United Airlines Holdings, Inc. (UAL) Q4 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to United Continental Holdings Earnings Conference Call for the Fourth Quarter and Full Year 2018. My name is Brandon, and I will 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, Michael Leskinen, Managing Director of Investor Relations. Please go ahead, sir.

Thank you, Brandon. Good morning, everyone, and welcome to United's fourth quarter and full-year 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 of these documents are available on our website at ir.united.com. Information in yesterday's release and investor update, the accompanying presentation and the remarks made during this conference call may contain forward looking statements, which represent the company's current expectations or beliefs concerning future events and financial performance. All forward-looking statements are based upon information currently available to the company. 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 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 are 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, Gerry Laderman. In addition, we have other members of the team in the room available to assist with Q&A. And now, I'd like to turn over the call to Oscar.

Thank you, Mike, and thank you all of us for joining us today. Well, what a difference a year makes. No doubt, remember, that over a year ago when we laid out our multi-year growth strategy and set forth a series of concrete promises, I'm proud to say that in 2018 our incredible United team, over 90,000 strong, got to work for fulfilling those promises because what matters is proof, not promise. You'll remember that we said we would deliver higher unit revenue in 2018, while simultaneously increasing supply, we have. And many on Wall Street believed this was possible, when we initially announced our plan and now there are a few questions of our continued growth. As we've talked about this uniquely United growth strategy is that not all capacity is created equal and I think we proved that this year. In fact, our PRASM has or is expected to outpace the industry in each of the last four quarters, and is likely to outpace the industry by approximately 200 basis points in 2018. We turn to Slide 5. You'll also remember that we said we are expected to increase our 2018 adjusted EPS between $6.50 and $8.50 and we have and we'll get better, i.e., $9.13 per share for the year. We also said we would be laser focused on cost discipline, with a full year CASMex goal flat to down 1%. We have again delivered on that promise, expecting to lead the industry with a CASMex down 0.2% for the year. We also said that we'd ensure that our commitment toward smart growth strategy wouldn't detract from our focus on running a great operations and we have. In fact, we flew more passengers than ever last year, and achieved the highest completion rate in our history. So, no doubt there is much more work to be done and we are very proud of the significant progress we made in 2018. And I thank all our employees. Now the question, of course, becomes what difference will the next year make? So as we look ahead to 2019, we are paying very close attention to the government shutdown, potential trade disruptions, other sources of economic instability. We read the same headlines that you do and while concerning, we've not, to this point, detected much of an impact on our numbers. Scott will walk through our facts that we are making this particular point. Of course, we will keep watching and in the meantime, we will just stay focused on the priorities that we can control, in particular, the way we serve our customers. So, switching to that, more than ever, we're focused on putting our customers, all of them at the center of everything that we do. This year we'll continue to roll out a series of innovations and improvements to customer experience and we believe we will continue to reshape United's image. We will introduce a series of new routes, boosted by new customer-friendly aircraft that are designed to make United the airline our customers choose to fly. Just next week, we will be able to download a completely reimagined version of the United app. It's already the number one downloaded app amongst US carriers but we are making it even better, putting useful information at your fingertips without losing the features our customers love. We'll also continue to add useful information to over 60,000 mobile devices used by your employees that have real-time information and communicate better and solve your problems in the moment. These are just a few of the examples of the digital advantage that has resulted from the new entrepreneurial culture that we're fostering here at United. This culture, coupled with our deep company-wide commitment to our core four principles, will be essential to the success of our efforts to take our standard of customer service to a whole new level. Lastly, moving to Slide 6. Let me emphasize that while we're delivering on our commitments to our customers, we are also delivering on our commitments to you and our shareholders. Last year, our ability to recover almost 100% of the year-over-year increase in fuel expense helped us achieve a full year adjusted EPS of $9.13. In 2019, we are committed to delivering an adjusted EPS target of $10 to $12, which puts us nicely ahead of the pace to deliver our adjusted EPS of $11 to $13 in 2020. So with that, let me hand it over to Scott.

