United Airlines Holdings, Inc.

Good morning and welcome to United Continental Holdings Earnings Conference Call for the first quarter 2019. My name is Vanessa and I will be your conference facilitator today. Following the initial remarks from management, we will open up the lines for questions. At that time, if you have a question, please press star followed by one on your touchtone phone. 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, Vice President of Corporate Development and Investor Relations.

Thank you, Vanessa. Good morning everyone and welcome to United's first quarter 2019 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 the 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. The number of factors can 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 the results and outlook are Chief Executive Officer Oscar Munoz, President Scott Kirby, Executive Vice President and Chief Operations Officer Greg Hart. Executive Vice President and Chief Commercial Officer Andrew Nacella. And Executive Vice President and Chief Financial Officer Jerry Letterman. 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 the call over to Oscar.

Thank you, Mike. And my thanks to all of you for joining us today. With the tailwind of an outstanding 2018 at our back, United came right out of the gate in the first quarter of 2019 with strong unit revenue growth, effective cost management, and a second consecutive quarter of adjusted pre-tax margin expansion, an emerging trend we expect to continue. Now running an efficient airline is precisely what has allowed us to make a series of industry-leading investments this quarter that are increasingly making United the airline people choose to fly. But first, let's turn to slide four. As the financial results this quarter affirm, clearly our strategy is working. The first quarter adjusted pre-tax earnings were $389 million, when the adjusted pre-tax margin was 4.1%. An increase of more than 200 basis points year over year, and the best first quarter we've had in three years. We more than doubled our first quarter earnings per share year over year. So this puts us well on track to achieve our 2019 adjusted EPS targets of $10 to $12, and gives us confidence that we will meet or exceed our 2020 adjusted EPS. From an operational perspective, this was not an easy quarter, especially considering the harsh winter weather, the max grounding, and several other events that Greg will cover later. So I want to thank our employees for their hard work in demonstrating once again the proof, not promises mentality you've heard us talk so much about. And by combining this impressive operational performance and making smart investments in the customer service, we've been able to elevate our customers' experience in tangible ways while strategically managing our costs. Here are just a few examples of the customer benefits we unveiled in the last few months. First, we made the United app even better. We debuted a new version of the most downloaded airline app in the world by making it more intuitive and a more personalized resource for our customers. Second, more than 100 channels of light television are now free for every customer and every class of service on more than 200 United aircraft. Third, on the fleet, we announced the two-cabin, 50-seat Bombardier CRJ-550 aircraft. When it is launched later this year, it will be a game-changer for regional flying for offering a first class cabin, economy-class seating, Wi-Fi, and more amenities than any other 50-seat regional aircraft operating today. This regional aircraft innovation will benefit, in particular, our customers in spoke cities who can enjoy more consistent product when connecting through our hubs to travel internationally. In addition, we announced the significant expansion of our premium offering by adding an additional 1,600 United Polaris business class and United first seats, which means more than 100 United aircraft will see their premium capacity increase by 50% or more. Fourth, we continue to grow our network to better serve our customers. We announced earlier this week that United is returning to Africa, applying to wide service between Newark, New York, and Cape Town, South Africa. And last month, we unveiled our plan to ramp up our service to Asia and launch six daily nonstop flights to Tokyo's Haneda Airport. Our success this quarter demonstrates our strategy to grow our airline, invest in our customer service, and effectively manage our costs of working. It is inspiring our workforce, it's winning over our customers, and it's delivering for our investors. Our momentum is only starting to build, and our future is really as bright as ever. So now let me hand it over to Scott for his take on the quarter and to discuss several uniquely united opportunities that won't be realized immediately, but over the long term will have a significant and positive impact on our airline and our customers. These opportunities have bigger outside potential for us than any of our competitors, and we're determined to make the most of them.

