so following 9/11 and it’s been great to have contracts with the kind of pay raises at least and then that [indiscernible] no one would have thought was possible. And I’m really proud of that and happy for people and they deserve it. What that means, however, is we have a cost structure that simply doesn’t work on small airplanes. We need to spread those costs out over a larger number of seats. I’ve been trying to spread them out over 70 or 80 seats. It simply doesn’t work. And flying a regional jet at the mainline is north of $1 million per year per airplane and these are airplanes that generate $9 million, $10 million in revenue and make 8%, 9% margins. And so you can do the math. You take an airplane that’s nicely profitable and you turn it unprofitable with that kind of cost structure. And so it’s purely about economics. The great news is, is that we’re growing the mainline. What our employees really care about is opportunity for them to fly big airplanes, fly widebody and fly large narrowbody. And our growth plan is designed to do just that. I think that United Airlines – I get asked – as an ex-Air Force guy, I occasionally get asked by people in the Air Force a recommendation on what airline to go fly at and I can honestly tell them and have been that the best and fastest carrier growth opportunities for pilots is at United Airlines because we are growing the mainline and we have opportunity to continue the grow plan and growing out our Mid-Continent hubs. And that’s what’s important to our pilots and that’s what we’re focused on delivering for them.

Thank you very much.

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

Thanks very much operator and thank you everybody for the time. I really appreciate it. I just wanted to follow up one question on I think something that Scott might have said. When you talked about your – maybe it was Scott or Andrew. When you talked about the hub performance and as you think about growth especially in markets where there’s a lot of capacity already like Newark where the only way to grow is really up-gauging, I guess my question is can you replace the E75s in some of those markets that your flying with A319s and maintain the profitability of the hub?

This is Andrew. Absolutely. We over years passed and we constantly refer to Newark, Atlanta as the prime example used to be able to successfully operate the large aircraft in Newark, Atlanta. We moved to a period where we were flying small aircraft and we’re now moving back to a period where we’re flying larger aircraft. Newark is a fantastic hub. It’s a gigantic market in New York City. And we have under gauged it and we are in the process of fixing it. It doesn’t happen overnight but we are steadily moving down that road and believe we can grow margins by flying the right aircraft on the right route and we’re well down the path.

Okay. And then my follow-up question – thank you, Andrew. I really appreciate that on a lot of different levels. Oscar and Scott, as you think about your business plan going forward and you’re hitting it, right, all year long. You’ve matched these numbers that you talked about on January 23 or maybe exceeded them. What could go wrong for you or for the business plan that would derail things? And I know Scott you talked about fuel and adjusting capacity and blah, blah, blah, but I’m just kind of wondering from a bigger picture item what could go wrong that this derails the plan?

He does a lot of blah, blah, blah by the way.

Sorry about that.

I’ll speak from my perspective and where I sit and I’m sure Scott will add into it. I think the biggest risk that you have is a, you grow complacent. You spike the ball too quickly. And this is a business that we’ve all learned has lots of impulse waiting around the corner and so we are just so continuing to have our head on the swivel whether it’s exogenous items, how we nimbly react to them, folks in customer service, building competitive advantages. You’ll hear more from us on some of the digital tools that we’re providing in all those things. But again, its constant vigilance would be a thing that I would concern myself and do concern myself with. Scott probably has an additional.

Yes. Look, the biggest risks are in the kinds of things that have always been the biggest risks, especially the short term; fuel price, macroeconomic environment, geopolitical events. And to my earlier point those things are sometimes going to happen and there will be points in time that we will miss quarterly guide. I don’t think this will be one of them and I hope it’s not, but we can wake up tomorrow and something happens that causes us to have a problem in the short term. What we have more control over, however, is our long-term performance because we can adjust to those things. And most of those things that happen we can make adjustments. Sometimes they’re hard decisions to make those adjustments to make sure we hit our $11.00 to $13.00 EPS by 2020. But in the short term just the normal spike in fuel or macroeconomic hit or some kind of adverse geopolitical event, those are the kind of things that we generally can’t overcome when we’re already in a quarter. But in the long term those are the kind of things that we hope to be able to deal with anyway. We will certainly move heaven and earth and do everything possible to hit our numbers.