Thanks Oscar, and thanks, everyone for joining us on the call today. 2018 was a fantastic year financially, operationally and for our customers. We operated the most on-time flights in United's history. This is the result of the commitment and hard work of the entire United team that came together to deliver a great operation and experience for our customers. From the frontline to the corporate support center, everyone played a part and I'd like to thank all of them. In 2018, we continued to run a great operation, including top-tier [D-0] performance, all while flying a record number of passengers and with record load factors. We had the best ever consolidating completion factor in our history and drove a record 9.3% revenue growth year-over-year. As Andrew will talk about later, we believe our strong operation and continuously improving customer focus drove about a point of PRASM improvement in the quarter. These operational steps, coupled with our strong PRASM performance and our return to margin growth in the fourth quarter are clear evidence that the growth plan we announced this time last January is the right strategy for United. As we look at 2019, we all know that there is a relationship between costs, with fuel being the industry's most volatile cost and revenue. It's precisely what gives us the confidence to give annual and multi-year adjusted EPS guidance. This historical relationship is why we were confident giving full year guidance for the first time last year. And we're able to maintain and raise that guidance even as fuel rose significantly during the year. This historical relationship not only gives us confidence for one-year guidance, but also allowed us to provide $11 to $13 adjusted EPS guidance for 2020 because we were confident that PRASM would increase in the world of higher fuel. Set another way, unpredictable fuel costs are reality, but at United, they will not be an excuse to miss our guidance. Our revenue strategy, combined with our cost discipline gives us confidence that we can continue - that we can continue to meet or exceed our adjusted 2019 EPS targets anywhere between $40 and $80 Brent Oil. As Oscar mentioned, there's been a lot of concern on Wall Street about the health of the economy as we enter 2019. We normally don't react to a single week's worth of bookings because of the inherent volatility in bookings. But the first full week back from the holidays is unique, as business customers are back in the office and planning business trips. It's the largest booking week of the year and the first opportunity to see what's happened with corporate budgets. Historically, the companies we are seeing weakness are concerned about the outlook. They almost always reduce the travel and entertainment budget for the coming year. As a result, business bookings for the first week of the year are reasonably good forward indicator for the health of economy. And despite all the stock market volatility hindering, despite the government shutdown, our business bookings is measured by all large corporate accounts and travel agencies, we're up 11% at slightly higher yield last week. The world can certainly change going forward. But United Airlines demand remains solid, at least, based on the data we have so far. Over the last several earnings call, you've heard us talk a lot about the benefits of our growth strategy. But today, I want to talk to you about another change that's hard to quantify and even harder to proceed from the outside of the company, but it's essential to driving strong PRASM and margin growth. In short, at United, we're changing our culture. We started to shift to a nimbler, faster and more action-oriented approach to improving our customer and employee experience. I can't tell you the number of times I sit in a meeting or someone walks into my office to show me something new and innovative that we're doing. You're able to see it in the performance of Gemini, to develop an industry-leading mobile app and the powerful new technology that we put in the hands of our employees. Our teams are developing new ideas literally every day and testing them in speeds we wouldn't have thought possible. We are now experimenting with all kinds of new initiatives and solutions, quickly expanding those that work and pulling back those that don't. And this is happening throughout United. At the start of last year's budget process, as an example, we asked the teams to keep M&A total headcount flat, despite growing 5% and adding all kinds of initiatives to deploy. There's a fair bit of anxiety around this from the team, but we did it and achieved the great results that we announced today. For this year's budget process, we took it a step further and set a goal to keep total M&A spending flat. So, leaders had to fund growth, new initiatives and pay raises without spending a single dollar more. And I'm proud to say that the team had embraced that challenge with the positive 'can do' spirit. It isn't an easy target to hit, but aided by our new entrepreneurial culture that’s taking root, we are confident we will do it. We're committed to making United best airline in the world. We have the world's best network potential and this ongoing culture change really is a significant and difficult to replicate competitive advantage for United. We had a great year in 2018, and I again want to thank the team for delivery. There's a lot happening at United. The growth plan, focused on the customer, great operations, and a new action-oriented culture facilitated by core4, to name just a few. As a result, we're confident that we'll meet or exceed our $10 to $12 EPS guidance in 2019 for any fuel price between $40 and $80 per barrel. As we said before, unpredictable fuel prices will not be an excuse here at United. 2018 was an incredible year, and set a solid foundation for the strategy we laid out one year ago. We're looking forward to repeating our success in 2019. With that, I'll turn it over to Andrew.

Thanks Scott. Turning to Slide 12. I'm pleased to report our revenue momentum continued from the third quarter and into fourth, with PRASM growth up 5%, achieving the high end of our expectations. All entities achieved positive PRASM in the quarter. For all of 2018, we achieved 4.3% increase in the PRASM on 4.9% more capacity. We achieved the high end of our unit revenue guide each quarter in 2018. Congratulations to the entire United team for top-tier PRASM performance in the quarter. There were a number uniquely United initiatives that drove our PRASM outperformance in 2018, outside of just our capacity growth. Our employees delivered a record setting operational performance and improved our customer service, which we estimate will add about a point of revenue to our PRASM year-over-year. Gemini, our proprietary revenue management system, which was also rolled out last year, has exceeded our expectations. We leapfrogged our competitors and have an industry leading RF tool that delivered 1 point of PRASM growth in 2018. Lastly, we further sharpened our product segmentation strategy to better deliver our customers the product they want, when they want it. These improvements and our host of other commercial and digital initiatives contributed about an additional point to PRASM. The culture change Scott talked about and delivered in an environment where innovation and change are welcome. Overall, we feel good that the plan we laid out in January 2018 is working as we head into 2019. Now for some details about each of the regions on Slide 13. Domestic PRASM improved 6% year-over-year in the quarter, leading away across all regions. Domestic capacity increased 6.4% in the quarter and 6.7% for 2018. Corporate revenues were once again strong year-over-year, outpacing our overall top line growth of 11%. We continue to successfully shift our booking profile to reduce dependence on lower-yielding tickets booked further out from departure, while increasing our share of higher yielding business tickets generally booked closer in. Gemini worked well last year and implementing this strategy. Our RM posture as we enter 2019 continues and accelerates this practice, relative to the industry. Following two years of very strong Atlantic PRASM growth, we saw Q4 PRASM growth of more moderate 1.6%. Passenger load factor was strong, increasing 5.2 points year-over-year. However, that increase was not large enough to offset declining close yields. Our outlook continues to show coach yield weakness, and as a result, slower PRASM growth with the Atlantic in the coming months. PRASM across the Pacific was up 4.5% year over year in Q4, our third quarter positive for PRASM. We continue to watch demand levels in business class for China play and have yet to see any reduction in demand for January, resulting from these trade disputes. After negative PRASM growth in Q2 and Q3 of 2018, Latin performance inflected sharply positive, increasing 3.8% in the fourth quarter. We are optimistic about strong PRASM from the Latin region, even with continued weakness in Brazil and Argentina. Looking ahead, we anticipate first quarter consolidated system PRASM to be flat to up 3% year-over-year. The shift of Easter holiday to mid-April is expected to be an 80 basis point headwind for Q1, with an equal tailwind for Q2. As we look at the revenue environment, the primary change we observed is pricing across the Atlantic. While it has gotten weaker, we believe it will improve as we enter peak travel in Q2. Overall, we do not think anything fundamental has changed as we look at the demand environment. That being said, the government shutdown and other factors have created some uncertainty in our Q1 outlook, and as such, we've guided to a 3 point range in yield revenue this quarter. As Scott mentioned earlier, domestic business bookings for the week of January 7th, the first clean booking week of the year were strong, indicating to us that our momentum continues to be on track. Our capacity outlook for 2019 remains at 4% to 6%. Our passenger segmentation strategies remain on track. Induction of widebody jets equipped with our all-aisle access flatbed Polaris seats continue to be on target. The mid-continent strategy continues with our Denver rebank scheduled for February. We're pleased with the results we've seen in both Houston and Chicago and see even more upside in Denver, and the possible itineraries at all three have grown about 12% year-over-year. The basic economy footprint has continued to grow. We continue to closely monitor our relative share performance related to basic economy sales. We feel it is important to differentiate our basic product and we continue to be pleased with the operational benefits of our bag policy. Another key component to our passenger segmentation strategy is Premium Plus, our new intercontinental premium economy seats. Early sales figures for Premium Plus have average fares of approximately two times the coach fare, above what we had planned for. Our ancillary revenue had a fantastic year as well, with revenues up 13% for the year. Increase in fees paid to upgrade into first class was a key area of success. In late 2018, we also started the sale of a limited number of preferred seats that will be a new revenue stream in 2019. As always, most passengers have the option of either picking a non-preferred seat for free or waiting to select an eligibility seat for free at the time of check-in. In summary, we're all set up for a strong first quarter and we'll continue to focus on enhancing the customer experience. And with that, I'd like to turn it over to Gerry.