Scott? Thanks, Doctor. It's great to have everyone on the call today. We started 2019 with fantastic momentum here at United. While we faced some external headwinds this quarter, our team did an exceptional job recovering the operation and minimizing the impact on our customers, while still achieving earnings above the midpoint of our adjusted pre-tax margin guidance. Given the extraordinary efforts of the United team to care for customers this quarter, Greg is going to take some time to talk more about what the team accomplished operationally. Last year, we were executing well, and because we faced few external headwinds other than high fuel prices, we were able to raise our adjusted EPS guidance every quarter. We continued executing well this quarter, and even as we faced an unusual number of exogenous events, we remained on track to deliver for both our customers and our shareholders. We believe successfully managing through a more trying quarter like the one we just had is an even better proof point of the strong path United is on. We have a responsibility to overcome adversity without making excuses, and we did just that last year with higher fuel prices, and we're doing the same in 2019. In the first quarter, we were pleased with our revenue performance and cost management and expect we will lead our peers in year-over-year pre-tax margin expansion. By continuing to run the airline more efficiently, we're able to invest in the business and still effectively manage costs, and we've done just that. Meeting or exceeding our adjusted earnings per share target is the foundation upon which our strategic plan is built. It's precisely what allows us to invest in our product and improve the customer experience. We're striving to up our game and consistently deliver customer service based on our core four principles, safe, caring, dependable, and efficient. We continue our commitment to building a culture based on customer centricity. There are backstage events where over the course of this year, We're gathering all 25,000 of our flight attendants near our headquarters in downtown Chicago. That's 34 separate two-day events with about 800 flight attendants at each one. In a series of interactive sessions and workshops, our in-flight crews are focusing on the central ethos of caring service to elevate the way our customers feel about their United experience. A second opportunity vividly illustrates how we're leveraging technology to deliver on the promise of caring for customers. We're pioneering the implementation of new technology called Dynamic Departure, which empowers frontline employees with real-time data they need to make an informed decision on whether to hold a flight or customers rushing to a connecting flight. This technology identifies flights where connecting customers will be arriving a little late, but we have the opportunity to make up time in flight, still arrive on time, and wait for the connecting customer instead of closing the door and misconnecting them. We've been testing this in Denver, and we expect to save hundreds of connecting customers per day when fully rolled out. Dynamic Departures is great at caring for our customers, but it's also another example of how our team is innovating and testing new technology to constantly make United better. Finally, with respect to our Mileage Plus program, we know some of us from prior personal experience that this is one of our single biggest margin growth opportunities, and therefore one of the company's and my personal top priorities. There are many aspects of the program we're very proud of. However, it remains true that the co-brand component of our program underperformed relative to our peers, and this disparity only widens after recent announcements. Fortunately, United has hubs in the largest and highest income cities, which gives United and Chase the most opportunity for a co-brand card anywhere in the world. We're negotiating with Chase on opportunities for improved economics for our card partnership to ensure that our deal delivers industry competitive value to all of our stakeholders. We look forward to moving ahead with these discussions privately, which means we cannot answer questions about the status of our deal with Chase or any related negotiations today. However, it's worth noting that our full year 2019 and 2020 adjusted EPS guidance does not include any assumptions regarding benefits from a new co-brand agreement, so the current negotiations are only upside to our existing guidance. Our success in the first quarter gives us confidence that we'll continue the momentum of 2018 into 2019 as we move into the second year of our strategic plan. While it was nice to be able to raise adjusted EPS guidance the past several quarters, in light of the max grounding and uncertainty around the duration, we feel it's best to simply affirm our full year 2019 adjusted EPS guidance at this time. With that, I'll turn it over to Greg to talk about the incredible thing the United team did to take care of our customers this quarter.

Thanks, Scott. As Oscar and Scott already mentioned, we faced a number of unexpected events in the quarter. We are particularly proud of the dedication of our 93,000 employees who worked through these challenges and went to extraordinary lengths to care for our customers. In addition to hub-closing weather events like the polar vortex in Chicago or the winter storm in Denver, we overcame a unique operational event in each month of the quarter. First, we started the quarter off in January with the government shutdown. Then in February, our flights to India, which represent 1.2% of our capacity, were impacted by the closure of the Pakistani airspace. The closure required us to stage crews and refuel in Germany in order to continue operating the flights. The team has worked hard to find a solution for our Mumbai flight, but unfortunately we have had to suspend the service to Delhi through July 2nd in order to minimize the disservice to our customers. On March 13th, the FAA announced a decision to ground the MAX aircraft. We have 14 of these aircraft in our fleet. This represents about 1.4% of our capacity, which means that the grounding has only had a modest operational impact on the airline thus far, but that impact grows the longer the grounding lasts. But we have been focused on caring for those customers whose travel plans were impacted. We adjusted schedules and even upgaged some routes with 777s or 787s like San Francisco to Maui and Houston to Los Angeles. These solutions cost us money in the short term, but it was clearly the right thing to do for our customers and the right thing to do for the airline over the long term. Making these kinds of adjustments gets much harder during the busy summer travel season. when among other things, aircraft utilization and load factors are higher. So yesterday, we announced that we'd pull the MAX aircraft out of our schedule through early July. Since no one knows when regulators will complete their review of the MAX, we'll be focused on two priorities. First, we'll continue to take extraordinary steps to care for our customers and mitigate the impact of this change on their travel plans. Second, we'll cooperate fully with the regulators as they conduct their own independent assessment of the aircraft's safety. For more than 90 years, the safety of our customers and employees at United has come first. That's why we won't put our customers and employees on that plane until that independent assessment is complete. We take a lot of pride at United in running a great operation. Despite all of the headwinds in the corner, we ran an operation we can all be proud of. In fact, in our largest hubs with major hub competitors, Chicago, Denver, and San Francisco, we once again ran the best operation of all the hub operators. These outstanding results are a testament to the hard work of our employees and the airline's ability to be nimble and adjust to an environment that is always changing. The success of our operation enabled the strong revenue results that Andrew will now go into more detail on.

