United Airlines Holdings, Inc.

Good morning and welcome to United Airlines Holdings earnings conference call for the third quarter of 2019. My name is Brandon and I'll be your conference facilitator today. Following the initial remarks from management, we will open the lines for questions. At that time, if you have a question, please press star followed by 1 on your touchtone phones. 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 Eskinen, vice president of corporate development and investor relations. Please go ahead,

sir. Thank you, Brandon. Good morning, everyone, and welcome to United's third 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 .united.com. Information in yesterday's release and investor update, the accompanying presentation, and the remarks made during this conference call, may contain forward-looking statements, which represent the company's current expectations or beliefs concerning future events and financial performance. All forward-looking statements are based upon information currently available to the company. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release, Form 10-K, and other reports filed with the SEC by United Airlines Holdings and United Airlines for a more thorough description of these factors. Also, during the course of our call, we will discuss several non-GAAP financial measures. For a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please refer to the tables at the end of our earnings release, investor update, and presentation, copies of which are available on our website. Joining us here in Chicago to discuss the results and outlook are Chief Executive Officer Oscar Muñoz, President Scott Kirby, Executive Vice President and Chief Operations Officer Greg Hart, Executive Vice President of Technology and Chief Digital Officer Linda Jojo, Executive Vice President and Chief Commercial Officer Andrew Nisela, and Executive Vice President and Chief Financial Officer Jerry 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 the call over to Oscar.

Thank you, Mike, and my thanks to all of you for joining us today. Before I start, as we always do, we want to thank each and every one of our United colleagues for their determination and passion for serving our customers. It truly is their dedication that has helped us build a track record of delivering our financial targets and returning a solid value to our investors that we have. So to the results, we have another strong quarter of results. As you can see on slide four, we reported adjusted pre-tax earnings of $1.4 billion with an adjusted pre-tax margin of 12.1%. Our adjusted earnings per share of $4.07 was 33% higher than the third quarter of last year. And that reflects 250 basis points of adjusted pre-tax margin expansion in the third quarter. It is our best so far this year. It also reflects the third consecutive quarter that our pre-tax margin has grown in the fourth quarter on an adjusted basis. This strong performance gives us the confidence to raise our full year 2019 adjusted EPS guidance to a new range of $11.25 to $12.25. We are now ahead of pace towards achieving our 2020 adjusted EPS target of $11 to $13, which we set nearly two years ago. We extended this quarterly streak of pre-tax margin expansion despite the obstacles like historically severe weather, volatile global market, and of course the grounding of the MAX aircraft. We didn't overcome these obstacles by cutting back on the value we provide to you, our customers. In fact, just the opposite. We continue to invest in a variety of improvements to the United experience that are benefiting our customers and elevating the value proposition of flying United. Here are just a few items. Our connection saver, which you've heard about, has already saved over 50,000 customers from missing their connections year to date, which is accruing customer gratitude and appreciation over time while ensuring each aircraft arrives on time. We are also now selling flights on the new CRJ-550, which will transform regional flying and give us a uniquely united advantage serving customers in our spoke cities as they connect to international destinations. As we've told you before, it will offer a first-class cabin, economy plus CD, Wi-Fi, and more amenities than any other 50 seat regional aircraft operating today. So from the award-winning, refreshed United app to expanded, complimentary snack options, we are continuing to invest in our customers' experience across the board. But ultimately, what makes all of those enhancements truly come alive are the people who deliver them and serve our customers every day. And that is why our backstage event for our flight attendants is so pivotal. It's proven to be an absolutely game-changing experience for our employees. I believe the reason for their enthusiastic response is that backstage brings our Core 4 principles to life in a variety of tangible ways that authentically resonate with our employees and our customers. It's been really satisfying to travel the system since we introduced Core 4 and witness how our employees have embraced this framework of safe, caring, dependable, and efficient. And it's inspiring to see how they've taken personal ownership of the concept, finding creative, compelling ways to embody it. Every customer, every flight, every day. In closing, when you look at the sum of all these efforts, what you see is a picture of what proof not promised looks like in practice. So we have less than a quarter left of 2019, and we believe our momentum remains strong. But, I promise you, and I use that word with earned confidence, we expect the best lies ahead. I look forward to welcoming journalists from around the world to our first ever Media Day here in Chicago on October 24th and 25th. It will be an excellent opportunity to showcase what is driving our confidence in the bright future of United Airlines and the new spirit of United. So with that, I'll turn it over to Scott.