Thanks Andrew. Good morning, everyone. Yesterday afternoon we released our fourth quarter and full year 2018 earnings and our first quarter and full-year 2019 Investor Update. You can refer to those documents for additional details. For the highlights, Slide 17 is a summary of our GAAP financials and Slide 18 shows our non-GAAP adjusted results. For the fourth quarter, we reported adjusted earnings per share of $2.41. That's 67% higher than a year ago and above the high end of our own expectations. Adjusted pre-tax income was $814 million and adjusted pre-tax margin was 7.8%, up nearly 100 basis points versus the fourth quarter of 2017. For the full year, we reported adjusted earnings per share of $9.13, which is 33% higher than 2017. This is a fantastic result and above the high end of our guidance. Adjusted pre-tax income was $3.2 billion and adjusted pre-tax margin was 7.7%. We are all proud of these results, and we believe they provide powerful evidence that our growth strategy is working. Slide 19 shows our total unit cost for the fourth quarter and full-year 2018 and our forecast for the first quarter and full-year 2019. Turning to Slide 20. Non-fuel unit costs in the fourth quarter decreased 0.7% on a year-over-year basis, better than the midpoint of our expectations going into the quarter. We continued to benefit from improved asset utilization, smarter maintenance practices, and lower aircraft ownership costs. For both the first quarter and full year 2019, we plan to, again, manage our non-fuel unit costs to flat or better and expect our cost discipline this year to remain industry leading. We believe that running an efficient airline is a prerequisite to growth, and we expect to continue to benefit from a lot of the same initiatives we had in 2018 and to take advantages of new opportunities. For example, as we begin to exit certain aircraft types, such as our oldest Airbus A320s and Boeing 757, we will benefit from optimizing the retirement schedule and related maintenance costs for these aircraft. It's also worth noting that we continue to benefit on the cost side from running a more reliable operation. Greater reliability allows for more efficient planning, allowing for less over time, as well as improved irregular operation recovery and generally, fewer buffers across the system. As you see on Slide 21, we repurchased $240 million in shares of our common stock in the fourth quarter at an average price of $88. Over the full year, we repurchased about $1.25 billion of our shares at an average price of $71 per share. I expect we will continue to be opportunistic with our share repurchases as our shares trade below our view of intrinsic value. During the month of December, we ordered four additional Boeing 777-300ER aircraft, with two of these aircraft delivering this year and two delivering next year. These aircraft are highly efficient for routes that have demand for large premium cabins. Also during the month of December, we finalized an order for 24 additional Boeing 737 MAX aircraft, with deliveries beginning next year. These aircraft will allow us to replace older and smaller gauge aircraft domestically and support our capacity plan. The unit cost advantage of these more fuel efficient and larger aircraft is expected to be in the double digits and support our CASMex initiatives for years to come. Our adjusted CapEx spend for 2018 ended at $4.2 billion, above our earlier expectations. This difference is largely due to opportunistic purchases of used aircraft and aircraft off-lease, which were not originally in our plan. We continually work to maximize both return on invested capital and our aircraft ownership costs as we update and upgauge our fleet. Even with this incremental spend, however, we had strong free cash flow of approximately $2 billion for the year. For 2019, taking into account, the additional firm aircraft order I mentioned, along with existing aircraft orders, continued opportunistic purchases of used aircraft and other high-value investments, we currently anticipate spending approximately $4.7 billion in adjusted CapEx for 2019. Finally, Slide 22 includes a summary of our current guidance, including the projected fuel price range for the first quarter. The range provided for capacity, revenue and cost implies a first quarter expectation of adjusted pre-tax margin between 2.5% and 4.5%. Implying at the midpoint of this range, 150 basis points of margin improvement on an adjusted - on an adjusted basis year-over-year. Also on Slide 22, we provide a summary of our full-year 2019 guidance. We are confident that we will deliver our adjusted EPS guidance of $10 to $12 this year. As you all know, fuel has been extremely volatile over the last few months and we're frankly not in the business of forecasting where jet fuel prices settle. What we are confident about is our ability to nimbly manage our airline to deliver bottom line results in a wide range of macro environment. In that spirit, we run numerous scenarios for fuel from as low as $40 per barrel to as high as $80 per barrel. We're committing today to meet or exceed our guidance of $10 to $12, and adjusted EPS this year within that very wide range of fuel prices. Before we take questions, last Wednesday, we released our December and full-year 2018 traffic results. Moving forward, we will no longer be issuing these monthly traffic results. As we focus on our long-term earnings targets, we believe monthly updates are unnecessary distractions from the steady progress we expect to deliver. With that, I will turn it over to Mike to begin the Q&A.