Thanks, Greg. The quarter got off to a great start with strong business and leisure demand with PRAZM up 1.1% for the period and top-line passenger revenue growth up 7.1%. Overall, we're very pleased with our revenue performance given the uncertainties we faced earlier this year. The continued success of our commercial initiatives helped us achieve this strong passenger revenue performance, and our ancillary revenues were up 13% or high teens. Our best performing entity for the first quarter was the Pacific. First quarter pricing increased 4.5%, which was above our early expectations and represents our fourth consecutive quarter of robust pricing growth. The demand for our flights was strong across the region, and we expect continued strong performance for the second quarter, albeit at more moderate levels. Latin America had strong shown in the quarter as well, a 2.6% increase in RASM. We expect even stronger performance in the second quarter across most of the region, in part due to the shift of Easter for even a very strong April. Brazil's RASM is also expected to turn positive for the first time since the second quarter of 2018, while Argentina continues to look negative. We anticipated a challenging first quarter for the Atlantic. Rasm decreased by 2.8%, entirely driven by weak main cabin pricing. The front cabin, however, continued to do well. In the second quarter, we expect a significant inflection in economy cabin yields in May, with healthy demand for both cabins. Europe for the quarter looks strong, but due to the Easter shift, comps will be difficult in April. Our domestic prowess in the quarter increased by 0.6% on a 7.4% increase in capacity. The first quarter will be our highest capacity growth quarter of the year, and we're very pleased with the results. Looking ahead to the second quarter, we expect our consolidated passenger unit revenue to be up 0.5% to 2.5%. year-over-year, the unit revenue is in line with our expectations when we set our full-year 2019 adjusted EPS guidance. Turning to slide 12, we continue to focus on commercial initiatives to capitalize on all the opportunities of our network. As Scott mentioned before, we're encouraged by the long-term potential of our co-brand agreement. Closer in, we just posted the strongest first quarter of new card account acquisitions we have seen in the past five years, continuing our trend of double-digit quarter-on-quarter growth. But as Scott has already outlined, we remain focused on the future and were recently reminded of the significant upside that will be available to United as we look forward. We officially flew our first flight on a Premium Plus aircraft to Tokyo in early April. We expect Premium Plus will have a negligible impact on revenues for 2019, but is expected to be far more impactful in 2020 and thereafter when fully sold out. We remain optimistic on the impact as we continue to see average yields for Premium Plus at more than two times the coach yields, and paid load factors are expected to be above 70%. A structural gap we have long been challenged to fill has been our premium seating in smaller communities across the United States. As Oscar mentioned earlier, in the quarter, we announced the introduction of CRJ 550 that is scheduled to join the fleet between this fall and June of 2020, only focused on short-haul business markets. Polaris seat installations continue to be on pace to be finished in late 2020, and our sixth planned Polaris lounge at Washington Dulles will open in 2020 as well. We continue to focus on using our RN system, Gemini. Yet again, in the first quarter, we held more seats to be built later in the book and verb. Saving seats to sell closer to departure date is possible due to the efforts of our sales force. In the quarter, corporate revenues, which look much closer to departure, increased 13%. well above our top line revenue growth. As planned, our Denver schedule is re-banked this mid-February. The recent capacity we have added leading up to the re-banking of Denver has been absorbed well by the market and successful at the onset. We're optimistic about the changes which increase connections as well as improve flight timings for our customers. With Denver Rebanks, we have completed all of our mid-continent hub restructures, and the first quarter of all three hubs posted positive unit revenues and had year-over-year margin expansion. Mileage Plus won the Best Frequent Flyer Program Award from Flyer Talk. We consider this one to be pretty significant, as this award is given to us directly from all flyers. We committed to winning again next year. We are recently announced we will be waiving close-in award booking fees together with removing the award charges. so we can more accurately match award supply with member demand through dynamic pricing for award redemptions. As part of our commitment to continuously upraising our MileagePlus member experience, we now instantly post milestone accounts as soon as a flight pulls into the gate. We continue to expand basic economy as well to more flights and more booking classes. We are also experimenting with increasing the buy-up amount from basic to standard economy. As of now, buy-up rates continue to be stable, even on higher buy-up costs. Earlier this week, we announced the introduction of service to Cape Town, South Africa for late 2019, and now we're just weeks away from launching Prague, Czech Republic, and Naples, Italy. We're thrilled to announce the addition of Africa to our global route offering. While we're focused on building our mid-continent connectivity in the coming years, we remain excited about the international potential of the United's network for the long term. The work we're doing to strengthen our domestic network enables a new international route, like the ones I just mentioned. In closing, we continue to feel really good about the plan we announced in January of 2018. It's working well. We're on track to achieve the adjusted earnings per share targets we outlined, as well as a pre-tax margin expansion in 2019. Thanks to the entire United team for a strong first quarter. With that, I will turn it over to Jerry to discuss our financial results.

Thanks, Andrew. Good morning, everyone. Yesterday afternoon, we released our first quarter 2019 earnings and our second quarter investor update. You can refer to those documents for additional detail. For the highlights, slide 14 is a summary of our GAAP financials, and slide 15 shows our non-GAAP adjusted results. We are pleased to report adjusted earnings per share of $1.15 for the first quarter, up 135 percent versus a year ago. Adjusted pre-tax income was $389 million and adjusted pre-tax margin was 4.1 percent, up more than 200 basis points year over year and marking the second consecutive quarter of adjusted pre-tax margin expansion. We are all very proud of these results. Slide 16 shows our total unit costs for the first quarter and our forecast for the second quarter and full year 2019. Turning to slide 17, non-fuel unit costs in the first quarter decreased 1.8% on a year-over-year basis. This was a great result driven by a combination of continued cost discipline, better completion, and timing of expenses over the course of the year. For the second quarter of 2019, we expect non-fuel unit costs to be flat to up 1%. As we look ahead to the rest of the year, a chasm headwind we face is driven by the reduced flying caused by the grounding of the MAX aircraft and temporary suspension of our flights to Delhi, which currently combined represents about 2% of our capacity. With respect to the MAX, we currently have 14 of these aircraft in our fleet, with five more scheduled for delivery in the second quarter and 11 more scheduled for delivery in the third quarter. While the financial impact of the max grounding and temporary suspension of service to Delhi has been modest, the longer these events last, the greater the impact on ASMs and CASMs. Based on our current assumption that the MAX aircraft will remain out of our schedule until at least early July and our flight to Delhi will remain suspended through July 2nd, we have reduced our full-year capacity guidance to a 4% to 5%. Due to the change in capacity, we have also revised our full-year CASMX guidance to be around flat year over year. Our ability to achieve better-than-flat CASMX this year will be negatively impacted if the MAX aircraft remain out of service or flights to Delhi remain suspended longer than our current assumption, but we remain confident in our full-year EPS guidance. As you can see on slide 18, we spent $527 million to repurchase shares of our common stock in the first quarter at an average price of $83.68 per share. As of the end of the first quarter, we have approximately $1.2 billion left in our repurchase authority and plan to continue to be opportunistic with our share repurchases. During the quarter, we took delivery of eight new aircraft. We also purchased five mainline aircraft and 16 regional aircraft off lease. These aircraft purchases, in conjunction with continued investments in the business, drive our 2019 adjusted CapEx outlook of $4.7 billion. Lastly, slide 19 has a summary of our current guidance, including the second quarter's projected fuel price range using the April 11th curve. The range provided for capacity, revenue, and cost implies the second quarter of 2019 adjusted pre-tax margin between 11% and 13%. We continue to expect full year 2019 adjusted earnings per share to be between $10 and $12. We are pleased with our results in the first quarter of 2019 and remain confident in our ability to continue to execute on our growth plan. We are managing the business to maximize earnings and continue to be focused on creating long-term value for our shareholders. With that, Mike will now begin the Q&A.