Thanks Oscar. I'd also like to thank all the people of United Airlines for the incredible job they're doing taking care of our customers and producing strong results. Thanks to our team's no excuses mentality, we delivered another quarter of adjusted pre-tax margin expansion. This continued an eight quarter streak, coming in above the midpoint of our guidance range. Andrew and Jerry will talk more about the recent results and the near term future, but I want to address a couple of the bigger picture questions that have been top of mind for our investors. First, we're getting a lot of questions about our ability to continue driving flat Casimax in the years to come. It certainly won't be easy, but our goal remains to drive flat Casimax. At the same time, we will of course continue to make the anticipated increases in compensation for all of our employees. After all, it's the people of United Airlines that are driving these results and they deserve to share in the rewards. As Oscar mentioned earlier, we also expect to continue making significant product and customer experience investments next year, consistent with our Core Four framework of being safe, caring, dependable and efficient. We've been doing that this year with investments like ConnectionSaver, Redirect TV, dramatic improvements to Wi-Fi and much, much more. We can already see the positive impact of those investments with material increases in customer satisfaction and Net Promoter scores, which is driving customers to choose United Airlines and contributing to our strong financial results. So how can we continue to invest in our people and our customer experience and drive towards flat Casimax? For one thing, we plan to take advantage of increasing gauge. We have large hubs in big cities across the country and because of that, we should be the airline with the highest gauge. But at this point, we aren't. In fact, United is seven to eight years behind our large competitors on gauge growth, with approximately 13% fewer seats per domestic departure compared to Delta. As our fleet makes shifts to a higher percentage of larger gauge mainline aircraft instead of regional aircraft, we begin closing that gap in earnest starting next year. And we're planning for approximately 3% more seats per departure by the end of 2020. We expect gauge growth to continue through the middle of the next decade. In addition to gauge growth, we've also built a disciplined, action-oriented, innovative, no excuses culture here at United, where we make difficult decisions to drive efficiency throughout the company, which provides us with the resources to continue investing in our people, product and customer experience. The second big concern that we're hearing from investors is what's going to happen to industry present with the return of the Max. We don't have unique insight into the economy that will make our opinion any better than yours, but we're more optimistic than most about industry revenues and more importantly, we feel good about our track record of overcoming hurdles and producing results without making excuses. We're in the early innings of our journey to make United the best airline in the world for our customers, our employees and our owners. We believe we'll continue to have uniquely United opportunities that will allow us to continue to differentiate our performance in 2020 and beyond. The bottom line is that we expect to meet or exceed our $11 to $13 adjusted EPS target for next year. I'd now like to take a moment to talk a little bit about the team and culture here at United. Many of you probably play fantasy football. I don't, by the way, but my wife Kathleen is in a couple of leagues and is actually the commissioner of one of our leagues, so I hear about it a lot. A successful company is a lot like a successful fantasy football team. You're looking for players you can count on who are more than just standout individual performers. You're looking for talented players who are part of a good team, playing in a good system, and who overcome obstacles to help their team win. And the reason is simple. Football is a team sport. Well, running an airline is a team sport also. And here at United, you've got a talented team and a great system that now has a track record of overcoming obstacles and competing at the highest levels. On these earning calls, we're increasingly trying to introduce you to more of the talent on our team. Kate Gibo, our EVP of Human Resources and Labor Relations, joined the call last quarter, and today you'll hear from both Greg Hart, our EVP of Chief Operating Officer, and Linda Jojo, our EVP of Technology and Chief Digital Officer. Even better, get out there and fly United, and you'll see in person what our incredible frontline team is doing every day to take care of our customers. This really is a new United airline, and we're continuing to build a new culture around a talented team that's determined to be the best airline in the world for our customers, employees, and owners. Right now, we're winning, and we're more confident than ever about our future. There have been and will be speed bumps along the way, but we will not be defined by them. We will be defined by our ability to overcome them. I'm really proud of this team and really proud to be a part of it. And with that, I'll turn it over to my talented colleague, Greg.

Thank you, Scott. I appreciate the opportunity to be here today, and I also want to thank all of our 95,000 employees. This has been an incredible year, and I want to take a moment to mention some of the great achievements of our team. We are consistently number one for on-time departures at all hubs where we face a large competitor, and the core of which is first place in Chicago, Denver, and Los Angeles. In fact, September was the 15th month in a row we've outperformed our three major competitors in LAX, the 31st month in a row in Chicago we've outperformed our two main competitors, and the 55th month in a row in Denver that we've outperformed our two major competitors, achieving first place in on-time departures at all of those hubs. And we did this while carrying more customers than ever. This is really something to be proud of and is a true testament to the team's ability to quickly and effectively respond to the range of operational challenges we face every day, while doing their very best to take care of our customers. Our teams have achieved this incredible track record despite the fact that we are facing some hard-hitting weather across the system. Tropical Storm Imelda caused severe flooding in Houston and impacted over 20% of our scheduled flights system-wide for three days in September. We also had 9% of our flights impacted by aircraft control delays in the core. This compares to about 4% at our competitors. Tough weather and irregular operations are nothing new to Uniting, but it's incredible to see our team gets better and faster at recovering from these events. To enable this success, we have equipped our employees with the right tools to manage all types of situations. Linda and her team have done an incredible job of putting technology in the hands of our employees to better communicate with each other to solve problems in the operation or take care of customers in the moment. We are running a great operation at Uniting and we couldn't be prouder of the team. We are the industry leader when it comes to our ability to recover from irregular operations caused by weather and will continue to learn and only get better from here. I'll now pass the call on to Linda.

