United Airlines Holdings, Inc.

Good morning and welcome to United Airlines Holdings earnings conference call for the second quarter 2021. 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 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, Christina Munoz, Director of Investor Relations. Please go ahead.

Thanks, Brandon. Good morning, everyone, and welcome to United's second quarter 2021 earnings conference call. Yesterday, we issued our earnings release, which is available on our website at .united.com. Information in yesterday's release 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 10-Q and other reports filed with FTC 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 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. Joining us on the call today to discuss our results and outlook are our Chief Executive Officer Scott Kirby, President Brett Hart, 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 executive team on the line available to assist with the Q&A, and now I'd like to turn the call over to Scott.

Thanks, Christina. Good morning, everyone, and thanks for joining us today. It was great to see many of you in person at our United of Next event last month in New York, and personally, it's been great to be back out on the road during the quarter talking to employees and customers and hearing anecdote after anecdote about how great it is to be back traveling. Thank you also to all the people of United Airlines for all that they did to take care of our customers and each other through the crisis and for all that they're doing now to really and truly change the customer experience at United Airlines. Before I really begin, I thought I'd take a moment to address the most talked about issue among airline investors recently, the Delta variant. As you'll hear from our bullishness today, we haven't seen any impact at all on bookings, which continue to just get stronger and stronger every week, but of course, that is backwards-looking data. Since early 2020, however, no airline has been more willing to candidly acknowledge the risks and challenges posed by COVID-19, and importantly, no airline has been quicker to aggressively confront them than United. We've worked hard to protect that operational flexibility. In fact, it's part of why we haven't had the same mass crew cancellation challenges that our competitors have faced as we ramped our schedule over the last couple of months. That all said, we think the most likely outcome is that the continued recovery and demand continues largely unabated. That's the most likely and logical outcome because the evidence is overwhelming that someone who's vaccinated is highly protected against severe disease, hospitalization, and death. The unvaccinated still face an elevated risk of serious illness and death from COVID-19. In fact, recent reporting says that over 97% of hospitalizations are for unvaccinated people, which implies that you're about 50 times more likely to wind up in the hospital for COVID if you're unvaccinated, but the unvaccinated are also a smaller and shrinking percentage of the general population and an even smaller minority among the most vulnerable groups. And for United Airlines specifically, our customer surveyed at the end of June also revealed that 84% of our Mileage Plus members were already fully vaccinated. And so, while we expect casetowns to rise, given the vaccination rates, they will still remain well below the peak and hospitalizations and deaths will not rise nearly as much. That leads to the logical outcome that the reopening continues on track. I'd acknowledge that shutting down or continuing the reopening also has a political dimension to it and that's a lot harder to predict. And so, it's possible we'll have a temporary pullback in the reopening, but given the data science around vaccines, that seems like a lower probability outcome and regardless it will be temporary even if it does happen. Turning now back to our results. Jerry and Andrew will provide a lot more detail, but if I was going to briefly summarize where things stand right now, I'd say that demand is recovering even faster than we had hoped domestically, both leisure and business demand. And internationally, we see the exact same pattern every time new borders are reopened. And while the US isn't yet open to Europeans, the data and science, including the demonstrated safety of air travel, similar vaccination and case rates, and similar level of variance in Europe and the US, support an opening and we expect it to happen at some point. And when the borders do open, we expect to see the same robust hockey stick increase in demand that we've already seen domestically. On the cost front, we remain on target for the near and long term. And as Jerry will detail, assuming the grounded 777s are back flying, we expect our 2022 CASMX will be lower than 2019, which means we're right on track to deliver CASMX 4% lower in 2023 and 8% lower in 2026, as we shared at our United Next event last month. Today, with the robust demand trends that we see and our return to profitability, we don't just see the light at the end of the tunnel. We're exiting the tunnel. We're focused on upgaging our hubs, significantly improving the product, and decommoditizing air travel by transforming our customers' onboard experience. This opportunity is unique to United and it's why we're so confident in our 2023 and 2026 financial targets. As we exit the tunnel, there's still a steep hill to climb to get back to and then exceed our pre-COVID margins. But we also have some important upcoming tailwinds that will benefit United more than others. First, our coastal hubs and our decision, which stands alone among network, large network carriers, not to retire wide body aircraft, means that we're ready to capture the pinup demand for long haul international travel. Second, our opportunity to up gauge our fleet while also driving increased connectivity as part of United Next means we can accelerate the margin improvements we saw from investments in the mid-con hubs in 2018 and 19. And of course, our confidence in United's future is also fueled by the incredible performance of the United team. Even in the midst of a global pandemic, our NPS scores rocketed up 30 points year over year and our 50 point year over year improvement in the JD Power Survey was the largest of any U.S. airlines. This customer-centric service culture and the influx of nearly 500 new aircraft, along with an unprecedented retrofit of our existing narrow bodies, will transform our customer's experience. It will also usher in an incredible new post-pandemic era for United's customers, employees, and shareholders, creating a new era driven by innovation that makes the travel experience better. And I'm really proud of the work the team did in the second quarter to innovate for the customers and our employees. And with that, I'll turn it to Brett. Thanks, Scott. I want to start by congratulating