Thanks, Jerry. First, we'll take questions from the analyst community, then we'll take questions from the media. Please limit yourself to one question, and if needed, one follow-up question. Vanessa, please describe the procedure to answer the question.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please press star followed by one on your touchtone phone. If you wish to be removed from the queue, please press the pound or hash key. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, if you would like to ask a question, please press star followed by one. Please hold for a moment while we assemble our queue. And first, we have from Stiefel, Joe DiNardi. Please go ahead.

Yeah, yeah. Good morning. Scott, you mentioned on an earnings call in 2017 that you thought the margin headwind from United's card economics were about a point to a point and a half. Based on Delta's recent deal, it seems like the economics they got maybe improved by 10% or so. So that would imply maybe your margin deficit is closer to two points now. Would you disagree with that, Matt? Yeah.

So, as you said, we think this is a significant opportunity. We're not going to proactively affirm what the number is and the size of the opportunity, but we certainly wouldn't disagree with your analysis on the potential opportunity.

Okay. And then just kind of higher level, Scott, as you think about the earnings potential from the card, United is quite a bit smaller, for now at least, in terms of passengers versus Delta and American passengers. So how do we reconcile that with what your card economics could be eventually? Do you have better card penetration? Is your spend per card higher? Like, why do you guys get market rate economics as a smaller airline? And then just, Scott, you mentioned that you're in negotiations with Chase now. Is that a change, like you're formally in negotiations, or have you been in negotiations for a little while now? Thank you.

Boy, per se, we're not going to talk about the negotiations. We sure are doing a lot of tough conversations about change to start. Look, first, I think it is fair to describe the opportunity. While our number of passengers is smaller, look at our revenues, and it's essentially the same, which is indicative of the fact that United is in the best market. You know, with hubs in New York, Washington, D.C., Chicago, Houston, Denver, San Francisco, and Los Angeles. Like, I think there's no question that we have the best set of markets and the best potential for cars for total spend. great markets with high incomes. They are the premier markets for the premium car demand. I think there's no question that we have the most potential. The issue is around realizing that demand. And we are working hard with them. We are in discussions with them. Those have been ongoing and hopefully got a little bit of an octane boost from, you know, the recent competitive announcement. But both sides are actively engaged. and working hard on a win-win solution that works for Chase, that works for United, and that gets more customers and more economics for both of us.

Thanks, Scott.

And we really are, by the way, in the future, we're going to try to not, we really don't have anything to add on the card, so we'd ask to not ask the same questions over and over again, please.

Fair enough. Thank you. From J.P. Morgan, we have Jamie Baker.

Oh, good morning, and thank you for taking my question. Following up on Jerry's Max observations, but maybe for Greg, you know, the cancellations to date have been well below those of, you know, other U.S. operators. Even when adjusting for the fact that your fleet is smaller, can you walk us through the mechanics of this? Does it imply you were... over spared to begin with? Was it accomplished just by pushing off non-essential maintenance? You know, what I'm trying to better understand is post-July, how do the potential pressures on margins actually show up?

Hey Jamie, this is Greg. Thanks for the question. It was really a combination of things we were able to do to recover the schedule, including we did take a little operational risk in terms of utilizing spares. We moved the hangar plans around and deferred some maintenance, as well as we changed some of the heavy check schedules on our aircraft. But it was a combination of things. With 14 aircraft, it was something that we could manage for a month or two, given some of the flexibility we have in our maintenance plans. But beyond that, it gets really tough to manage because there are not many maintenance in advance that we can preclude doing it within the timeframe.

Sure. Okay, that helps. And a second MAX-related follow-up, but for whoever would like to take it, you know, as we think about the potential timing of a pilot deal, You know, I would initially assume that the two phenomena are mutually exclusive, but with all the MAX focus, both for management, you know, and for ALPA, you know, is this slowing down the conversations that you'd otherwise be having with your aviators or not?

No, it's not. And I would say that ALPA has been a great partner for us on the MAX issues. Well, we have negotiations. We don't always care about everything. When it comes to safety here at G9, that's one where we work hand in glove with Alpha, and we appreciate their active involvement in the process so far, but it is not at all hindering or impacting the ongoing negotiations.

Cool. Just wanted to check. Greg and Scott, thank you very much.