Thank you, 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.

[Operator Instructions] And from J.P. Morgan, we have Jamie Baker. Please go ahead.

I'd like to start with a quick cost question for Gerry. The 4% pilot raise that's effective this month or has already gone into effect this month? I obviously have estimates. But can you share with us in dollars what that drives in terms of incremental 2019 expense? I just want to better understand the underlying W2 component of pilot comp as we look forward to next year and I don't necessarily trust Form 41 on this?

Jamie, that's a detail we can just follow up with you later.

Second, when I think about last year's RASM, and what that potentially portends coming into this year, I think most of the focus understandably was on the mid-continent growth, the speed with which RASM ramped quickly in those markets. But the reality is, you've also called a considerable number of what, presumably were underperforming unprofitable markets across the network. Is there any way to quantify, which has had more of a positive impact than the other? I mean, adding the new stuff or cutting the weak stuff. The reason I ask is that, I've got to imagine most of the underperformers have already been cut, which suggests that RASM going forward is going to be much more indicative of how the network actually handles the growth component, if that makes sense. Any color?

I'm not sure I agree. I think while we did get rid of a few routes, I think approximately 30 that were underperforming financially, I think there's more to come. And Jamie, what I would say is the potential of our - or the way we look at it is our pipeline of ideas and changes was not just for 2018, there's a lot of - the initiative for 2018 that apply for 2019 and then there's a whole list of other initiatives that come online. And I'll just - I have a few examples I suppose. The Gemini RM system, which we turned on early last year, we really didn't get fully sold until 2Q. So, we think there is tailwinds from that, that will continue to come. In 2019, we have another 60 wide-body jets that will get Polaris all-access aisle seats. We're going to rebank the Denver hub on February 14th, that's not in our baseline numbers. And the number of departures for bank go from 43 to 50. The other, tidbit example, we've cut the number of pre 6 am flights by 50%. For 2019, our 6 am flights have RASMs that are 9% greater than our 5 am flights. Last fall I talked about the transfer of aircraft from New York to Dallas, that transfer, we're doing Phase 2 of it as we speak right now. We've moved about 33 aircraft flying around and amazingly enough, the margin point change for that is 50 points for those 33 aircraft and almost all of that will be in 2019. We have this full capacity we added in 2018, in the '19, for example, our Singapore and Sydney new flights. That's about 1% of our company, and we expect those two new flights to perform much better this year than they did last year. We'll obviously continue to add our catchment area of growth line from mid-continent hubs. That's worked well. But even better than that, the number of flights that are in bank in 2019 versus 2018 that all of these hubs is going from 89% to 95%, in-bank flights have better RASM. We are growing our premium cabins from New York to LA and San Francisco. It's really important for us. We're going to continue to grow our co-brand card. We're going to continue to fill up Premium Plus. The point is, there is a whole host of RASM initiatives as we go into 2019 that we think are going to fuel United Airlines. They're not all about growth. In fact, many of them are not at all about growth as we go forward.

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

I think this is probably too for Scott. Hey, Scott. How will these strong run of financial results and the business momentum you guys have been showing impacted the tone or the pace of the negotiations with the pilots, particularly on some of these more complicated issues?

So first, I'm actually afraid to answer a question after everything that Andrew said. I, kind, of want to stop the call after that. Hard to go up from there. But look, good results create a good background for everyone on getting - whether it's getting contracts done, doing deals with other partners. It certainly doesn't hurt the tone of the tables. We are having good run - I'm talking about the details there. We're having good discussions with ICAO. We have good relations with all of our unions. We're looking forward to getting competitive deals done that are good for our people and good for the company. And we're confident that we're going to get there. But good results help the tone of everything.

And then also, Scott, what did you learn in the last five years about how the market values airline stocks and also how investors value airline capital deployment?

Boy, that's going to be a tough question.

You can handle.

First, I think, whether I have learned it or not, I think at the end of the day results are what are going to matter and results are what matter the most. We are trying to focus here, as Oscar often says, on proof not promise, it's a dramatic difference as we sit here today and when we said almost exactly a year ago, when we announced the growth plan and the difference is that we're proving that what we're doing works. We spent time today trying to talk about things beyond growth. Andrew had three points of PRASM, that we think three points of PRASM in the quarter about things that had nothing to do with growth. There's just an awful lot going on here at United that we feel really confident, that we're going to be able to continue to drive earnings and margin growth for years to come. And ultimately that will matter. I do think from an investor perspective, credibility is important. And when I say credibility, I mean, credibility on delivering on your numbers. We talked about last year a "no excuses, sir" mentality and the importance of hitting guidance. Today, we've tried to even expand on that by saying we're giving you guidance that is good for any fuel price raise between $40 and $80 a barrel on Brent Oil. We know that there are going to be speed bumps that are going to happen. The government shutdown was one of those things. And as we look long term, there is going to be a quarter, there's going to be a time when those speed bumps become significant enough that despite our best efforts, we can't overcome them in any given quarter or year. We hope that's not this quarter. We hope that's not this year. But we're also giving you guidance that allows us to hit some speed bumps. We have resiliency, flexibility to adjust and even if we hit speed bumps, we are committed to, as we said before moving heaven and earth to hit our numbers. And I don't know what that means for industry multiple. But as long as we keep growing earnings every year, as long as we keep delivering on our commitments, I believe that not only will we get a higher stock price from higher earnings, but we will get a higher multiple as that credibility grows and people have more confidence.