Thanks Greg, it's great to be on the call today. I'm excited to share some of the progress we've been quietly making on the digital front while our operational improvements and growth plan takes hold. At its core, we've created a fast-paced, action-oriented culture that frees our people to partner closely with the business units and quickly roll out and test new innovations. Now not all of them work, but the fast pace allows us to quickly test new ideas, discard those that don't, and double down where we're seeing success. Today I'm going to highlight a few examples of those high return investments. Starting with our digital channels, united.com and our award-winning mobile app. We enable our customers to purchase and change both tickets and employee products through any of our channels at any time before their trip. All with the confidence that if they change their mind, we have their back. For example, a customer can prepay for her bag at time of ticket purchase, but if she doesn't actually end up checking a bag, the bag fee is automatically refunded. We're the only airline to do this. Or, if a customer checks the app when she arrives at the airport and sees that she might be too far down the upgrade list, she can purchase an upgrade right in the app. We also continue to build upon personalization of our mobile app. Developments like MilePlay, which is unique to United, are an in-app product offer with artificial intelligence gamification features that increases customer engagement and drives take rates even higher, especially with our millennial customers. These examples may seem small, but they have helped us grow employee revenues by over 18% -to-date. I want to speak briefly about how we work. Our digital team does not sit in some far-off building or city. We're embedded in the airline, and rather than take years, new tools and features are rolled out in weeks, often at just one airport or one region, where we get real-time feedback, make changes, and then repeat it until we get it right. As you've heard from Andrew in the past, our new revenue management platform, Gemini, is helping us get more granular, and it's delivered significant value to United through more precise forecasting and predictive modeling. This wasn't a big bang implementation, but one that started small, was modified, and expanded until it covered all of our markets. In the operation, we took this approach when solving the problem of aircraft swaps. If we have to take a plane out of service, we have a new tool that considers several possible aircraft, evaluates future scheduled maintenance, the seat layout, and many other factors, and then makes a real-time recommendation to our routers on which aircraft to swap. This gets our customers on their way, all while creating the least amount of downstream disruption. What I've touched on today is just a small sample of what we do. We have created tools, developed apps, and streamlined processes that benefit our customers and our employees while improving revenues and driving cost savings. And there are hundreds of projects we're working on now, -by-side with Greg and Andrew's teams, that we believe will drive customer engagement and empower our financial performance for years to come. With that, I'll pass it over to Andrew to recap our commercial performance.

Thanks, Linda. In the third quarter, Prasm grew 1.7%, which was slightly above the midpoint of our guidance, with September being the strongest month of the quarter. Prasm performance in our domestic network was up .1% on a .7% increase in capacity, driven by solid close-in bookings. International performance was mixed with continued robust results in Latin America, offset by headwinds in Asia. Latin America was our best performing international region in the third quarter. Third quarter Prasm increased .2% on a .4% increase in capacity. We had great results in many parts of Latin America, including double-digit increases in Mexico, Brazil, and Puerto Rico. Formant across the Pacific further weakened in the quarter, with a negative .4% decrease in Prasm on a .3% increase in capacity. All of the weakness occurred in Hong Kong and to a lesser extent Beijing and Shanghai. As we indicated earlier in the quarter, Hong Kong, Beijing, and Shanghai reduced our Q3 system performance by about a half a point. Atlantic Prasm was up .8% in the quarter on a .8% increase in capacity. Strong US point of sales demand offset weaker European point of sales demand. Looking ahead to the fourth quarter, we expect our consolidated passenger unit revenue to be up 0 to 2%. We see potential for stronger yields among leisure travelers during the holiday season. We think this is a positive indication of the increasing effectiveness of our commercial initiatives and customer focus here at United. Our Prasm outlook is also impacted by our ability to quickly adjust to change in market conditions as demonstrated in the third quarter. This summer, we announced the suspension of Chicago to Hong Kong and New York to Buenos Aires, which were offset with capacity increases to other parts of Latin America. In a global network as large as ours, there will clearly always be a few spots that have demand issues. Hong Kong demand, while weak, has for the moment stabilized. We expect Pacific -over-year Prasm performance in the fourth quarter to improve versus the third quarter. We continue to push the booking curve closer into departure dates, saving more seats for our closer-in, higher-yield business travelers, which in turn allows stronger yield performance early in the booking curve for leisure customers. Gemini, our new RM system that Linda mentioned earlier, is working well with this strategy. Additionally, our sales team has been busy signing up new corporate accounts totaling over 500 -to-date, a record number for United so far. This is just one of the many initiatives that we have in place to help us drive our Rasm performance in 2020. We believe United's network is uniquely suited to be the leading airline for business here in the U.S., as well as across the globe with our great partners. Our network is performing well as we continue to build connectivity, schedule depth, and small community service focused on our mid-continent hubs. However, our coastal gateway hubs also saw improved profitability following many network realignments over the past year. We're running a disciplined airline that will make hard decisions like suspended service, and as a result, all of our hubs are profitable on a rolling 12-month basis. It's a nice achievement on our road to our adjusted EPS targets. Turning to slide 13, we continue to focus on our commercial initiatives. Our first set of 10 dual-class CRJ550s are scheduled into service in the next couple of weeks, with flying focuses here in Chicago, later followed by New York. We expect to have 54 CRJ550s flying by the fall of 2020. We announced several changes to the Mileage Plus program in the third quarter. First, miles won't expire anymore, which will help engage new members and less frequent travelers in the program. Second, we replaced our upgrade certificates with Plus points, which, starting in December, will be easier to use and understand. Plus points can be managed in our industry-leading mobile app, a first for any U.S. airline. Third, we will adjust how members earn status going forward to be more reflective of their total value. As a reminder, we are also now dynamically pricing award redemptions in Q4 for the first time, which allows both lower and higher redemption pricing, a win for our customers and our investors. Segmentation initiatives continue to form well, and we have a lot of them in different phases of rollout. Basic economy allows us to offer a low price point profitably. Premium Plus will accelerate in 2020 and be more consistently offered across the globe on our widebody jets. Our high business class configuration 767s are now operating in both flights from London to Chicago and New York. Installation of Polaris seats continues, and in 2020 our passengers will find an increasingly consistent experience on our intercontinental fleet of widebodies. We now regularly offer plans to continue in 2020 Boeing 787-10 service from New York to California and have recently started selling Premium Plus seats on these selected flights. We estimate that our Economy Plus seats per departure on mainline jets is now more than 50% larger than our competitors, providing our free compliers with more upgrade opportunities, and serving as an excellent driver for ancillary revenue growth. As we look to next year, we expect these uniquely united initiatives, the CRJ550 deployed in key high-yield markets, and the Ancillary Revenue Drivers that Linda spoke about earlier, to drive incremental revenue growth moving forward. Thanks to the entire united team for a great third quarter. With that, I'll turn it over to Jerry to discuss our financial results.