Thanks, Jamie. And from Vertical Research, we have Daryl Genovese.

Morning, everyone. Thank you for the time. Jerry, you had previously talked about flat to down chasm X in both 2019 and 20. With some of the exogenous issues that you're facing this year and the move to a flat chasm guide, is there any reason why, you know, assuming the 737 MAX and India-Pakistan issues are cleared up by year end, we shouldn't be thinking about down chasm in 2020?

So if everything is cleared up this year, there's no reason that we wouldn't be focused on what we said we would do next year.

Okay. I guess what are the big levers that you still have to pull on CASMX? I realize that, you know, the capacity growth is helping, particularly during some of the off-peak periods. Are there any other focused initiatives that you would highlight as being the big TASM opportunities over the next year, year and a half to get you to that?

I would describe the categories as the same as we've been talking about. There are some, for instance, Gage, which probably kicks in more next year than this year, would be one, you know, continued efficiency. and the use of our assets is another one. But generally, the categories will continue to be the same. It's just better execution.

Okay. And then can you also just give us a sense of the CapEx trajectory from here?

So, you know, we highlighted in the investor update our schedule for new aircraft deliveries next year, which ties to what was disclosed in our 10K. Next year is a peak year for wide-body deliveries. We have 17 next year on top of 28 narrowbodies, whereas there's only 10 this year. That does drive incremental capex versus this year. It's too early to give you the precise number. But ballpark, I can tell you, you're looking at the cost of those widebodies at about a billion more than this year. That's a peak. We expect widebody deliveries to come down after that. You know, we're very focused on making smart decisions on CapEx. An example of how we look at it, take the 777-300ERs that we're taking this year. We expect a first-year ROIC on those aircraft in the mid-teens, well above our cost of capital, and that only improves as those aircraft depreciate. I'd also highlight that we're focused where we can on mitigating aircraft CapEx. Between now and the end of next year, we actually have 30 used aircraft coming in. And if you look at what that's saving us versus new aircraft, that's $600 to $700 million of CapEx savings. Beyond that, I can repeat what we've talked about before, which is a normalized basis of replacement of non-aircraft CapEx and growth around GDP. That's around a $4 billion CapEx number annually. As we find opportunities to grow, like next year, you can see a year like next year where there's a little bit of a spike.

And thank you. Our next question is from Wolf Research, Hunter K. Hey, thanks.

Good morning, everybody. Just a little bit more on that CapEx. I don't want to diminish anything from the CASM progress you've made, but do you have any idea how much the incremental CapEx is going to save you on the P&L for CASM-X? And why did that CapEx come up relative to the initial plan on the wide bodies? Jerry, thanks.

I'd say that it hasn't come up, that's been our plan now for a few years. It just happens that next year, you know, consistent with the growth plan that we've had, there's a spike in wide bodies. But what it allows us to do, in addition to the growth that had been planned, it allows us to really redeploy the wide bodies much more effectively, putting the right aircraft on the right routes. And also sets us up nicely for the ultimate retirement of some of those older aircraft. But, you know, keep in mind, these are 30-year assets we're investing in. And, you know, these are all, you know, the newest, most efficient aircraft. So they're going to have a nice, you know, has a benefit for us.

Right. Okay, and then, Scott, you used to say the old Orion system used to under-forecast demand. Is it possible, given all the investments in the premium products you guys are making and the strength in business travel, that Gemini is still under-forecasting some of that close-to-demand strength now?

Yeah, I think, Jamie, yeah. I think we've made a lot of progress with Gemini. And we've been very careful on to change our booking curve, reflect the fact that we have more close in demand. So we learn from it every day, obviously, and we get better and better at it. But there may be still some upside there as we kind of go through the rest of the year as we tweak how we work with Gemini. So that's more to come, I think. But we've been very conscious to make sure that we start changing our booking curve to reflect the revenue potential of the airline and we successfully did that in Q1 and we think we're well on our way to doing that in Q2.

Thank you. Our next question comes from Dan McKenzie with Buckingham Research.

Hey, good morning. Thanks guys. A couple questions. Regarding the news that's spilling into the media regarding negotiations with Expedia, I guess first, how material is Expedia to the overall distribution of United's inventory first? And then second, you know, some of us are going to ask, of course, you know, what it means for the full year guide and yield. So I'm just wondering if you can help put some numbers around, you know, how to think about that.

Well, this is Andrew. Maybe I'll... I'll try to answer that question. It's complicated from the perspective of we can sell tickets in many, many different ways. But we were clear earlier this year that we'll be moving on on the distribution partners to better suit into our future, not our past. Expedia tried to stop us in Portland, quite frankly failed. The most simple way to say this is times have changed. Companies need to evolve and innovate. We here at United have changed a lot. We have in particular invested in our own website and our app to be much more cost-effective, being transparent, and come up with the optimal sales abilities to distribute our content. Expedia has historically been a very good in selling our lowest fares, but quite honestly, we think we can sell our lowest fares just as well. And that's where we are. So we look forward to having a direct relationship with our customers going forward. And that's really where we are with Expedia.

And I would just ask, Dwayne, because you asked about the, I don't know, effective whole year guide. We've assumed from the whole year that effective at the end of September, we will not be in Expedia. And we are still confident we'll hit our $10 to $12 guide.

Thank you. I appreciate that. And then I guess, Andrew or Scott, given the Easter shift, You know, obviously we hear the commentary on demand, but how would you characterize core underlying booking volumes? Normal, elevated, below average? You know, so on the first call you shared some booking perspective, and it is helpful to have some volume perspective behind the revenue guide. So just some perspective on how consumers are digesting, you know, what's going on with the existing yield backdrop.