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

Hi. Scott to go back to Hunter’s question about flying regionals at mainline, you ran through some math. Presumably that was for the 76 seaters. And my question I guess is now that you’ve done a lot of work on the network and I know various people at United have said that either you’re looking at 100 seaters or you’re not looking at 100 seaters. And now with this A220 seemingly gaining legitimacy in the marketplace and I do – I think your predecessors at United did do a lot of work on C-series. Like how do you think about the possibility of a 100-seater or maybe it’s 110 or 120-seater and does that airplane then have a role within mainline? And I’m not talking about an A319 or 737-700. I’m really talking about like an E195 or what would be the A220.

Mike, it’s Gerry. I’ll take that question. My team coordinates the analysis of all the options we have on the fleet going forward working with Andrew’s team and Greg Hart’s team. So it’s a complicated question on how we manage the fleet. We’ve never actually stopped looking at that small narrowbody question. We’ve looked at it a few years ago, decided it’s not the time. We continue to look at it. I want to be cautious in my comments so I don’t have a line of manufacturers waiting for me outside this room when we’re done with the call, so I’m not going to tell you too much about what we’re looking at when but I would say that it’s always true that everything’s on the table. One caveat to think about though and this goes for that category or really any category of fleet which is complexity. And we’re getting much better at really understanding the cost of complexity of operating multiple fleet types. But there may be a case where there’s a particular aircraft that’s just perfect for a route but if that means bringing in a new fleet type, you’ve got to burden that with all the cost associated with that. So we’re pretty conscious about that as well. So as we make decisions on fleet, we’ll let you know. But from small narrowbody to large widebody we continue to look at every part of the fleet.

Okay, great. Thanks, Gerry. And then just my second follow up to Andrew. I guess international premium economy I think it’s actually on some of your airplanes now. When do you actually start selling that? And then have you publicly sort of carved that out and said, hey, this is worth x, I don’t know, 100 million plus per annum in revenue. Can you just color on that? Thank you.

Sure. We haven’t released a number on what we think that particular part of our segmentation strategy is worth. We do have at least one, maybe two 777s out there flying with this mid-tier seat onboard, the cabin onboard. It is not being actively sold as a premium economy seat today because we just don’t have critical mass. We expect to have critical mass late this year, early next year and we’re working on all the IT work that goes with it and everything else to support this product onboard the aircraft. So we expect our first sale late this year, possibly early next year and first flight definitely next year where we have the full product onboard. That’s when we’ll have the IT ready, we’ll have the product ready and we’ll have critical mass.

Great. Thanks, Andrew.

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

Hi. Thanks so much for the question. Not sure if this is for Scott or Oscar and appreciate the comments about the importance of targets and hitting them. But I wonder if you could just bridge that commentary with the targets that you put out in the fall of 2016 less than two years ago? If we dreamed the dream then, we were looking at 3.2 billion in incremental earnings off of a base of about 4.5 billion pre-tax. We’d be looking at 8 billion this year. Instead we’re happy to be at 2.8. Of course we have a lower tax rate and you’re aggressively buying back stock, lowering the share count and you’ve managed expectations really well. But if I just step back and look at it, margins have been down every single quarter since that plan was rolled out. So I’m listening, I’m hearing about the conviction about these longer-term targets. Can you just bridge the old versus the new and when did this sort of increased commitment really happen?

So I’ll try. The old was relative targets as opposed to absolute targets and I think that’s the biggest difference, saying relative targets versus absolute. One of the things that became clear to us is that using the relative targets which we could have proved which you couldn’t hold us accountable for and that was feedback we got from you and others was appropriate. And it was impossible to hold anyone accountable for a relative target. And so because of that we switched to absolute targets that there’s no hiding from. We either hit 11 to 13 or we don’t. And that’s the no-excuses-sir mentality that we’ve adopted.

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

Yes. Good morning. Just two questions. One is a follow up from some of the previous questions and that is as far as giving the market more hurdles to watch, I’m really gaining confidence as you execute your plan. Just thinking ahead to '19, would you expect that to be an earnings improvement story which steps up to your 2020 target or are there things that we should be thinking about on a fuel-neutral basis, like reinvest in the product that will produce some headwinds next year to at least well for 2020? I’m just trying to think this through.