Thanks Andrew. Good morning everyone. Before I start, I want to mention that one prominent analyst recommended that we have no theatrics on the call this morning. In deference to this analyst, I will attempt to be as bland as possible. Yesterday afternoon, we issued our third quarter 2019 earnings release and our fourth quarter investor update. You can refer to those documents for additional detail. For the highlights, slide 15 is a summary of our GAAP financials, and slide 16 shows our non-GAAP adjusted results. We are pleased to report adjusted earnings per share of $4.07 for the third quarter, up 33% versus a year ago. Adjusted pre-tax income was $1.4 billion, and adjusted pre-tax margin was 12.1%, up 250 basis points year over year, and marking the fourth consecutive quarter of adjusted pre-tax margin expansion. These strong results demonstrate our ability to offset challenges across our global network as we continue to grow margins. Slide 17 shows our total unit cost for the third quarter and our forecast for the fourth quarter and full year 2019. Turning to slide 18, non-fuel unit costs in the third quarter increased .1% on a year over year basis, slightly above our original expectations. This was due to our capacity growth through the quarter coming in at 1.9%, slightly below our original expectations. As we discussed on the last call, we have some pressure on non-fuel unit costs in the second half of this year due to the timing of a number of maintenance events which move from the first half of the year to the second half of the year. We expect fourth quarter ChasmX to be up year over year by approximately 3.5%, which brings projected full year 2019 ChasmX to be up around .2% as compared to last year. Almost all of this year over year increase in unit costs compared to our original plan of year over year flat or better is driven by the max grounding, temporary suspension of our India flights, and suspension of our Chicago-Hong Kong flight. Looking ahead to 2020, we are in the middle of our budget process and will provide formal guidance in January. However, based on preliminary numbers, we expect non-fuel unit costs next year to be flat as compared to this year. This would put us slightly above the target we established almost two years ago to maintain flat ChasmX during the three year period from 2018 through 2020. We began making investments in customer experience over the past year and those investments have resulted in improved financial results. We expect to continue to make more investments next year that we believe will enhance margins. While these improvements represent about 1% of ChasmX growth overall, we are very proud of the cost control we've delivered and will continue to deliver. Through next year, we expect the three year compound annual growth rate for non-fuel unit costs to be just 0.3%, which would be a remarkable and industry leading achievement and allow us to deliver our commitment to you to meet or exceed our adjusted EPS targets. As you can see on slide 19, during the quarter we took delivery of six additional used Airbus A319 aircraft and nine new Embraer 175 aircraft. We also spent $363 million to repurchase shares of our common stock in the third quarter at an average price of $88.22 per share. This brings our -to-date repurchases through the third quarter to $1.4 billion. During the quarter, we raised $1.2 billion of WETC debt at a blended interest rate of about 2.8%, the lowest rate on record for this type of debt and another proof point that the market already views us as an investment grade credit. We maintain a healthy balance sheet that allows us to be opportunistic with sharing purchases and strategic investments. Lastly, slides 20 and 21 have a summary of our current guidance. The range provided for capacity, revenue and costs implies an expected fourth quarter 2019 adjusted pre-tax margin between 7% and 9%. As Oscar mentioned earlier, we now expect full year 2019 adjusted earnings per share to be between $11.25 and $12.25. With three quarters behind us, we are proud of our financial performance and ability to nimbly manage the business. Finally, our cost management is an integral part of our path towards continued margin expansion and our entire team is taking a rigorous approach to our budgeting process to ensure that we offset inflationary pressures next year and achieve our financial targets. With that, Mike will now begin the Q&A.

Thanks, Jerry. First we will take questions from the analyst community, then we will take questions from the media. Please limit yourself to one question and if needed one follow-up question. Brandon, please describe the procedure to ask a question.

Thank you, sir. And the question and answer session will be conducted electronically. If you would like to ask a question, please press star followed by 1 on your touch-tone phone. If you would like to be removed from the queue, please press the pound sign or the hash key. If you are on 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 1 on your touch-tone phone. And please hold for a moment while we assemble our queue. And from Bernstein, we have David Vernon. Please go ahead.

Hey, good morning, guys. Thanks for taking the question. Andrew, I wanted to follow up on an issue we talked about before, which is the premium economy rollout. Have you guys gotten any closer to being able to kind of give us a sense for what the unit revenue headwind or tailwind from that is going to be in 2020?

I don't have a 2020 number for you. I can tell you in Q3 it was a half a point on the system, so it's pretty substantial.

So half a point tailwind from the premium economy rollout and that should be a bigger impact next year or a smaller impact?

I'm not going to give you that number today, but what I would say is that we are becoming increasingly consistent and Greg's team is rolling out these aircraft very, very quickly. So we expect by next summer premium economy to be really consistent across the system. So we're pretty bullish about its contribution next year. It's one of the reasons why we think the outlook for RASM next year is pretty good.

OK, and then maybe just as a quick follow up, if you think about the impact of dynamically pricing the award tickets, can you help give us a sense for what that should do from either a utilization or yield benefit, as we think about the 2020-2021 time frame?