the entire United family on our expected return to profitability in the second half of this year. The United team has worked towards this milestone of achieving positive adjusted pre-tax income for over a year and could not be more proud. During the second quarter, United continued our work to make the travel experience safer and more convenient for our customers. We recently made new enhancements to our already industry-leading app to allow customers to schedule COVID-19 tests and have results directly verified through the travel ready center platform within the United app. In May, we announced a first of its kind collaboration to use Abbott's COVID-19 home test and app to enable our customers to self-administer a rapid antigen test and use the verified negative test result to board an international flight to the United States. As borders continue to open, we're working to make the return to international travel as convenient as possible for our customers. These initiatives make us uniquely ready to facilitate international travel and further position us as the leading international airline in the US. In addition, we recently launched our Your Shot to Fly sweepstakes, working effectively with the federal government to creatively encourage people to get vaccinated and ultimately get back on planes again. We feel optimistic from the recent progress among European countries allowing US tourists to enter the various, to enter with various vaccine and testing requirements. Countries such as Iceland, Croatia, Greece, Italy, France, and Spain have all begun accepting US travelers for the summer tourist season. And we look forward to more destination options for our customers in the coming months. We continue to encourage the Biden administration to open up international travel and appreciate bipartisan as well as industry support to ease international travel restrictions. And Andrew will detail further the demand surges we've seen to countries once restrictions are loosened gives us even greater confidence regarding the long-term outlook for international travel. On the domestic side, nearly all states have reopened local economies and removed travel restrictions enabling the surge in domestic leisure travel we're currently seeing. We remain focused on United's transformation to be the airline customers choose to fly. We have already eliminated change fees and with our new aircraft order we will improve the customer experience. We're adding feedback entertainment to all of our aircraft, improving Wi-Fi, and innovating with customer-friendly technology like Consig. Like Connection Safer, which saved over 140,000 connections in the second quarter. News from Washington DC continues to be a focal point for United. We are encouraged by the bipartisan efforts to make needed investments in our nation's infrastructure. Infrastructure is the backbone of our economy and it must be robust, sustainable, and resilient to meet the needs of today and tomorrow. We support modernizing our nation's air traffic control system and advancing sustainable aviation fuel as important aviation infrastructure investments that also reduce industry emissions. Moving on to other highlights within our global network, at United we continue to be a proud partner for our communities. Throughout the quarter we expanded efforts to support those impacted by COVID-19 crisis in India. United remain the only US carrier to serve India, a distinction we hold today and help transport more than 300,000 pounds of critical medical supplies to the region. We additionally launched a fundraising effort to enable our customers to donate to the group's partners. In the quarter we announced new initiatives with multiple partners to advance our sustainable goals across the United States. These partnerships cover a range of sustainable initiatives including decarbonization, sustainable aviation fuel, and sustainable agriculture. During the quarter we also announced a new order with Boom Supersonic for the Overture, the first large commercial aircraft optimized to run on 100% sustainable aviation fuel. We also announced our latest investment under United Airlines Ventures and Heart Aerospace, an electric aircraft startup developing an aircraft that has the potential to fly customers up to 250 miles before the end of this decade. United continues to lead the industry with a multi-pronged approach to our commitment to reducing our greenhouse gas emissions by 100% by 2050 without relying on traditional offsets. And we look forward to more to come on this front. And with that I will turn it over to Andrew.

Thanks Brett. I'm going to start off today by thanking the best commercial team in the business. Our combined efforts and agility over the last 18 months led us to this moment today, announcing a generally positive trazem, prasm, and yield outlook for the second half of 2021, something hard to imagine just 12 months ago. The revenue outlook is allowing for a much improved and profitable financial results on a adjusted pre-tax basis for the second half of the year. And Jerry will talk about that in just a bit. Our realistic view of the pandemic's impact on our business and industry was sometimes questioned. However, a realistic assessment from day one combined with capacity corresponding to real demand, not what we hoped demand would be, were the keys and prepared us for what comes next. We'll let facts guide us the entire way and I'm pleased to report today the facts point to a strong recovery of our business across all segments. As Scott said, we're coming out of the tunnel. We now have a clearer path not only to profitability in the near term, but a path to higher long-term margins even in an environment with elevated industry domestic capacity. During the crisis, we were pleased with our trazem performance, and in the second quarter our trazem was down 11% versus 2019. Our performance in Q2 was well ahead of our original guidance, but largely consistent with our updated mid-quarter expectations. International long-haul demand, business demand, and yields just improved faster than expected three months ago. We still face significant headwinds for the second half with borders being closed and business traffic not fully back, but ultimately we expect these headwinds will transition to tail. Our ability to adjust our global network to transport record amounts of cargo is one of our proudest accomplishments and a clear differentiator versus others. In fact, during the quarter United generated $606 million in cargo revenues, our highest cargo revenue quarter ever, up 105% from Q2 2019. With long-haul passenger demand now increasing, we will cease most of these cargo-only flights for the remainder of 2021, although we continue to protect strong cargo yields for the remainder of this year. During the crisis, we also carefully planned and collaborated across divisions to execute a bounce back plan for the second half of 2020-21. Our summer capacity plan continued a measured phase in of that capacity. For Q3, we expect system capacity to be down 26% versus Q3 of 2019, or up about 39% versus capacity flown in Q2. We expect domestic capacity to be down about 20% versus Q3 2019, and up 43% versus Q2. Business travel, which was down over 90% versus 2019 for most of Q2, has inflected sharply in June and is currently down about 60% versus pre-pandemic levels. We expect two more inflection points from business demand, first at the end of the summer and second the new budget cycle beginning in January. We expect business demand to improve by the end of the third quarter to be down about 40 to 45% versus 2019. Our recent survey of business customers now indicate over 90% plan to return to travel, including international travel in the second half of 21. That is up from around 55% earlier this year. On our last conference call, we talked about the fact that domestic yields for United would be positive this summer, and that we still expect that to be the case. Overall, domestic yields are still likely to be slightly negative in the quarter due to business traffic's slower recovery. To give you some color on yields, Q3 right now booked domestic yields today are running ahead of 2019. That higher yield is also matched with higher booked load factors relative to 2019. We really have set ourselves up from an RM perspective very well. International demand is also recovering, but as we anticipated at a slower rate. For Q3, we expect international capacity to be down 36% versus 2019 relative to down 53% in Q2. The demand bounce back does differ considerably by cabin and by region and even within the region dependent on travel restrictions. While business demand is down, we've used special incentives to get our mileage plus members back on board with better access to Polaris seats via awards and upgrades. Asia was the first region to be impacted by COVID and continues to be the slowest to recover with the largest number of border restrictions. It will likely be 2023 at least until we see a normal schedule to Asia. In the meantime, our global network already includes new service to India and Africa to compensate for reduced Asian flying. Our European schedule this summer is quickly ramping back up. However, with continued restrictions on Europeans from entering the US and on US travelers from entering key countries in Europe including the UK, we anticipate that it will be the spring of 2022 prior to resume in a normal schedule. We expect our summer Atlantic load factors to be around 70% in 2021, 16 points lower than 2019. I have to add that we think the summer of 2022 across the Atlantic has the potential to be our best season ever with pent up demand and easing border restrictions. We continue to see structural changes in global long-haul flying that we believe will create tailwinds for United as borders continue to open. We expect to have 30 incremental widebody jets available to schedule in the summer of 2022 versus 2019 which is why our recent aircraft order was focused on narrowbody aircraft only. We continue to operate our 767 fleet which we used just a few weeks ago to begin service to Croatia, the optimal plane for this type of mission. Overall, we expect that our trazm for Q3 will be positive. Premier members of the mileage plus program are rapidly returning to flying on United, a great sign for 2022 business demand. Year to date, three quarters of our top premier members have already flown with us or have booked a flight. Of the premier members that have not planned a flight yet, our research shows that they tend to be flyers focused largely on global long-haul markets that simply haven't opened up yet. Many of our premier members are also maintaining active spend on one of our credit cards, increasing the level of program engagement in 2021 among our top members to more than 90%. Our Chase co-brand card programs are thriving. Our June 2021 new accounts, domestic sales and account retention metrics all exceed June 2019 figures. I just want to also spend a few moments today talking about United Next. United Next is simply our acceleration of many of our pre-pandemic strategies. It's a plan to close the short gaps in our commercial strategies, customer focus and passenger amenities. Most importantly, our plan is for Gage to increase by 30% by 2026. 50 seat RJs allow United to grow schedule depth as we build our mid-con hubs, but it's now time to replace many of these jets with modern, more fuel efficient 737s and 8321s, lower in our unit costs and increase in profits while at the same time increasing our product quality with amenities such as seat back entertainment at every seat and larger overhead bins. Most importantly, United Next is not about increasing seat density in planes, reducing comfort, lower and onboard amenities, or reducing the number of first class or economy plus extra legroom seats as others have done. In fact, our premium seat counts will increase by 75% in North America per departure by 2026, versus 2019 and of course that's aligned with the revenue potential of our United Hubs. United Next will allow us to differentiate and decommoditize our network, segment our products and put customers first, but also maintain fair competitiveness with low cost competitors while offering a superior product. We're excited to come out the other side of this tunnel and plan for an amazing and bright future. I'd like to thank the entire United team for their efforts as well. Together we've made an amazing difference. With that, I'll turn it over to Jerry and he'll talk about our financial results for Q2 and the outlook for Q3. Jerry?