Sure. Well, you know, I was talking about a few ones. we thought was very strong. And if you look forward in the Q2, I would say the same. That we're really happy with demand levels across the board. There are a few pockets, Argentina being one of them, that's a little bit weak. But overall, we feel really good about this. You know, Europe for the next few weeks is weak due to the Easter holiday shift. But after that, it looks really great in both cabins. And Latin America is, I think, clearly going to be our best performing entity of the quarter. And a big part of that is the Easter shift. So there's a lot going on. A lot of the holidays have moved, which affects how we look at things. But I would say the underlying demand is that we see going in, particularly as we look out into May and June, is very good.

Thank you. From Credit Suisse, we have Joe Payato.

Thanks very much. Good morning, everyone. Andrew, are you able to quantify the contribution from premium plus revenue flights that's embedded in the Q2 revenue guide?

It's really insignificant at this point. You know, we'll say we started... We started flying the cabin early this month. Tokyo and Newark was the first routes. And there's a couple things we're looking at. One of them, what is the yield versus coach? And as I said earlier, that's tracking to more than two times coach. The other thing is we have expectations for load factors and excess payload factors in excess of 70%. And in fact, the first two weeks, the pay load factor has been 89%. So we've got this – we really started off with a great few weeks here with this new product. But this is really early days. It's on very few of our aircraft today. But every day, there will be more and more. Ultimately, you know, premium plus will be 78%. of our wide-body capacity going forward. And given what we've seen over the last two weeks, we think this will have an impact on our 2020 and 2021 financials in a really important way. So I can't say how excited we are, in particular given the data points we've seen over the last two weeks.

That's very helpful, Connor. I appreciate that. Jerry, one for you. Can you just maybe parse some of the puts and takes with respect to the unit cost outlook here for the year? I mean, max is obviously adding some pressure, the lower capacity growth. But the change to the full year unit cost outlook is fairly small. So can you just talk about some of the offsets and where those cost controls are really shining through or maybe what's outperforming your expectations?

I would just say it's indicative of the fact that As of now, the number of maxes we have is a relatively small part of the fleet. So the adjustment right now is solely the result of the maxes and the suspension service fidelity, and that pretty much everything else is tracking as we expected, and that this is simply the arithmetic of changing the capacity output.

And thank you. From Raymond James, we have Savi Seif.

Hey, good morning. Two quick follow-ups. Just on the MAX grounding, could there be an impact on CAPEX this year as, you know, kind of what your expectations are for when deliveries will resume?

You know, obviously, if the grounding lasted long enough, Boeing wouldn't be able to deliver aircraft. But, you know, our expectation is that if there's return to service this summer, it won't impact the timing of our deliveries beyond this year. So the aircraft scheduled for delivery this year, we would expect to take this year.

Okay, great. And then just on the other revenue, the non-passenger revenue, any thoughts on what you're seeing on the cargo front and then also just the other revenue, employees doing really well, But other revenues kind of lost a bit of its momentum. And when you might expect that to pick up outside of a new credit card dealer or anything.

Hey, Sabi, this is Greg. I'll take the cargo piece and then turn it over to Scott for the rest of the question. But on the cargo side, our cargo revenues were down 2.5% roughly, driven largely by capacity and industry. Okay. But relative to the performance of our peers, we continue to be really, really happy with the performance of our cargo team and driving a really, really good product force across the network.

In the other regulated category, this is Andrew speaking, last year we had a one-time payment from Chase that we didn't get this year. So I think that reflects a big chunk. It's not the majority of the change.

And thank you. From Cowan & Company, we have Helene Becker.

Thanks, Operator. Hi, team. Thank you for taking my questions. My first question is, has Boeing offered you any compensation or offered to make you whole at all on the MAX being grounded? Yes.

Hey, Elaine, it's Jerry. So, you know, right now we're focused on assisting every way we can with regulators and with Boeing on solving the problem. And that's all we're focused on. Having said that, you know, obviously there are some costs that we've been incurring and we expect to continue to incur. Boeing's been a great partner of ours for decades. And, you know, if you use some... historical references, such as the 787 situation a number of years ago. We'll have a conversation with Boeing, and I expect, like we always do, to resolve whatever that conversation is in a way that works for both of us.

Okay. Thanks, Jerry. And then my other question is completely unrelated and really has to do more with customer service. I think Denver Airport right now is undergoing some construction in the main area, you know, area where you go through security and Newark is certainly going through, you know, construction and seems to have been under construction for the better part of, I don't know, one, one and a half years or so. Can you just talk about any impact that, you know, that has on your customer experience and whether or not and how long that will continue to go on?

Hey, Helene, this is Greg. Thanks for the question. You know, We always work very closely with all of our airport partners in making sure that we mitigate as much as possible the impact on our customers. And a lot of the projects you actually talked about, by the time they're finished, will actually materially improve the experience for our customers. So these projects aren't easy. They are complex. And from time to time, we do get together with our partners and reassess where we are and what changes we may need to make to the programs to ensure that the impact on our customers is mitigated as much as possible.

And thank you. From Deutsche Bank, we have Mike Linenberg.

Yeah, hey, good morning, everyone. Hey, two quick ones here. Andrew, just on PRASM for the June quarter, you mentioned that Latin America was going to be the best. March quarter, Pacific looked like that was the best performer. Is there a moderation in Pacific? And what drove Pacific's strength in the March quarter? Can you just give us some of the highlights? Thank you.