What I would tell you is that we're able to kind of move the redemption awards around in a way that allows us to price lower and price higher, which we think will be a net benefit to the airline. But I'm not going to give any more details than that. But we do think this is a win for everybody and that we have a lot more lower priced inventory available out there based on our ability to be more surgical in the way we price it.

Have you seen any change in the redemption rates on that so far? Is it just starting to nibble with it?

No, we are continuing to redeem miles, I think, at the same page. It's going very well.

All right. Thanks very much for the time,

guys. From Credit Suisse, we have Joe Cayado. Please go ahead.

Hey, good morning. Thanks very much. First question, really on high level 2020 capacity growth outlook. Now, I'm not looking for explicit guidance. We have the 4 to 6 percent guideposts that you've given us. But Scott, since you mentioned that we're going to start to see some gauge growth in the operation next year, I was just hoping you could talk a little bit about how we should think about departures and gauge and stage and the overall composition of your growth for next year.

Sure. This is Andrew. We're still developing the plan for next year, so it is still preliminary. That being said, assuming the max returns there, we don't know when that will be. And based on the fleet plan we have, we are driving to increase the gauge of the airline. It happens more in the back half of the year than the first half, quite a bit. In fact, more in the last 90 days, quite frankly. But as we looked at our load factors, where we're flying aircraft and the size of aircraft we have out there, we think this is the next great opportunity. It's going to be a significant help to ChasmX, as I'm sure Jerry will talk about later. So that's kind of where we're going. But there's still a lot of moving pieces. The plan is not finalized, but we believe there's a ton of opportunity for gauge growth at the airline, given our hubs are located in the largest cities across the country. And we're currently flying the smallest gauge of anybody.

OK, got it. And then actually just another quick follow-up for you, Andrew. You mentioned your corporate sales team signed a record 500 new accounts this year. I think that's what you said. Can you just give us a sense for how that breaks down roughly between brand new corporate accounts for United versus customers that maybe left United several years ago and now you're winning them back?

There's definitely a mix of both, but quite frankly a lot of these, the disproportionate share, are brand new customers. To be clear, some of these customers flew United without a corporate deal. So we want to be very clear about that. But now they're signed up on a corporate deal where we can provide them the appropriate discounts and gain a bigger share of their spend. So I think it's a pretty big deal. Our sales team is doing an excellent job out there. And quite frankly, the product that we're delivering every day is making their job easier and easier. So we can win back customers that maybe left us many, many years ago. And we also can gain new customers. So it's just been, I can't say how bullish we are about the progress we've made on the sales front. And we believe that a lot of that activity in terms of the revenue it creates shows up in 2020 and beyond.

I appreciate the answers. I'll jump back into queue. Thanks.

And from Morgan Stanley, we have Rashid Laloni. Please go ahead.

Hi. Good morning, guys. First, an obvious one on the CASM side for, I guess, Jerry and Scott. Does your preliminary CASM thoughts for next year still include a reset of all your open labor contracts?

Yes, Jerry. So all of our CASM guidance that we've put out, including the original three-year numbers, includes something for any open labor contract.

And does that apply for 2020 as well?

It applies pretty much for any CASM guidance we've put out, period. So yes.

For any guidance we put out, we make it a point to put in scenarios for everything. So we're not going to make excuses. And this is consistent with our guidance practice of putting anticipated labor increases in the guide.

I understand it just seemed like things were moving around and I wanted to clarify. So thank you for that. And then, Andrew, a relatively quick one for you. You talked about health and leisure going into the fourth quarter. Can you provide a little bit of color on how corporate's looking and then maybe some color on domestic versus international?

Sure. I'll try to take it piece by piece. I mean, I would think what we're seeing is corporate volumes are steady. They're not growing rapidly, but they're steady. But even more importantly than that, we're seeing leisure yields as we enter the quarter being pretty strong. So that gives us a lot of confidence about our outlook as we go into the quarter. So, for example, the premium cabins were slightly down across the Atlantic and across the Pacific in the previous quarter. And that's probably true in the next quarter. But the main cabin is outperforming that. And so we're pretty pleased by that performance. And that's driven, again, by leisure travelers or main cabin travelers more than business travelers. In terms of the view of the world, you know, international had tough times in the Q3 time period. As we go into Q4, I expect international is likely to outperform domestic on -over-year present increases. As I said earlier, I expect the Pacific to do better in Q4 than it did in Q3. You know, it's interesting. I would almost say that I've never seen a bigger disconnect between the global headlines in terms of the economy and its potential impact on travel than the numbers I see here at United for our yields and future rousing bills across the globe. Latin America looks, continuing to look very strong. Europe's definitely going to be probably the weakest of the three. But also still doing, I think, very well from a P&L perspective. So overall, I couldn't be, you know, more happy about where we stand and the outlook for Q4. I think it looks really solid.

And from JP Morgan, we have Jamie Baker. Please go ahead.

Hey, good morning, everybody. First question for Jerry. How do we think about chasm relief as the maxes are reintroduced? Obviously, an above-plan growth rate next year, you know, provides its own relief. But specific to the max and the cost drag that it's currently creating, how sticky are those costs? How quickly do they exit as the aircraft is reintroduced? And also, for any one-time maintenance costs, and I understand it's going to differ whether the planes have been in short-term or long-term storage, do you intend to take those as one-offs or is that also baked into the chasm guide?

So, you know, our plan for the maxes next year is actually similar to what we were planning this year. The issue is going to be, Jamie, if, let's say, there are further delays next year than what we are currently assuming, that could create, again, chasm pressure like it did this year. But other than that, you know, for us, it's sort of business as usual and baked into that chasm, I wouldn't call it guidance yet, but the chasm expectation that I mentioned earlier.