Thanks Andrew. Good morning everyone. For the second quarter of 2021, we reported a pre-tax loss of $600 million and an adjusted pre-tax loss of $1.6 billion. Our adjusted EBITDA margin for the second quarter ended down .7% in line with our prior guidance with our adjusted EBITDA margin a positive 9% for the month of June. Our adjusted operating expenses for the second quarter ended down 32% versus the second quarter of 2019, which was slightly worse than prior guidance of down 33%. The entire difference though is attributable to greater fuel consumption and higher fuel prices as compared to what we anticipated when we provided second quarter guidance. All of our other costs came in as we expected giving us continuing confidence in our ability to achieve our near-term and long-term cost targets. As previously noted, as the demand environment continues to improve, we expect to generate positive adjusted pre-tax income in the month of July. In fact, as we have said, we expect to generate positive adjusted pre-tax income for both the third quarter and fourth quarter this year. Despite business and long-haul international demand not being fully recovered, we are pleased that our return to profitability is expected to occur well before prior expectations and we anticipate another step function improvement once business and international demand fully return. Turning to our outlook on cost, we expect our third quarter Chasm X to be up approximately 17% versus the same period in 2019 with capacity down 26% versus 2019. To put the Chasm X number in perspective, while capacity may be down 26%, we are not simply flying 26% less of the same network. Given our current international domestic mix where we are currently flying more short-haul domestic flights and combined with the temporary grounding of our fleet of power of 777 widebody aircraft, this has created an incremental six-point headwind to our Chasm X because of lower stage length and lower gauge versus 2019. Our cost outlook additionally includes investments necessary for future flying such as training and maintenance costs. On the positive side, embedded in this outlook is also the early success from our $2 billion structural cost savings plan. We expect Chasm X will better represent our true cost performance once our capacity reverts back to 2019 levels and when the network begins to be reshaped with our United Next plan and we achieve the full implementation of our cost initiatives. We are currently in our 2022 planning process and though we won't share details today, we feel confident that our 2022 Chasm X will be lower than 2019. We expect that our 2022 outlook demonstrates stand for progress towards hitting our long-term Chasm X targets of down 4% in 2023 and down 8% in 2026 versus 2019. In addition to the structural cost reductions, our United Next targets are enabled by our recent announced order for 270 new narrowbody aircraft which when added to our existing order book provide almost 500 narrowbody aircraft on firm order. We expect 191 of these aircraft to be delivered through the end of 2023 and for those of you in the aircraft financing community, this includes 13 737 MAX 8s through the remainder of this year, 20 MAX 8s and 20 MAX 9s in 2022 and 56 MAX 8s, 16 MAX 9s, 50 MAX 10s and 16 A321 NEOs in 2023. Regarding capital expenditures this year, we currently expect adjusted capex for the full year to run about $4.5 billion. This assumes we take delivery of all eight 787-10 aircraft scheduled for later this year. With Boeing's recent announcement regarding delays in delivering 787s, it is possible that some of these aircraft and the related capex may slip into next year. In closing, our expectation for adjusted pre-tax profitability in both the third and fourth quarters represent a milestone that the entire United family has worked towards since the beginning of the pandemic. Gone are the days of talking about empty aircraft, cash burn and job losses. We have now shifted our focus fully towards the long-term path for United Airlines and the United Next Plan. We believe our achievements throughout the crisis fully prepared us to execute on our plan to both maximize earnings power and be the airline that customers choose to fly. And with that, I'll hand it over to Christina to start the Q&A.