Yeah, again, great quarter, really happy with the performance, but I'll try to give you a little bit more color, but in the March quarter across the Pacific, we saw a good trend across really the entire region, but it was in the economy class cabin, so that's actually great to see. We've seen really good strength in the business class for a long time, so it's really nice to see the economy cabin Catching back up across the Pacific. Latin America, as I said, had a great quarter and looks really stellar Q2. A big part of that is Easter shift and Latin America is doing incredibly well. But we see that trend continuing into May and June at this point as well. And the Atlantic, again, looks fantastic for May and June at this rate. And I'm really, I think, very bullish on the entire international entity for TQ as a result.

Okay, great. And just my second question to Scott. You know, with Los Angeles unveiling the Terminal Zero and Terminal Nine projects, is Terminal Nine, is that the missing puzzle piece for United in L.A.? ?

That's probably an accurate description. We'll look forward to having a terminal line built someday. And today we're really full at Los Angeles. We have incredible utilization on our gates. And we will look forward to the opportunity to get more gates and grow in Los Angeles at some point in the future when that's done.

And from Goldman Sachs, we have Catherine O'Brien.

Good morning, everyone. Thanks for your time. With the progress you've seen over the last two quarters of margin expansion, can you talk about where in your network you're seeing the biggest improvements? Is that all the mid-con hubs rebanking? Are there certain initiatives like segmentation that are driving that? What's really been maybe the leader of margin improvement you've seen over the last two quarters?

Sure, I'll try to pick that on. Really, we have a whole host of commercial initiatives, big and small, and we've talked about all of those on the call before, and we tend not to break out the value for each of them individually for a lot of different reasons. It's all the usual suspects. In particular, the performance in the mid-con hubs as we generate this incremental connectivity is just key to what we're trying to accomplish. We're really, really focused on that, and that's a big part of it. But basic economy and segmentation and where we're going on premium plus, premium plus has a lot to offer in the future, given it's brand new. So I'm really excited about the broad array of commercial initiatives we have and what they're going to deliver over the medium or long run. The last thing I'll say is the international potential of the company is incredible. We're starting in Naples and Prague in a few weeks' time, and we now have the ability to successfully, we believe, fly to Cape Town, South Africa with a 787. So we have a lot of potential in the long run for our international division. But when you bring all of these commercial initiatives together, with the product changes we're making, the connectivity changes, the schedule changes, the great reliability we're offering in the marketplace. I think you see the results that we saw in the first quarter and what we anticipated in 2Q this year.

Understood. Thanks so much for that, Collar. And then maybe one more. So in the past, you've spoken about the importance of scope release to compete with your major airline peers. With the innovation of the CRJ550, do you feel better about your competitive position even in the event you don't get increased scope, or is that still top of mind in your discussions with the pilots? Yeah.

So I actually think you used words there that we don't use. It's important that we be able to grow United Airlines. It's important that we be able to do that in a way that is good for our pilots and all of our employees, our customers, and our shareholders. And so getting to a win-win position where we can offer our customers a great product in the kinds of markets that aren't large enough for mainline flying is really important. The CRJ550 is going to give us a unique ability to compete for premium demand that none of our competitors have. But it still remains important, and we are working with our pilots on it to find a win-win solution that allows us to be competitive with other full-service carriers across the board. And I'm confident that we're going to get there. We're going to do it in a way that is a win for us and that I would feel good about being a win for them and their growth opportunities in the future.

Thank you. From Barclays, we have Brandon Oglenski.

Hi, good morning. This is actually Matt on for Brandon. So now that you have all the mid-con hubs rebanked, I want to just come back to the opportunity there. Is it fair to say that the focus remains on the mid-cons to continue to optimize and optimize schedules? And really, how would we see, is there a lot of opportunity left to make improvements within the hubs?

Sure. Andrew speaking. As we look at it, what we're trying to do in the mid-time hubs is create a sufficient level of connectivity, a level of connectivity that, quite frankly, some of our competitors have had for years and for a number of reasons United didn't have. So we're well on our way, but we're still well short. of the number of aircraft we want to have on the ground at the same time to create that level of connectivity. And we've adjusted the structures in each of the hubs to make that happen. And as we continue down this path, we will build the connectivity to make all that kind of come together and build our RAS instruments. So we measure, you know, the connectivity, how we rate versus others in similar sized cities. And we still see a significant gap that we're closing over the next year or so.

Okay, cool. Now, just a quick follow-up on that. Are there any structural, you know, limitations or, you know, whether it's airport infrastructure or employees or anything that could inhibit that growth? Or is that something, particularly in Denver and Houston, I know Chicago has a little bit more, but anything to be aware of kind of as you deploy that growth strategy?

So across all the different teams here at United, we've kind of outlined where we're going as a team and whether it be the number of jetways that are hanging at an airport or the baggage system or ticket counter space. We've factored all of those issues into what we need to achieve the growth plan that we've designed. So every airport has unique characteristics, and every airport has constraints. There's no doubt about that. But the plan that we've designed, we've designed an infrastructure plan around it that we can achieve in the short run to allow it all to happen. So there's nothing that's going to stop us from achieving the plan that we've laid out at this point in time.

Thank you. From Bernstein, we have David Vernon.