And this is Greg. The maintenance costs associated with bringing aircraft back in the service is minimal, not material at all.

Okay, perfect. And second question, probably for Scott or for Andrew, how have your multi-year forecasts for Latin America changed in the last month or so? Obviously, material, you know, revision in terms of alliance structure down there. I realize you're pursuing your own strategy with several partners. We also have American adding capacity with its own metal. I know you don't guide by geography, but have you made any internal revisions to your forecast as to how you're thinking about Latin America on a multi-year basis?

We have not. I will tell you that I think our recent performance has actually gotten better, given all the changes to the region, which is, I think, fascinating. It is doing incredibly well, as you can see by the numbers we put up this quarter and last quarter. So we're pretty happy by it. You know, it's not our biggest international entity, and therefore we've been working really hard with a great set of partners, Copa, Avianca, and Azul. And, you know, we are going to put together a fantastic joint business and we are going to be competitive in the region as a group in a way that I think has actually just been enhanced over the last few weeks. So I'm pretty pleased by where we stand and our position in for the long term.

Okay, thanks for the color.

Thanks, gentlemen. From Vertical Research Partners, we have Darrell Genovese. Please go ahead.

Hi, good morning, everyone. Thanks for the time. Scott, I don't want to downplay the CASMX performance that's clearly industry-leading, but I do. I would like, if you're able, to get a little bit better feel for the investments that you're talking about. In particular, you know, I guess your operational reliability has become much better, the customer experience is better, as you've outlined. Limit Steam has clearly made some investments. Is there a way to tie all that back to your expected RASM performance relative to the industry?

Sure, but maybe I'll start us, Andrew. I'll give you maybe one or two examples. So we announced, I think, six or nine months ago, the high J767 that would be flying across the Atlantic. When we did that, we took a bunch of seats off the aircraft and we caused the CASM of that aircraft flying from New York to London to go up by about 25%, quite frankly. And so as we give our guidance for next year, part of that guidance includes, you know, a significant CASM headwind related to the reconfiguration of those aircraft. But we reconfigured those aircraft to get higher RASM. And in fact, our performance as we look forward is going to be well in excess of the increase in CASM. Otherwise, we would not have done it. And so I think that's working well. But when you add that up, you have to think about the fact that our CASM is definitely higher on that aircraft. And as a result, it's going to drive higher RASM. And it's one of the reasons we think we're going to have, you know, decent RASM results for next year. The CRJ 550 is not all that dissimilar. We now have a premium cabin being offered on short-haul flights that we didn't have before. We know our CASM of that particular aircraft is going to be up, you know, a high single digits relative to what it otherwise could be. But we think the RASM gain related to that is more than that. So those are just two, I think, really very specific examples of us pushing higher costs onto the airline in terms of CASM-X. But no one were going to get it back in terms of RASM. And no one were managing our total CASM-X number to a really great spot. But those are just two examples.

Yeah, this is Linda. I can add one really about improving onboard Wi-Fi. You know, Greg's team at TechOps has just done an incredible job to make the product more stable. We have 63% less maintenance deferrals, 22% less onboard resets by our in-flight crew. What that's translating into is customers are just using it more. We have 30% increase in our data consumption and a 17% increase in customer satisfaction.

Great.

I'll keep it to one. Hey, Darrell. Oh, yeah. Hey, Darrell. Let me just add, you know, I've been around long enough to see where there are times we manage for revenue, there are times we manage for cost. And as you know, those never work. And what you're hearing everybody say is all this is managing to margin and EPS. So those investments that we're making are going to drive those financial results.

Perfect. Thanks very much, everyone. From Wolf Research,

we have Hunter Kate. Please go ahead.

Hey, good morning. Hey, Scott, you guys are clearly driving some transformational changes with the way you do business and your success is obviously emboldening some pretty big thinking. So with that backdrop, Scott, what is the likelihood that you push for and get partial content agreements with GDS in your next negotiation? And if that's not a near-term issue, how important is that to you that you eventually get there?

Look, we are quite proud of the culture that we're creating here at United. And you're right that there's transformational change going on. We talk about some of the big picture items. The reason I've talked about the team and the culture on some of these calls recently is because I literally could talk for the next hour off the top of my head on examples of things that are going on throughout the airline that no one else is doing and that the team of people at United Airlines is doing and doing quickly and it's showing up in our bottom line results. As to the GDS specifics, it kind of depends on where those partners are and what they want to do. We want to be able to deliver our product to our customers who are actually willing to pay a fair price to do that. We want to be able to deliver our product to our customers in the way they want to consume it and purchase it as long as we can do so at a fair price. And importantly, as long as GDSs or OTAs or anyone else can actually display the products to the customer. And so any pushback that we have in the months, quarters, years to come with third party providers is more likely to be about their ability to service the customers in a way that we think is appropriate.

All right. And then on CASMAX, the third party expense was up over 100% year on year on 4Q, the guide. Why isn't other revenue tracking higher? And is $65 million a quarter a good run rate to use as we model that out for 2020? Thanks,

Jerry. So what happened with other revenue is what you also see in there is the impact of the decline in cargo, which offset what you would have seen as a gain in third party maintenance revenue.

Right. And then the run rate in the 2020, Jerry, if you would. Is it a good run rate to use? Should we take $65 million a quarter in third party expense and put it into that run rate for 2020 third party expense?

Yeah, it's a good number to use.