Thank you, Jerry. We will now take analyst questions. Please limit yourself to one question and if needed, one follow-up question. Brandon, please describe the procedure to ask a question.

Thanks, Christina. The question and answer session will be conducted electronically. If you'd like to ask a question, please press star followed by 1 on your touchtone phone. If you'd like to be removed from the queue, please press the pound sign or the hash key. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, if you'd like to ask a question, please press star 1 on your phone keypad. Please hold for a moment while we assemble our queue. And from Raymond James, we have Savi Sight. Please go ahead.

Hey, good morning, everyone. Your 3Q revenue guide is very strong and both relative to 2Q and compared to one of your peers. I was wondering, you know, what factors are driving that strength and what assumptions you're building in for that business demand recovery. Thanks.

Hi, Savi. It's Andrew. Good

morning.

You know,

what I'd say about our guide is that, you know, and I've said this, I think over the last few conference calls that in particular our coastal hubs have really, suffered during the pandemic, traffic was down in those hubs a lot more than mid-cons and small community, or mid-con hubs in small communities around the country. And we really see an acceleration in demand now out of those hubs, including leisure and business for, business for domestic in particular, which is really great to see. And, you know, it goes to say again that those headwinds, which were so significant during the crisis, are going to flip to tailwinds for United and provide us, I think, a lot of opportunity kind of going forward. A little more color, for example, Newark in Q2 of the year, so it was really our worst performing revenue hub. And we expect Newark in Q3 to be one of our best, to give you a little bit more color on what we're seeing there. So there's a lot more to come, I think. I'm really excited about this because these headwinds were just so significant during the crisis. And I think there'll be tailwinds as we come out of the crisis.

Andrew, just a follow-up too. Just, it seems like you did a lot better job of also kind of tilting towards leisure and the FR lately, maybe not similarly at some other airlines. But just wondering, you know, what mix of those new markets or capacity, you know, remain on as things normalize and, you know, just really trying to understand if there's an opportunity here to change the seasonality of the network.

Excellent question. And thank you for the vote of confidence there. I'm sure our scheduling folks really appreciate it. We did, as I would say, tilt our capacity towards more leisure-oriented markets during the crisis, and we continue to do so. And we'll do so for at least the rest of this year. And tilting of those ASMs towards more leisure-oriented markets, I think, has helped us during this recovery. To the extent we did that better than others, I think our revenue forecast will be better than others. And so we're pretty proud of that. We do intend to keep a bigger footprint in these leisure markets going forward, in particular Florida, where United was undersized. And that undersized had led to Q1 results, you know, for United that, you know, could seasonally trail others. And we're hopeful that on the other side of this crisis, as we rebuild the airline and we rebuild the network, we're going to build it better. And we're going to be a bigger player in these leisure-oriented markets in the Q1 time period than we have historically been.

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

Good morning, everyone. Just really kind of follow on to Savvy's question on revenues. Maybe, Andrew, can you maybe talk about how the booking curve has sort of changed over the course of 2Q now into 3Q? I would assume you have a lot more visibility today in terms of your 3Q revenue outlook as compared to back in April. And is there any color you can maybe give us in terms of what percentage of your anticipated 3Q revenues are already booked right now and how that compares to normal periods?

Sure. Everything is starting to return to normal, which is great to see. So right now, about 60% of our revenue for Q3 is on the books. And we have, obviously, I think, really good visibility in July and August. And in particular, I'd say August looks really quite good. September, we have less visibility into, but we still feel very bullish about that as business traffic returns. So overall, things are returning to normal. The booking curve isn't exactly normal yet, but it is quickly getting there, particularly from the domestic point of view. So hopefully that takes to your question. But again, about 60% is booked. And I'll also add that we do expect positive prasm in all three months for the domestic entity for the quarter.

That's helpful. And then, Jerry, you called out the chasm impact from the stage and gauge differential here in 3Q of the six point. Should we think about that as a similar impact on traasm as well?

Yeah. Stage and gauge obviously impact all those stats. So there is going to be some impact as well on traasm. I'll

add that there is. But the dilemma we face from a capacity point of view is the triple seven aircraft that are grounded are large capacity domestic movers. And we use those for Hawaii and hub to hub. And so right now, we're flying well below where we'd like to be in Hawaii. And it goes without saying that Hawaii is an incredibly strong part of our network. And so we would have absorbed that. And I think we would have still done very well in Hawaii, even with those extra seats, so we're really disappointed they are missing. And then domestically within the continental United States on the hub to hub missions, where our load factors are just off the charts, we are the simple way to describe it is like clogging the system because we don't have enough gauge between our hubs to flow the appropriate number of passengers over them. So we really want those aircraft back and we think those aircraft are really important to our chasm. But they also unlock, at least right now in Hawaii, better results and they unlock a lot more connecting traffic through our domestic system. So hopefully that gives you color as to how we think it impacts chasm as well as traasm.

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

ahead. Hey, good morning, everybody. So Scott, kind of a follow up to a question I asked you in New York, you know, with the event a couple of weeks ago, I noted that bad things seem to happen to the industry every 10 years or so. So as it relates to the 2026 guide, it looks like we're probably in the clear. Anyhow, the follow up.