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

I guess, my first question is around the growth rate. You reiterated your 4% to 6% growth plan in '19. 4Q is at the high end of this. 1Q is going to be towards the higher end. I guess, just in this kind of backdrop of slightly slowing global economic growth, why is the high end the prudent way to start off the year?

We end 2018 on a high note and we look at how things are doing right now and we think we're still on a high note. There are definitely risk factors out there and we've widened our range for RASM, But we feel really good about our plan. And then as Scott already said, this is a lot more than growth that is driving the RASM of the company. And so all those other initiatives are just as important and unique, I think, to United at this point. And so we're excited to go in that direction and believe we can deliver on the results we’ve talked about and promise for the year.

I guess, just looking at that growth a little bit more closely, just based on the schedules, it still seems like a big part of your domestic strategy, as you head through '19 is still much more focused around the regional flying. So, maybe can you give us a sense of where you think, what inning are you in terms of your mid-continent doled out and how long can this kind of regional growth do you think continue to outperform mainline?

I think it's done, obviously, very well and we have more runway there. We're going to take it quarter-by-quarter, and we're going to adjust as needed. To be said, things don't look the way they like. We like them. But at this point, they do. We are still relatively undersized in our level of connectivity we offer. And so we are working hard at that and improving the quality of the schedules, and you'll see more of that. But I just think we're very bullish on where we've been and where we're going, and we'll be nimble if we have to change.

And then just quickly, one last question. You mentioned the Denver rebanking beginning kind of mid next month. How would you rank that rebanking opportunity relative to what you've done in Houston and Chicago? Thanks.

Sure. It's similar, maybe worth a little bit more. We're taking the number of banks down by one, which is increasing our connectivity. We will have 43 aircraft - or 50 aircraft on the ground at the same time on average versus 43. So, we're pretty optimistic about it. But that being said, there are other changes we are making to the schedule in Chicago and Houston as well. We better tweak those and make them better, the early flights of the day and the more rebank places are a good example for that. So, we are going to continue to mine this mid-continent hub strategy. And we think we have a long way to go. And again, not all of those things are entirely about growth, changing when our place departs or making the bank sizes difference is not necessarily about growth. So, there's a lot of different dimensions what we are working on.

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

Maybe it's for you as well, Andrew. When we look at the 2018 performance, which was very strong from a revenue perspective, when I understand the effect that regional variances and easy comparisons had versus strategy and also like what - whether you see 2019 having more of the dollar benefit from the initiatives you put in place than 2018. Basically, I'm trying to see how we should see comps and regional variances versus your strategy over '18 and '19.

I think we fought really well in 2018 and I'm not going to attribute it to easy comps. I, in particular, for the fourth quarter, I'm not going to attribute it to easy comps. I think we had a reasonable setup and we hit it out of the park in fourth quarter and we are really happy about it. As we go forward to the next year, we have a whole host of initiatives. We are not going to break them out and say, what each one is worth. And by the way, there is plenty of initiatives that we didn't talk about and there is plenty of initiatives that increase margin but do lower RASM. It's just the nature of the piece. And so we feel really bullish as we go into this year that there is this little bit more of uncertainty, which is why we widened the range of the RASM guide. But we believe our initiatives are going to still deliver and lead to the EPS targets that Mike and the team have laid out.

Maybe if I could look at this maybe a little differently. What aspect of your network strategy was most beneficial in 2018? If I had to say, you could only pick one thing you have done that you did in 2018, which one would you do again?

You are asking a network guy a question and it's hard to answer because we did so many great things. But I think in more aircraft on the ground, at the same time, it's just fundamental and that is connectivity. So that is awfully importantly and we look forward to do it more that in 2019. The other example I'll give is, we grew capacity a lot on off-peak days. And we did that because in years passed, United had, in theory, cut capacity on those days to reduce RASM, when in fact our results for this year showed that our RASM under off-peak days actually went up more than our average RASM. And that's because United uniquely cuts muscle from the bone, is the best way to say it. And that actually lowered RASM. It didn't increased RASM. So, one of my favorite things in 2018 is taking off-peak days, growing them faster than average and increasing RASM faster than the company's average throughout the year. I don't know if we can do that again in 2019. All we did was returns those off-peak days to these normal schedules that we should have always had as many of our competitors have as normal. But that was an exciting achievement for the year.

And maybe one little quick question for Gerry. Gerry, the slide on the flatter, better costs in Q1 and assuming for the year, is that drawn to scale? Is that supposed to indicate a similar numbers or is that just a directionality downer?

Kevin, this is Mike. It's not the scale. Do not get your ruler out.

And from Credit Suisse, we have Joe Caiado. Please go ahead.

First question for Andrew and Gerry. Just following up on Andrew's earlier question on Denver and your expectations from the rebank. I think you'd previously said, you expected that to start driving improved results in Denver starting in late February. I'm just wondering if that expectation is embedded in your Q1 PRASM guidance.

Yes. Yes and yes. February, 14th and yes.

And then that expectation is again based off of your lessons learned in Chicago and Houston but maybe a little bit better it sounds like? Or you not assuming that potential for it to be a little bit better?