Hey, good morning, guys. Thanks. Andrew, I just wanted to follow up on the 7% to 8% of capacity that's going to be premium plus. I think you said that was wide body. Can you tell us kind of what the ramp should be over the next couple of years? I think that was a long-term goal, but I wanted to see kind of what the volume number we should be working with for 2020 would be.

Yeah, so I think most of that is definitely all of that's online in 2021. A little bit next year in 2020, and then all of it in 2021. The dilemma is, as we stand here today, while it's on quite a few aircraft, actually, we're very careful on where we sell it as premium plus, because we want to ensure that the right aircraft shows up at the right date to have the product on board. So in year one of premium plus, we actually have the fees on board, but we really can't monetize it the way we'd like to. So in 2020, you know, you should see, I would say, in round numbers, three, three and a half percent of our wide body capacity being sold effectively as premium plus. In 2021, that would be between seven and eight percent.

And thank you. Ladies and gentlemen, this concludes the analyst and investor portion of our call today. We will now take questions from the media. As a reminder, if you would like to ask a question, please just star followed by one on your touchtone phone. Please hold for a moment while we assemble our queue. And from the Associated Press, we have David Coyne. David, your line is open. If you're muted, could you please unmute, sir?

I'm sorry. My bad. Good morning. Can you hear me now? Two things. One, super quick. If Jerry could complete his answer that he gave about max deliveries, are any scheduled in the fourth quarter? We heard about two and 3Q. And then my question, and Greg mentioned this in response to Jamie Baker. Exactly what kind of maintenance are you deferring while your MAX 9s are grounded, and how much extra have you spent to date to protect your schedule from those groundings?

So on the deliveries, no, we had no aircraft scheduled to deliver in the fourth quarter, although I would expect that some of those third quarter aircraft end up slipping to the fourth quarter, but there were no previously scheduled fourth quarter deliveries.

Okay, great.

And then on the maintenance work that we've deferred to help cover the max schedule ranges from Wi-Fi installations to voluntary – other voluntary maintenance work that we've had scheduled that is perfectly – able to be deferred to a later date, as well as something as simple as paying an aircraft we've deferred. So it kind of runs the gamut across what we do in the maintenance world on a voluntary basis.

But importantly, it's no safety-related item.

That's what people wanted to know. And then how much extra have you spent so far to keep your schedule intact, more or less?

I don't think we have that much. answer for you, but it was not material.

Okay. All right. Thank you.

And from the Wall Street Journal, we have Allison Sider.

Good morning. Hi. My question, just sort of given the incidents and what's been detailed in the preliminary report, are you satisfied with pilot training at Ethiopian Airlines and safety practices and How confident are you feeling sending customers on co-chair flights with Ethiopian? Is that something you're reviewing just in light of everything that's happened?

We are confident in the training programs at United Airlines. And in what we do for training our pilots, I think we're prepared to comment on the training programs at Ethiopia. We do have a process that we go through and we'll continue to go through that involves IOSA standards for auditing for all of our co-chair partners that we use, but we don't have specific commentary on their training programs.

So when you mentioned an auditing process, is that something you've, like, initiated for Ethiopian now, or is that something that they would undergo when you strike up a partnership? Or, you know, is there going to be additional review of Ethiopian or your partners generally?

We go through that audit process with all of our partners, and we've done that for at least as long as I've been in the island industry.

Thank you. From Bloomberg News, we have Justin Bachman.

Hi. Thanks for the time. I wanted to focus on the Casamex performance in the first quarter and wondering if you could go through some of the buckets that went into that performance in terms of the capacity growth and the maintenance deferrals that you did. And sort of what are the different areas that make that up and sort of by percentages. And secondly, on CapEx, when you have aircraft scheduled for delivery, what's the breakdown of costs united for pre-delivery payments versus what you pay upon delivery of the aircraft? Thank you.

So can I take that second question first? And, you know, that breakdown between pre-delivery deposit and pre-delivery What we pay at delivery varies airline to airline and is really not something airlines specifically talk about. That might be a better question for Boeing to answer. With respect to first quarter TASM-X performance, which did end up somewhat better than our expectations, but really a lot of that was just timing certain maintenance events that nothing more than we expected, for instance, some engine maintenance that ended up not having to be done, but we would expect that to be done later in the year. It's that sort of thing. It's strictly timing versus what our original expectations were.

Okay. And then how much of that was just overall capacity growth that you had planned as far as the mix of, you know, was that active management or was that some of just the function of the airline's growth?

Well, clearly the growth of ASMs helps us manage our chasm, but that's all built into the plan.

Thank you. From Reuters, we have Tracy Rosinski. Hi. Good morning.

Good morning. One quick question, talking about pilot training, will you be requiring simulator training on the MAX?

Hey, this is Greg. If you don't mind, I'd just like to provide a little context to your question. Based on the preliminary results of the investigations of both the Lion Air and Ethiopian accidents, runaway trim was among the primary causes of the accidents. For decades, All of our pilots on all of our Boeing aircraft here at United have been trained to respond to a runaway trim situation. In fact, the training around the situation is so central to our curriculum that the pilots are required to memorize the procedure. That's why we have consistently reiterated our confidence in the ability of United pilots to safely operate United Max aircraft. Now, of course, if the regulatory authorities require any changes to our training programs, we will comply with them.

Okay, so no decision yet then on simulator training?

Right now, we have no plans to add any simulator training to our training regime. But obviously, if the regulatory authorities request that as an ad train, we'll comply with that request.

And thank you. That was our last question. I will now turn the call back to Mike Westman for closing remarks.

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

And thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating. You may now disconnect.