That's definitely glad to have a full perspective.

So you have these financial targets. You have your largest aircraft order in history. If we do hit some sort of a speed bump, do you sacrifice the targets or do you adjust the capex and the delivery schedule? Basically, is the order book sacred or is it a lever you can pull to protect the financial targets? Just trying to, you know, better understand the priority there.

Well,

I'll actually let Jerry start. OK.

Yes, Jamie, as we said at that event, you know, certainly starting in 2024, we have enough flexibility in the order book to be able to adjust based on what the macro environment would dictate. So that's a decision we can make, you know, as we approach the later years of it.

And I just would add also that we, I think we've created a track record and it is certainly true that we are committed to targets. When we put targets out there, we're committed to achieving those targets and we're going to achieve our 2023 and 2026 targets. And if that requires adjustments in the plan one way or another, we'll make adjustments to make sure that we achieve those targets.

And Jamie, you know, one of the nice things about this order, as well as our fleet that has, you know, some aircraft, as you know, that are aging, simply replacing those aircraft and not doing anything else helps us with gauge, which helps us with those targets.

OK, that's helpful. Thank you both. And then just a bit of a modeling question. You know, there wasn't a huge change in fuel efficiency. Just looking at ASMs, you know, per gallon from the first quarter to the second quarter, I mean, a little bit of an improvement, but, you know, with more international turning on in the current quarter, can you give us some consumption guidance fourth quarter as well, if you happen to have it?

Jamie, I'm sure I can give you a precise number right now, but keep in mind, just given the mix with, you know, a higher proportion of regional flying by definition as, you know, the widebody has come back and become, you know, revert back to normal, that will help with fuel efficiency.

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

Morning, everyone. Thanks for the time. So maybe one more on cost, you know, as we move to unit cost being down from 2019 levels next year, you know, outside of capacity, what are the other tail ends we should be thinking about? I know you called out the six point impact from gauge and the triple seven grounding, but outside of that, are there some ramp up headwinds today that we should think about abating as we move into the fourth quarter in 2022 and just any color on the size of that impact? Thanks.

I think the most significant tail end actually, aside from gauge and stage length kind of reverting back, is the ramp up of the structural cost savings. So, you know, if you want to model something right now, and we'll give you some more color, you know, as we finalize 2022, but right now, you could model that about half of those savings are in our numbers for the rest of this year and starting in 2022, early in the year, first quarter, let's say that's 80% ramp ramping up to 100% by mid-year. So that's probably the most significant tailwind I can think of, you know, as we normalize the business.

Okay, great. That's really helpful. And then one, maybe for Andrew, throwing it back to 2020 in February, 2020, when you got the chase extension you entered into, I believe at the time of the announcement, you noted a drive 400 million increase in annual cash, and we were about to get some more details on that and then COVID hit. So we didn't really, I don't remember getting a timeframe for when you'd hit that, I'm guessing the pandemic maybe hit pause in the ramp up, but can you just give us some color on what portion of that uplift you've seen flow through your P&L to date and how you expect that to trend over the next year or two? Thanks.

Yeah, definitely everything's been interrupted by the pandemic. Although, you know, we have seen recently where our numbers are now equal to or greater than 2019, so we're pretty, you know, excited about that. And, you know, our new agreement with chase, it was effective then, and it's impacted in everything we do here in our financials already. But the real, I think the real value in this is our working relationship with chase is just incredibly good right now. And we're coming up with all creative ideas, new products, and that's fueling the card growth and the new number of cards we're putting out there and spend on the historic cards. So that's maybe not every answer to the question you would like here, but what I would say is that the relationship is going well, which gives me great faith that we're going to hit the targets we put out there. I don't have the exact timeline as to when that will happen. It was clearly interrupted by the pandemic, but we're back on course.

From Jeff Rees, we have Sheila Tayyalu. Please go ahead.

Hey, good morning, everyone. Thank you. So maybe it seems like capacity additions are coming back at a faster rate, and I appreciate the coastal hub. Can you maybe provide a little bit more color around CASMX below 2019 and 2022? What are your assumptions around capacity and maybe mix of international and domestic?

It's still a little early to give you the capacity guidance. We'll do that in a normal course, but I can tell you, just given the size of the fleet, as it stands today, we expect 2022 capacity to be higher than 2019. But we'll give you more precise numbers in the normal course.

Okay, no.

Jerry, I was going to add, I think with the incremental widebeddy jets that we have available, along with our expectation about what the transatlantic market is going to look like next year, it wouldn't shock me that we see international growth faster than domestic growth for next summer.

Yeah, I guess on that note, somewhat related to that big picture, you mentioned in your prepared remarks on the international side, you're one of the carriers that have kept your widebodies going. So that supply demand picture might look more attractive as international comes back, but domestically, what we're seeing is low cost carriers are doubling their fleet or expanding their fleet substantially, as you guys are too, and increase in gauge. How do you think the supply demand picture plays out through 2026? How do you think United is positioned with that?

Well, I'll just go back to our United Next Plan, where I think we thought and probably talked about all the details there. We are working to make sure that we build our connectivity, our scheduled depth, and most importantly, our gauge. And we think those factors along, of course, with our customer focus, are really going to drive our profitability in really unique ways relative to many of our competitors over the next few years in an industry where we absolutely expect elevated domestic capacity growth for everybody over the next few years. So we feel really good that we've identified this. We've articulated a way to manage it here at United together from a revenue and a cost perspective and a customer perspective to make sure that we can meet the targets that Scott laid out in New York a few weeks ago, and he laid out just a few minutes ago here.

From Wolf Research, we have Hunter Cade. Please go ahead.

Hey, good morning. Do you think that investor Scott should just ratchet down our permanent expectations for pricing power for this industry?

No.