Well, I mean, each hub had a baseline that we're trying to improve from and Denver is a great hub, before we made this change to be very clear. So, each number for each hub is different based on exactly what we were doing. Denver has one fewer bank. It's a dramatic increase in our connectivity. Particularly during the middle of the day, it's a dramatic decrease in the number of pre 6:00 am flights and it's increase in the number of early am departures out of Denver for our local passengers. So, we're not going to give a specific number for Denver. But as we create the revenue plan for the year and the revenue guidance for Q1, we do make an attempt to make sure that what we are working on is reflected in that guidance.

And then just one more for Gerry. Just given the new lease accounting standards and moving pieces on the balance sheet, do you have an updated view of what you think the right leverage range is for the company going forward?

As I said before, I think we're in that range. We spend a lot of work over the last six, seven, years, getting our balance sheet into the position it's in today, where we have a very manageable debt load including our capitalized leases. We have $7 billion of unencumbered assets. We have very manageable amortization schedule. Everything about our balance sheet is in great shape. I wouldn't anticipate it moving much one way or another. We'll continue to finance new aircraft deliveries. I would expect most of those to be dead. I would say that the lease market is getting a little more attractive than it's been historically. So, there could be a mix there. But as new debt comes on, we've got the debt amortizing. So, it's going to stay in the range it is and we're very comfortable with the state of our balance sheet.

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

Have you guys put out an estimate for the impact of the shutdown, just given your presence in the DC market?

No, we haven't. We do have a largest exposure. We have a biggest presence in DC. But as we said, it's hard for us to know what the impact is right now or what it's going to be. We also don't know how long it's going to go. And really what we did is gave a wider range to reflect that uncertainty. Maybe after the quarter when it's all over, we'll try to look back and see what the impact was. But right now we're not going try to pin a number on it.

And then just a question to Gerry. Just in the income statement, there was a sizable decline in depreciation and amortization - excuse me, aircraft rents, you got cut a bit. And I just wasn't sure if that was actually tied to the move toward lease accounting and I don't even - my sense is that just looking at the balance sheet that you have yet to make the adjustment, is that a 2019 phenomenon? So, sort of a two-part question there on lease accounting.

So the reduction in rent expense is largely due to the initiative we have of buying aircraft off-lease. Switching from rent expense to basically depreciation, in many cases, is terrific and is factored into our CASM numbers. Particularly for mid-life aircraft, the lease expense - going from lease expense appreciation reduces ownership costs by 60% to 80% in some cases. So, that's why there is that significant drop in rent expense. And then lease accounting is - you'll start seeing that next year.

And from Barclays, we have Brandon Oglenski. Please go ahead.

So listen, I don't mean to be too much of a nerdy analyst here, but if I take the midpoint of your full-year guidance and I look at the current fuel curve, I think that implies something like a flat RASM outcome for the year. So, I just wanted to ask, is that something in the plans? Are you guys looking to get momentum on unit revenues throughout the year?

Brandon, we'd encourage you not to be a nerdy analyst. Because really what we're trying to say is we can hit, and we said, meet or exceed our $10 to $12 guidance range at any fuel price between $40 and $80. That's another way of saying. At some fuel prices, we think we will end up above that range. But you shouldn't try to pin down a fuel number today and say that's what we think RASM is today because we've intentionally tried to move to a rule where we were going to tell you an EPS number and we're going to have a commitment to you that we try to hit that we do everything we can to hit that EPS number in a wide range of fuel prices. And we're getting away from point guidance on fuel changes constantly or on RASM.

And I think I get the sense too that there's a higher focus on margin? Or is that also correct or incorrect?

That is correct.

Okay. And the last one…

From Goldman Sachs, we have Catherine O'Brien. Please go ahead.

So, maybe one more question is on the complexion of your capacity growth for this year. Based on schedule so far, it looks like you have a couple of long haul routes that drives about a point capacity pretty similar to last year. But last year you also had two points from Hawaii. So as it stands now, should we expect more of your capacity to be generated from, easing up some of your hubs? And do you think that's positive for 2019, RASM trends, given the performance you've seen this year? Or do you think we'll start facing tougher comp issues at some point? Any color there would be really helpful.

There's a lot of moving pieces here, and we did grow Hawaii a lot in 2018. And while we like the margin results of that RASM, in that case, would have brought down the averages. So, we're going for margin. And the fact is Hawaii will have dramatically less growth for United Airlines in 2019. And that's an example of, I think, ultimately will be a tailwind to RASM year-over-year. But Catherine, there are so many moving pieces on that front. And again, we're moving things around that, do things that boost RASM, but we're also doing things that take RASM away in the extent that they reduce the margin. Another good example is our 787-10s flying across the Atlantic. I expect the 787-10 to replace older less efficient aircraft. And our CASM on those aircraft will fall by 10% or 15%. But our RASM is also going to fall on those aircraft by some percentage less. So, hopefully that answers your question. I think there is just an incredible number of moving pieces.

That makes sense. And if I could just maybe ask one more quick question on the CASMex. I just want to be sure first that we shouldn't be assuming that a new potential pilot contract is not in there. And then second, obviously, I know you can't negotiate in public. But could you offer any guideposts on how a new pilot contract could impact your 2019 CASM outlook? Have you built enough variability into that or a better, quote unquote, or do you - to keep CASM flat or do you think that we could see some CASM inflation if we got a new pilot deal?

So, keep in mind that embedded in our CASM guidance is the 4% increase the pilots receiving this year under the current contract. So that's in the number. With respect to a new contract what we committed to when we put out our multi-year CASM guidance, last year was that this would include the impact of labor increases.