Okay, Jerry. Thank you.

From Cohen, we have Helene Becker. Please go ahead.

Thanks, operator. Hi, team. Thank you very much for the time this morning. So I'm not sure whether it's Scott or Oscar to answer this question, but or maybe even Greg. Last week, I think you said you were going to hire 10,000 pilots over the next decade, which seems right. When we look at your numbers, we see about 6500 of about 12,000, 13,000 maybe retiring in that time frame. So it works out to like a thousand a year, right? Can you say what percent of those hires are going to be growth versus retirees?

You know, Helene, that's a difficult question to answer right now because a lot depends on where we're flying. And obviously, if we're flying long haul flights, we've got augmented cruise, which drive a little bit more need for pilots. But the vast majority of those hires will be replacing retirements with our wave starting to hit us in 22 or 23. So that's kind of what we're looking at is the vast majority of the 10,000 will be replacing folks currently on our seniority list.

OK, well, so then as you up gauge, just as a follow up, as you up gauge the aircraft, is it more do you need more pilots per plane or, you know, I guess the other part of it is the training costs associated with moving pilots around.

Helene, I'd cost you to not try to back use our pilot, high level pilot hiring number to try to back into what our 10 year growth plan assumption is. We don't actually have.

I'm not sure I'm going to be here in 10 years, but thanks.

There's nothing to be read into that number. It's a nice round number that's in the order of magnitude of what we'll hire over the next decade.

OK, that's really helpful. Thank you. I'll keep it at one question.

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

Hi, good morning, everyone. Jerry had a question just in terms of some free cash flow components. Can you maybe help us understand some of the bigger buckets there, particularly in terms of planned pension contributions, anything we should be thinking about on cash taxes? And then should we still be expecting capex of about a billion dollars higher next year than originally planned in 2019?

Let me start with capex. As you know, next year is a peak year for us for aircraft deliveries, particularly the 17 or so wide body aircraft on top of hopefully a significant number of maxes and other aircraft. And so when you start adding all that up and assume kind of a normal level of non-aircraft capex, you actually get to a number that's potentially closer to seven billion than six billion. So it's going to be higher than just a billion more than this year, which is still running, we think, at about the 4.9 billion that we said. With respect to pensions, this year was a little bit of an unusual year because we effectively in September prepared a contribution that we normally would have made in the first quarter of next year to save a substantial amount of fees we otherwise would have been hit with. So this year's total pension contribution, slightly over 600 million, I would expect next year to be, could be potentially zero, but what you should assume right now is probably 300 million at some point during the year.

Got it. And just curious, when do you become a cash taxpayer?

Oh, I really hope it's not for a while other than a small amount of taxes. One of the benefits that we now have that is making up for the burn through of the NOLs is the 100% expensing on new aircraft that we are now able to take, pretty much on all the new aircraft that are delivering this year and for the next few years.

Great, that's helpful. I'll keep it to that. Thank you.

We have Michael Lindenburg. Please go ahead.

Just two quick ones here. I guess first to Andrew, as we think about your 2019, excuse me, 2020 capacity headline number and we think about how it relates to the original plan. How many points, assuming that the max does come back in January, which does seem less likely, but if we assume the current schedule, how many points tied to the max in India does that drive that headline number relative to the original plan? Is that about two points, two and a half points?

I think one and a half points is our estimate.

Okay, thanks. And then just my second question. Jerry, for the year on the tax rate, you were guiding to 21 to 23% for the first three quarters. It now bumps up by about 100 bips for the full year. What's in the fourth quarter? Is that timing? Is that just end of year reconciliation? Anything other than that? Thanks.

It was the result of some choices we had to make on how we were going to take some bonus depreciation that slightly increases the effective tax rate, but economically it was the right decision to make. There was substantial cash savings as a result. It's counterintuitive, but to get some actual cash savings, the effective tax rate crept up a little bit.

That's great. I mean, look, at the end of the day, you have a higher EPS guide, so that's all we care about. Thank you.

From Stiefel, we have Joe Gennardi. Please go ahead.

Hey, good morning. Is Luke Bondar on the call by chance?

No, he's not.

Okay. In my opinion, he probably should be. I think he's an asset of United that is doing a lot from an innovation standpoint for the loyalty program. Maybe Scott or Andrew, the level of innovation, I think, within United's program is clearly very different than it is elsewhere in the industry. I'm wondering if you could just talk about, in terms of the gamification, personalization of the loyalty program, what that's meaning from an engagement standpoint with your members, and then how relevant that is along with the improvement in operations to a card issuer when you think about the economics that you'll be able to get.

Well, look, all these things work together. We set out about two years ago with Luke leading the charge along with Linda on the digital side to kind of rethink the whole program and what it should look like and how we can make it even better for our customers, quite frankly. Plus points is a really good example of an amazing innovation that we put forward that will be available on the app. It will be easy to use and it will be simple. The new value qualifications, I think, will be much easier to understand for our customers going forward. So we're really excited about that. We're really excited to lead the charge, and Luke is doing a great idea. And all of this, as I said in the previous call, has resulted in a lot more engagement by our customers. We can see their propensity to hold the credit card or to join the club or to fly more often or to buy higher fares has all increased versus the previous year by a significant amount. And that's all kind of coming together. I think I'll pass it off to Linda because the digital technology you used to make all that happen has just been phenomenal.

Yeah, thanks, Andrew. I think the way to think about the loyalty program is obviously in the way it's designed, but it's ultimately about giving the right offers to our customers to get them to want to fly us. So we are thinking of all different ways to leverage where our customers want to go and then create very targeted offers. MilePlay is a great example of that, where we are using gamification to get customers to really try things that they haven't tried before, whether that's a new product or a new location, and then rewarding them with the currency that is our program.

So we'll let Luke know that you're pretty high on him. Yeah,

I appreciate that. I mean, Scott or Andrew, there was some headlines, I don't know, a month or two ago that your deal with Chase runs through 2024, 2025, which is a lot longer than I think most deals run. So Scott or Andrew, can you talk about your ability to close the gap in earnings between you and your peers without a new deal or whatever you'd like to say along those lines? Thank you.

What I would say is we're working really hard with Chase, and our new acquisitions last year were up 20%, and this year are going to be up 20%. So the teams are working together really well and creating a lot of value, and that's about all I can really say on it. So we're pretty happy with the recent increase in new credit card acquisitions.

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

Good morning, everyone. Thanks for the time. So over the next five or six years, it looks like you have more widebody aircraft coming up to the global average retirement age than you currently have on order. Should we think about some of those aircraft maybe being replaced by new technology, long-range narrowbodies, would you look to the secondary market? Just any thoughts there would be helpful. Thank you.

Maybe I'll start off, and Jerry can help me on this. We've invested in our 767s and our 777s to extend their life. Both aircraft are incredible machines and continue to perform well for the company, both from a reliability standpoint and an economic standpoint. So the new Polaris interior has just recently been put on them. So I'm not sure what you're assuming for retirement age, but we're pretty happy with these widebodies and they can fly for a bit longer.

Okay, I don't have to judge. Yeah,

I would just add, certainly over the next five years, there's really no need to retire any of the widebodies that are currently flying. And that's not our focus right now on the next fleet to retire. To be honest, next fleet to retire, we'll start looking at the remaining 757s that will start coming out.

Okay, that's great. Thanks so much for the call, and then maybe just high level, you guys have discussed quite a few exciting projects that you're looking forward to next year, whether that's more premium plus, more CRJ 550s. How should we think about ranking some of these projects in terms of what you see as being the largest drivers of revenue enhancement for next year? And is there anything else that's on the list that features prominently in how much revenue growth we should see next year just outside of capacity growth? And thanks so much for the time.

Well, it's pretty clear we have a large number of commercial initiatives ongoing, and they're all in different stages of rollout. Our segmentation philosophy, I think, really expanded and doing very well for the company. So we're not going to line item the value that each one of these brings to the bottom line. I provided a small hint that our premium plus project across the globe already has given us a half point of rasm in the third quarter, which is pretty substantial given that we just started. So there is a lot to come, and there are initiatives that are coming that we have yet to announce, which is really exciting. That's why we're pretty bullish as we look at the outlook for next year that we know where we're going to be, and we're on our road to our EPS target.

That's great. Looking forward to hearing more in March.

Thanks. Thank you. And this concludes the analyst and investor portion of our Q&A for today. We will now take questions from the media. Once again, as a reminder, if you have a question, please press star one on your telephone keypad. We're standing by for questions. Please hold for a moment while we assemble our queue. From Wall Street Journal, we have Allison Sider. Please go ahead.

Hi. Thanks, everyone. I was wondering if you could sort of share anything about what you're hearing in terms of the regulatory process on the max. If you're getting the sense of any disagreements between the FAA and the OSMA, might push back recertification or the EPS. And if that happens, whether you might consider pushing back your own return to service if it's something you ask that hasn't yet signed off on.

Hey, Allison. This is Oscar. There's ongoing dialogue between, there's a lot of chatter from many different folks. I think the ultimate goal of all regulators around the world is to obviously do the facts and data research on the aircraft and its qualifications and make the right decision. So as far as what we hear and what you hear, I'm not sure it's entirely pertinent. I think we're all focused on making sure that aircraft is safe and returned to flight, one that is. And so to that extent, there's nothing much else to say on that subject.

I mean, if there was some kind of staggered regulatory process, though, would that affect your plans? Like, does that create any issues with your alliance partners, if different regulatory authorities have a different view of the plane?

You know, I think we'll cross that bridge when it comes to it, but I don't think so. I think, you know, we are overseen by the FAA, and we'll certainly look to that aspect. And across the country, across the world, we hope, and I think we're driving towards a somewhat staggered sort of roll-up, but not necessarily one that's going to be measured in a lot of time.

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

Hi, thanks for the time today. My question is about your non-fuel unit costs over the next few years and the goal to be flat. But as you think of the different revenue initiatives and the plans that United has to grow those revenues and profits over time, how do you balance that against the employee base that obviously would want to share in some of that? And, you know, how do you see the longer-term cost picture playing out in terms of employee contracts?

We absolutely, as I said in my opening comment, think that our people are the ones that are delivering these results, and they deserve to have increases in compensation, and we'll get those. We built that into our plan. We have the ability to keep costs flat because we're doing it in other ways. We're doing it by putting, you know, by gauge growth. So flying larger airplanes is lower-casum. We're doing it by constantly getting more efficient. We're going to be the second year in a row here as we go through the budget process, for example, where despite growing the airline, despite all kinds of new initiatives, and despite giving pay raises to management and administrative employees, we're going to keep total spending there flat. So we're doing a really effective job, this team, at managing fixed costs and keeping them fixed as we grow the airline. And by growing the gauge at the same time, that gives us the money to invest in our people, product, and customer experience.

Great. Thank you.

Thank you. We'll now turn it back to Mike Leskin for closing remarks.

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

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