Well, why not? I mean, you know, it's so clear that the market puts multiples on industries that, you know, can price, and the decision to deflate unit pricing and outrun it with lower chasm, you know, it's hard to see why that makes sense when it's such a clear track record for when this industry works is when they're pushing price. And look at what you just did right now with the yield performance, not suggesting you're going to be down 25% forever, but I'm sure it was pretty satisfying to be able to push that price.

Well, first, I disagree with the premise of the question. Okay. And look, Hunter, I recognize you've got a perspective. Respect that. But, you know, we had a pretty good track record in 2018, 2019. I think it was your research report that pointed out we grew EPS by 74%. You know, this is in a large degree, a continuation of the strategy is working well with the improvement, I think, that we're really focused on decommoditizing air travel and getting customer choice. So it's about far more than growth. But even the 2018, 2019 plan was working, you know, it is in your research report. It seems like the best evidence that we can do this without disinflating, I think was the term you used. I'm confident that we're going to do that. I'm particularly confident that when you take the mix of what the international market is going to look like and the percentage of our revenues, combined with, I think, our ability to decommoditize travel domestically, that, you know, our targets for 2023, 2026 are arguably conservative. And that's going to also be good for our shareholders.

Okay. Yeah. Look, thanks for the time, Scott. I don't want to be disrespectful here. I appreciate the conversation. A quick modeling question for you, too. I have you, Jerry. Should we assume that the SWB Chasm is going to be in 2022 and 2023, above or below 2019? Are you willing to help us out with that?

I'll follow up with you offline, Hunter.

Okay. Yeah. All right. Thanks. Sorry. Yeah, we'll get you those numbers.

From Cowan and Company, we have Helene Becker. Please go ahead.

Thanks very much, operator. Hi, everybody. And thank you very much for your time. So kind of a different question. You have an open contract with your pilots, and I know you have the letter agreement, you know, to agree to the differential so that you are able to ramp up as the recovery occurs. Can you just talk about how you're thinking about entering those negotiations again in, I don't know whether it's 2021 or 2022, but when should we think about that contract again?

Hi, Helene. This is Bret Hart. How are you doing? But I think part of the underlying premise of your question also points out that we obviously have had a really good working relationship with our pilots throughout the pandemic, work hand in hand with them. And at the end of the day, we are confident that we do get to an agreement that it will be one that works for our pilots and for the overall company. But as you can, I'm sure appreciate, we don't get into discussing the specifics of our discussions or negotiations or the timeframe for reaching agreements in public or on earnings calls, but I appreciate the question.

Okay, well, that's helpful. Thank you. Just the other question is, as we think about the improvements that you're talking about in efficiency, I don't know, Andrew or Jerry, how should we think about it, like working through the next two and a half years? Are you just going to give us guidance every quarter for how we should think about those efficiencies or is there some number beyond minus 4% in 2023 that we'll be able to mark to?

Helene, that's really the heart of the $2 billion of structural cost savings. And as I said earlier, by next summer, I would expect 100% of those in the numbers. And then we will continue and we'll continue to provide guidance. Keep in mind, those structural savings include savings that will continue to grow as we grow the airline. So, you know, it'll come out through our continuing chasm guidance over the next few years.

From Evercore ISI, we have Dwayne Fenickworth. Please go ahead.

Hey, thanks. I really appreciate the time. Just a couple for me on cargo. Andrew, I think you said no more dedicated freighters. I assume this is just a function of passenger demand coming back, but maybe you could just expand on that. And if we think about sort of your cargo capacity in total, maybe no more freighters, but more longer haul flights coming back, how do you think about your cargo capacity in total?

Sure. Correct. We are not going to be able to do more cargo-only flights. We're obviously disappointed by that, given where yields currently stand. The reason for that is the aircraft can be better deployed in passenger markets. However, many of those passenger markets are also not exactly optimal cargo markets. They do have cargo, but they're not optimal cargo markets. The 52 777s that are grounded means we just have less flexibility on this front than we would otherwise have. If those aircraft were flying, we clearly would continue all cargo emissions because we'd have the ability to do both. So then when we look at capacity available to fly, it's still really significant as we put all these passenger planes back in the air, and we think we've got this properly accounted for in our forecast, and we think we're going to have another great cargo quarter in Q3, and it's already gotten off to a really good start. That being said, it's going to be different in the amount of all cargo flights. So what I tell you is we don't really see those details, but all the numbers are in there, and hopefully we can do a little better on cargo than we are currently planning. But there is a marked change in our cargo footprint starting today, really starting a few weeks ago, obviously, and we'll see where it goes. But we're still very bullish on cargo for the remaining half of this year.

That's super helpful. And just for my follow up on scope, scope is something that United talked a lot about in the past, obviously in the recent investor update, you talked about big up gauge from 50 seaters. But I have to think, just thinking about high frequency with 50 seaters going fully to mainline, maybe that implies less frequency. I have to think there are many markets where a 70 or 76 seater would be optimal. How should we be interpreting a kind of lack of commentary around scope? And is it something maybe longer term, maybe beyond the forecast period that you offered that you think still makes sense?

Well, to be clear, when we induct a MAX 10 or an A321neo, it's not replacing the 50 seat RJ route for route. There's a cascade that starts at the top that goes all the way down. So 50 seater routes today will often go to a 76 seater route in the new United Next vision. So just the economics of that are a little bit different than maybe you described. I'm not 100 percent sure. But so we still will do that. As we look at our fleet counts and hubs and schedule depth, it is not our intention to reduce service to smaller communities in the United Next plan. And we've laid this out in great detail. That being said, it's also really not going to increase our scheduled depth or size in smaller communities either. We're going to grow by a gauge, which we think is the right way to do it, given where our hubs stand, particularly our mid-continent hubs, where again, most of the growth is gauge. There's a little bit of frequency, but most of the growth is gauge. So hopefully that helps answer the question.

From UBS, we have Miles Walton. Please go ahead. Thanks, good morning.