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

Congrats on the margin expansion. Your commentary about corporate bookings being up 11% last week, is the federal government included in that figure? And what would you guess your sort of percentage of volume is from the federal government?

Yes, it is included. But before I answer, we want to apologize to Brandon who got cut off or the operator cut him off. It wasn't intentional, Brandon. So if you want to get back in, please do. It includes all of our bookings. So it includes government. I don't have the exact number of what our percentage of government business is. And even if I did, it's not exactly reflective because we could tell you what's on government contract. But we can't tell you all the contractors or partners or others that are flying in to meet with the government. So wouldn't be a meaningful number anyway. But the 11% is everything. So it includes the impact of government shutdown at least for that first week.

And then just for my follow up. The four to six this year, just broad brush, I wonder if you could talk about domestic versus international, regional versus mainline, and maybe just contrast that at a high level with '18. Thanks for taking the questions.

Sure. At this point, I think a similar profile. Domestic is we're focused on our mid-continent hub strategy. We will continue to be the higher of the two numbers. And international, the lower obviously to offset that. And I'm not sure I can add any more from there. But domestic will be a little bit higher and international a little bit lower than the average. And again, it's very similar to what we did in 2018.

And from Cowen, we have Helane Becker. Please go ahead.

So, I guess in the end, it turns out that your hearts were in the right place there. You are generating good traffic growth in each of the locations. Can you talk about the opportunities that you have in San Francisco, LA and New York that might add to growth this year, that maybe what - that you're not talking about because it's less impactful than mid-con, that will still be impactful to revenue growth?

Helane, I'm not sure we heard your question. If I understood the bits and pieces correctly, I would say, you're asking for 2019 for our what role did our coastal gateways play in our plan?

Exactly, because your growth has been focused on mid-con and yet you still have opportunities in New York, LA and San Franc because I have seen you add capacity in those markets as well. So, maybe you could just parse out the difference between the two. Sorry, I'm losing my voice here.

Well, I'd say we really do love all our hubs. And we have spoken a lot about our mid-content hub strategy, because our margin gap in the mid-continent hubs is clearly the most significant and more pressing issue for us to address and that's exactly what we're doing. But I will say that our coastal gateways are really unprecedented and they are really - they are long-term potential. And so, I'm really excited about them, New York and Dallas on the East Coast are amazing. Having our single hub in New York City is a great advantage and we announced new service to Naples and Prague this year out of New York. And Tel Aviv out of Dallas, San Francisco, I think is the premier gateway to Asia and we've grown that as well. And we've announced new service to India and Australia out of San Francisco. So, we will continue to focus on our mid-continent hubs for the time being. But I do want to say that over the long run, we do recognize that United's international footprint and our ability to mine that is pretty unprecedented. It's unique to United in many respects. And over the long run, I think you'll see a lot more activity there. But in the short run, we have a problem to fix in our mid-continent hubs and we are well on our way. And we want to close that margin gap that we cited last January in those hubs and we think we're doing it as we want to do it and it's working.

And from Barclays, we have Brandon Oglenski back on line. Please go ahead, sir.

I appreciate. But I get rejected all the time. So, this is not there for me.

Well, we are sorry. We didn't mean to.

Look, I guess, I was going to ask a variation on the question that's been asked couple times on the call. But you talked last year with the strategy about how United has to plug back into these small communities and we saw a lot of regional flying additions last year. But if I look at your fleet schedule, it does look like the majority of your capacity this year is going to come from mainline aircraft additions. So, can you just talk about how does that fit into the connectivity strategy and does this increased risks that now you're maybe going up more head to head with low-fare carriers than you were maybe incrementally in '18?

This is Andrew. The way I would describe that is our deployment of regional jets was not all that optimal and that we flew regional jets in mainline markets. So, what I think you'll see us do in 2019 is make sure that mainline markets have more often a mainline aircraft. And that will allow us to redeploy the regional aircraft into the regional catchment feeder markets. So, I don't think that dramatically changes the profile of our client or competitiveness. It does, as you can imagine in the big market, it lowers our unit cost structure dramatically and makes those, I think, much more profitable. So, it's about getting the right aircraft in the right markets. Our jet fleet size, I think is approximately the same. I don't have the exact numbers in front of me. So, you are right. But how we deploy the aircraft really matters. And that is what I think you'll see more and more changes as we go through 2019.

And from Bernstein, we have David Vernon. Please go ahead.

So, Scott, a little under a year ago you laid out the rationale for the hub connectivity strategy. You identified about a 10 point margin gap in the mid-con hubs at United. Can you give us a sense for how much of that gap you guys have closed to date, and whether or not it's feasible to actually kind of get those mid-continent hubs to parity? I'm not sure if there is some geographic differences that might not sort of let that get all the way to closing the 10% gap.

We haven't actually updated that analysis. We probably will at some point. But I guess, I'd just point it to, at least, part of the relative margin performance at United where I'm doing this math in my head, but try to beat the industry on average by a couple hundred basis points on year-over-year margin last year that I would say half of that is probably from the growth strategy. And half is from all the kinds of other initiatives that we talked about today and that we continue to talk about. So, that's probably a good indicator of how much we closed the gap so far. That would tell you that there's a lot of runway left and a lot of room to go and ultimately, I think we'll get to margins that are, at least, in the ballpark of where our competitors are.

Is it right to think that there might be some sort of diminishing sort of an impact of that, whether - like if some of the first network changes you made were more impactful than a later network changes or does it not work that way?