Well, we’ve never actually given a 2019 target and so I’m not going to start today. But obviously getting to 2020 we are assuming that we are making progress between – that we are having improvement in earnings along the way. There is not some step function that happens in 2020. We are assuming continued progress towards the 11 to 13 per share for 2020.

And Susan, keep in mind on the cost side we’ve been pretty clear that next year or the year after we’re holding ourselves to flat or better CASM. So at least on that side we’re going to manage that.

Okay, terrific. And then --

This is Oscar. I’ll just pipe in again. Again, you mentioned something of product investment. All of that is incumbent upon making the right balanced investments for our customers and our employees along the way but continuing to manage our cost as the situation adjusted.

Good. That’s good to hear. And I just want to switch to domestic PRASM. I was wondering if you can give us a little more color just what you’re seeing in your rebanked hubs versus your others, just some type of relative performance I think would be helpful?

Sure. One of the ways we measure is we divide up our cities into big, medium and small. And as we went into this project on changing the network, we wanted to increase our share medium and small city traffic and that’s exactly what we’ve seen. So in Houston our [indiscernible] markets are generating 10% RASM increases year-over-year and the same in true in Chicago by the way. And that’s exactly what we’re hoping to see, it’s exactly what we’re seeing and it’s because of the incremental connectivity that were added to each of those hubs. So that’s how we wanted to measure it, that’s what we’re looking for and that’s exactly what we got. And now we’re trying to figure out how to make it even better in those two hubs and we are preparing to launch that in our Denver hub as of February 2019. So it is on plan and we’re really happy with the performance and we’re measuring it very carefully.

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 Bloomberg we have Justin Bachman, please go ahead.

Hi. Thanks for the time today. I wanted to raise the issue of the Chinese government’s demands regarding how you referenced Taiwan with that deadline coming up next week and I just wondered what your thinking on that is and what are the possible consequences in terms of not complying with that? Is it possible that United may not be able to serve China down the road?

Well, the latest deadline is still a week away so there’s hope. This is a clearly a policy disagreement between a couple of governments and from our perspective we’re always striving to cooperate with all the governments where we operate which is a lot of places. And at this point are supportive of the efforts by the two countries to sort of resolve this disagreement soon. With regard to potential future aspects I think at this point in time I really don’t have anything to mention until we get passed this next period.

Thank you.

From Wall Street Journal we have Alison Sider, please go ahead.

Thank you. I was hoping you could talk a little bit more about what you’re seeing in the Pacific and sort of what’s changed there and how sustainable you think that is?

We think it’s very sustainable. We’ve had a good performance across the region including China and Japan, definitely being strong but both positive. So it was great news. And our Guam and Micronesia operation is also recovering after a difficult nine months in the region. So we think that’s sustainable. It’s also important to note that while our China performance is better year-over-year, it’s still negative year-over-two years. So that’s another indication that we still have more upside left in those markets in our opinion and believe that there is further growth to come.

Thanks. And if I could just ask a quick follow up. You touched on this in the call. Just curious if you’ve done any analysis of how sensitive that could be to any kind of trade headwinds going forward?

All we can do is look at our bookings and I’ve watched them every day across the globe. And I can tell you at this point we don’t see any impact and bookings in both cabins, in particular premium cabin looked quite normal if not strong. So at this point there’s nothing to report and I don’t see any headwinds.

Thanks.

From CNBC we have Leslie Josephs, please go ahead.

Hi. Good morning. I have been seeing a little bit about these credit card promotions that flight attendants are doing onboard. I just want to confirm. They get $100 every time someone signs up. And how long do you expect that promotion to go on? Thanks.

So it’s part of our Explore card promotion. We and many offer an opportunity for our flight attendants to let our passengers know about the program and all the benefits that it has when you’re flying on United Airlines. So our flight attendants participate in that program. It does include a bonus for our flight attendants. I don’t know the exact duration is $100. I think it will eventually move to $50 at a later point in time. But we’re excited to launch our new card. We thought it was appropriate to launch it with $100 and that’s where we are and we will be monitoring our progress. And it’s a great opportunity for the airline and our flight attendants.

Okay. And it will continue indefinitely?

The promotion --

Yes, onboard promotion.

Indefinitely but the amount of compensation will vary over time.

Got it. Thank you.

Thank you, ladies and gentlemen, for joining the call today. This concludes today’s conference. You may now disconnect.