It's a bit of a follow up to Hunter's question again, but I'm curious, Scott, if you've thought about perhaps using a return on invested capital or efficiency metric to go alongside your pretext margin and your pretext income financial metrics, which govern your long term incentive schemes as a way to sort of answer the question around the efficiency of assets being put under utilization.

Hey, it's Jerry. You know, we actually always look at the return on investments we want to make. And, you know, kind of our rule of thumb is kind of mid-teens to justify making those investments. So that's always part of the equation, but I do think at the end of the day, you know, pretext ultimately is the best way to look at things. You know, the other components of it just all go into that. But we do look at returns on investments we're making.

OK, but not in the formal incentive scheme, just pretext income is the governing metric?

I think it's just the one that best reflects how well we expect to do.

Hey, Miles, this is Mike Luskinen. I would just add that even if you think about replacing some of the older aircraft with new technology, you look at the 737 MAX aircraft, even in that scenario, you're getting a mid-teen return on invested capital. And so the return on invested capital is a gating item. We're driving pretext margin, but ROACs are well ahead of our weighted average cost of capital, and it is a hurdle.

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

Hey, good morning, guys. Thanks for taking the time. So Scott, I wanted to talk kind of at a high level here about how investors should think about the upside you see in decommoditizing travel. You know, we get a little pushback that this is just a buzzword, if you will. I'm just wondering if you can talk about how much, whether this is just about a revenue premium that you can earn for having higher price seats on the departure. And if so, if there's a way to think about that relative to kind of maybe the revenue you might have earned without the strategy. And also, if you could talk a little bit about whether this is also about limiting how much the inventory that you put out in the market is actually exposed to low cost competition on a day to day basis and how that might be changing over the next couple of years as you implement this United Next strategy.

Well, I'll start and Andrew can add on if you want. On the point about decommoditizing air travel, you know, it's hard to put a precise quantification on it today, but I think customers do care about quality and do care about product. If you get on airplanes and talk to customers or just watch airplanes and people flying, I think that is an inescapable conclusion. There's at least one airline in the U.S. that embarked on this a decade ago and it was quite successful. There's certainly room for two of us in the United States, the largest travel market in the country, for two of us to pursue that strategy. And, you know, frankly, United has, I think, the most opportunity because we're in the biggest premium market where our seven hubs are. And so I think there's more upside for us than there is for anyone to pursue this strategy. And so I don't know for sure how much that turns into in terms of a revenue premium or growth that in rather than faster than the rest of the industry, because it's not as easy to quantify some of the work that we do, but confident that it will lead to strong results for United.

The only thing I would add is that, you know, flying approximately 300 single class 50-seaters with no premium product on board at all up against competitors that had premium products is just a step change function for United as we take that number down. We already saw with the introduction of the CRJ-550, which is our 50-seat dual class aircraft, really great progress prior to the pandemic on being able to monetize those premium seats. We see our competitors do it all day long. And we were simply underrepresented in this category, you know, and flying the wrong aircraft into big cities with no premium seats. And by the way, our hubs have a lot of premium demand. And we just underindexed to it and that was wrong and we're going to correct it and we're going to correct it really quickly.

From Steele, we have Joseph Finardi. Please go ahead.

Oh, thanks. Good morning. Scott or Jerry, can you talk about CapEx needs on the widebody side? When do you need to address that with an order? When does the delivery start, do you think? And then based on that, in what year do you see yourselves getting below 7 billion in CapEx?

Actually, I'm looking at Andrew, who's always wanted to ask me, you know, for aircraft. But, you know, keep in mind, you know, over the last few years, we've taken 20 some odd widebody aircraft. We haven't retired any. We have a lot of widebody aircraft. Andrew's talked about that. And so the focus right now is really on the narrowbody. And, you know, Andrew can provide some color, but I can tell you that, you know, it really depends on both the speed of recovery throughout the world and then the opportunities that Andrew is teaching.

Yeah, Jerry, I'll just add what I think I've said, but I just reiterated that because we took delivery of a large number of widebody aircraft, you know, or we ordered some right prior to the pandemic. Those aircraft are coming online over the next 12 months. So we'll have available to schedule up to 30 incremental widebody jets for the summer of 2022. So that really does provide a lot of growth and possibly for a number of years, depending on market conditions. So we'll watch this carefully. The second thing that I said a few weeks ago that I'll say again is we're carefully looking at the economic lifespan of these widebody jets. And I can tell you, prior to the pandemic, we were thinking many of them, particularly the 777 and 767 fleet, could go 30 years or more. And, you know, I'll give kudos to our maintenance team for keeping these aircraft in great shape to allow us to have that optionality. So we do have optionality to fly these aircraft longer than I think people automatically assume. And then the last thing I'll add is the interiors on all these aircraft, including the older ones we've just been describing, have been recently retrofitted. We've completed our entire 777 fleet and we're close to completing the 767 fleet with brand new interiors from nose to tail to give a great, great customer experience on board. So with that, we have a lot of incremental widebodies that have just arrived. And we have a lot of brand new aircraft on the inside that have a long lifespan left. And so we have a lot of optionality. And to the extent we want to grow, it'll be because we have growth opportunities, but we'll monitor that over the next few years. So that's a lot more details than you probably wanted. But that kind of explains where we are from a widebody point of view.

And I'll just add, you know, the fairly straightforward analysis to justify that growth, that goes back to the financial target that we just talked about, that they need to demonstrate that we can hit those returns, which they do anyway on a regular basis.

And I'll add one more because I feel so passionate about this point. The retention of the 767-300s, I think, gives us and any other airline that has done that, a structural competitive advantage. These aircraft, between their size and trip cost, chasm, and passenger comfort, are really amazing machines. And they enabled, as I said earlier, this new route to Croatia and many new routes that we're talking about that could otherwise, I don't think, be flown over the next few years profitably.

OK. So does 2025 CAPEX come back down to the $3 to $4 billion range, or is it still elevated? And then, Scott, you talked, I think, last call or the call before about doubling loyalty EBITDA and haven't heard much on that. Is that like an aspirational goal that we should kind of discount significantly? What are the drivers behind being able to do that? Thank you.

Well, it's our goal. I wouldn't discount it because I think we're going to do it. But you can choose to if you want. And this is one of those that, you know, until we have something to announce, you know, it's another one of those that we're not going to have something to announce until we have something to announce. So I saw the team meeting earlier this morning on it, and they're looking for me later today to get an update. So we are doing, there's a lot of activity on it, but we're not going to have anything to say publicly until we're ready to make probably a big announcement.

And hey, on capex, it's too early to really give capex projections beyond 2023.

Thank you. We will not take questions from the media at this time if you have a star. If you have a question, please press star 1 on your touchtone phone. Standing by for questions from the media. And please hold for a moment while we assemble our queue. Okay, from Wall Street Journal, we have Allison Snyder. Please go ahead.

Hi. Regarding your conversations with the government about lifting travel restrictions, is there anything that the administration is asking for from airlines, you know, in terms of contact tracing or extending the mask mandate or, you know, checking vaccine status, is there anything that you will have to do, you know, it's part of an agreement to lift those restrictions eventually?

Hey, Ali. We are working closely with the government, and it's a two-way conversation where they're getting input from us, input from them. All of us want to make sure we do this safely and competently, that when people get back to flying, it's not only safe that people feel confident in the safety. And we certainly haven't advocated for any of those specific policies, but if the government, you know, brought those things forward, we've indicated a willingness, for example, with, you know, vaccine requirements which are happening in much of the world already, United, uniquely our digital team has done a pretty amazing job of creating an automated way for customers to upload that information. I think it's easier on United to deal with vaccine requirements around the world than any airline in the world. So we're doing those kinds of things, and we're very open to any requirements that they have. We look forward to working with the administration to get it back open.

Got it.

Thanks. And from Bloomberg, we have Jeff in Bachman. Please go ahead.

Hi. Thanks for the time today. This question is maybe for Andrew or Scott, but it goes back to Scott's comment at the top of the call on, you know, the Delta variant, any impact probably being short, and people are, you know, confident in the rebound. I'm curious, like, as far as your business today, is this a lot of people who are, you know, repeat customers and flying quite a bit compared to during the pandemic, or are you seeing people come back who may not have flown since 2018 or 2019? I'm just curious about the mix of who's flying today and your confidence about, you know, those habits continuing even if the pandemic takes another turn. Thanks.

Sure. Good morning, Justin. We track this pretty carefully, particularly from a Mileage Plus point of view, and particularly from the premier population of Mileage Plus. And what we can tell you is that while the penetration of Mileage Plus on the aircraft is still below our historic norms by about seven or eight points, we see that number gain in strength each month. And more and more customers are coming back, and our premier members are back to flying again and using our credit card. And the ones that aren't are because they only generally fly global long haul, and those particular borders are closed or difficult to get into. So we do see this return into normal from all the things we look at. The other thing I would tell you is, as we've kind of gone through this crisis, headlines have driven cancellation and no-show factors higher. And I can assure you right now our no-show and cancellation factors are completely normal. We've seen no change in them over the last few weeks. And they're basically slightly above 2019 levels, which they have been for quite some time. So we don't see any change. Of course, I'm not saying exactly what's going to happen in the future, but I can just tell you right now things look good, and we do look like demand is recovering and maintaining a strong recovery even with the negative headlines.

Okay.

Thanks for the help.

And from writers, we have Tracy Ruthinsky. Please go ahead.

Hi. I also wanted to go back to Scott's comments at the top of the call. Scott, you mentioned a potential temporary reopening pullback. Can you be more specific on what that pullback could look like and where and what kinds of scenarios you're preparing for from a demand perspective?

Well, I don't know what it would look like. I think it would be something, you know, government-related that there were some new rules or recommendations, which I think is unlikely. I mean, I think the most logical and likely outcome is that we largely continue unabated. But if something did happen, you know, we've had a history going really all the way back to the last weekend of February of 2020 of reacting quickly, realistically, nimbly. And, you know, we put a team together last year to deal with kind of the shutdown in March of last year. That team has not been disbanded. That team continues to exist for managing the vagaries and the ups and downs because we've known all along that there's going to be ups and downs. And there's going to be ups and downs between now and the time that, you know, enough of the world is vaccinated that this really recedes into the background, which we look forward to. But there will be ups and downs. And we're prepared to deal with whatever those are, knowing that we can't precisely forecast exactly what the ups and downs are going to be.

Hey, Sherry, let me just add. Sure. Yeah, one of the things we learned in the pandemic was the need to be able to be flexible financially. So as we've begun to invest money, we also build an off-ramp in case we have to bank in one direction or the other.

What are you hearing from corporations in terms of their reopening plans? There were reports yesterday, for example, that Apple is delaying its return to office by a month.

Hi, it's Andrew. I did read that in the newspaper. Overall, we're hearing a return to this new normal as the end of the summer occurs in September. Obviously, some may come back in October or even November. But we're anticipating a return to normalcy. And then, therefore, we're also anticipating a step up in business travel in September. And then once again, in January, when the new budget seasons start, we've already seen, for example, our advanced business bookings for September are now only down, I think, about 50%. And we expect that number to continue to get better and finish the month at around 40% to 45% down based on where we are right now.

Thank you. We'll now turn it back to Christina Munoz for closing remarks.

From everyone here in Chicago, thanks for joining the call today. Please contact Investor Relations or Media Relations if you have any further questions. And we look forward to talking to you next

week. Thank you. Ladies and gentlemen, this concludes the conference. Thank you for joining. You may now disconnect.