Well, I'll let Andrew add on to this. But the way it works when you grow a hub is, it's kind of a quadratic curve turned upside down. So, as you are growing, you're driving exponential connectivity, which drive margins growing fast. So the next airplane comes in, it drives margins up. You realize you've gotten to a mature hub where you get to the point that margins at the hub start to flatten out. And that means that you're, when you get to 900,000 flights a day and you're adding the next route, the next flight and it's to a smaller and smaller place, margins start to flatten out. At that point, you kind of know that you've gotten to a mature hub and if you keep growing then you drive margins down. But as you first start growing a hub, you start growing connectivity. It has kind of exponential growth and connectivity, which drives really strong growth in margins. And I think we're still at the early part of that curve, particularly in the mid-continent hubs.

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] And from The Associated Press, we have David Koenig. Please go ahead.

I guess, this is for Scott. I'm trying to understand the 11% increase in business bookings. How much of that is repeat from existing customers? I mean, are they just - are your old customers just spending 11% more than they did a year ago, or how much of it is getting new customers, including maybe taking some away from your competitors?

I don't know is the short answer. Look, we have 11% more bookings. I'm sure some of them are new customers. I'm sure a lot of them are old customers. I think the better way to think about it as opposed to that lens is that businesses still have enough confidence to be getting out and travelling and on the road. And despite all the doom and gloom you hear, you watch CNBC in the morning, businesses aren't coming through with that. Yes, I agree that people are nervous and they're watchful and they're waiting for something bad to happen, but it hasn't happened yet. And the economy is performing better than you would think, if you just listened to some of what people say that are worried, that could all come to pass. But right now, the economy is performing pretty well and you just see that in strong business bookings. I suspect our competitors - this is really just a share thing. I suspect - actually, I think even Delta yesterday talked about strong demand as well. So, this is just overall strong demand.

And Delta put a number on the government shutdown, you didn't. Did you consider that or is the size too hard to estimate the direct and indirect effects?

Look, it's hard to estimate and we want to get ourselves focused on delivering on our earnings commitments and that's the focus.. And trying as best we can to overcome the speed bumps that gets thrown in our way. And we are starting to quantify them. It feel like now is the right way to just say, we're going to have to power through and figure out how to get done. So we didn't spend really a lot of time trying to quantify.

And from Wall Street Journal, we have Micah Maidenberg. Please go ahead.

How many passengers have missed United flights because of long TSA or customs line? And is there any way you can quantify how much rebooking them cost United? And then secondly, just overall, how widespread are the delays in screening, where are you seeing problems?

This is Greg. We've seen pockets of staffing issues around the system, but really what's happened is it hasn't really impacted line waits all that much, and we haven't seen an impact in terms of people not being able to make their flights. Typically, what would happen if we're having that issue is we hold the flights for those customers. And we just haven't had to do that. So the TSA has done a pretty good job of covering for it when they've seen some staffing shortages.

Has United deployed any of its employees to assist TSA? Delta talked about that yesterday.

We have not. We do have partners who help us with some of the line management and other things that help the TSA with processing our customers. But we haven't used our own employees to do that.

Okay. And from Bloomberg, we have Justin Bachman. Please go ahead.

This question might be for Oscar or Scott. I wanted to ask about the state of the ALPHA talks in terms of the urgency for that this year, given that the pilots got a 4% raise, sort of weighed against the idea and your thoughts on flying the E170s with 70 seats on them in the future. What's the level of urgency on getting that deal done?

Look, we continue to constructive conversations with them. We have a good relationship and good partnership, and we are succeeding together but we're going to leave the negotiations at that table.

And from Reuters, we have Tracy Rucinski. Please go ahead.

I wanted to ask a little bit more about your use of regional aircraft as well. You mentioned that last year, the use wasn't very optimal. Regional costs have clearly gone up in part because they are having to pay more to attract pilots. Have these added costs factored into your decision not to deploy them in mainland markets this year?

This is a long-term strategy, and we want to make sure that our smallest regional aircraft are flying in short-haul catchment markets and our mainline aircraft are flying in mainline markets. We just didn't have the right fleet mix historically to do that and we still don't. This is a process that evolves over time. So, what you'll see is fewer 50 seat regional jets, in particular, flying on routes that are between major hub cities. That's the right thing to do. It was the right thing to do two years ago. It's the right thing to do today, and we're going to do continue to execute on it. And I think that's the right way to look at it.

Okay. And can you give an update on your Career Path Program for pilots and generally on pilot shortages?

Hey. This is Greg. We've got a program in place with a number of our partners to facilitate hiring at those regional partners as well as matriculation eventually to the mainline. It's a program that's working really well for us and we're happy with the results.

And from CNBC, we have Leslie Josephs. Please go ahead..

You guys have been adding a lot of premium seating, business class in Polaris. What happens if there is a slowdown and just how prepared are you guys for a recession or just economic slowdown in general, given that you're putting such a focus on corporate travel and high-paying customers? Thanks.

Leslie, we watch the data, as we said several times in this call, we watch the data even more closely. We built an airline, as Gerry talked about, our very strong balance sheet. We've got incredible flexibility with the fleet. We've built an airline that we think has a lot of resilience and flexibility in it, created a culture where we can be more quick and nimble about taking actions if we need to. And so we feel pretty good that, in the event things change in the world for the better or for the worse, that we've got the ability to respond nimbly and keep the airline running well and performing well.

Are there any - is there anything specifics that you've toyed with, if there is a slowdown and you mentioned being quick and nimble, anything like - any color of what the airline could look like if there is a slowdown in demand?

Certainly nothing that we would talk about publicly.

Thank you. And we will now turn it back to Mike Leskinen for closing remarks.

Thanks to all for joining the call today. Please contact media relations for any media questions. And I will be reaching out to the analysts. Thank you very much.

Thank you. And ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect.