United Airlines Holdings, Inc.

Good morning and welcome to United Airlines Holdings earnings conference call for the second quarter 2022. My name is Hilda and I will 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 01 on your touchstone 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, Cristina Muñoz, Director of Investor Relations. Please go ahead.

Thank you, Hilda. Good morning, everyone, and welcome to United's second quarter 2022 earnings conference call. Yesterday, we issued our earnings release, which is available on our website at ir.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 the SBC 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 in Outlook are Chief Executive Officer Scott Kirby, President Brett Hart, Executive Vice President and Chief Operating Officer Toby Inquist, Executive Vice President and Chief Commercial Officer Andrew Nacella, and Executive Vice President and Chief Financial Officer Jerry Letterman. In addition, we have other members of the executive team on the line available to assist with Q&A. And with that, I'll hand it over to Scott.

Thanks, Christina, and good morning, everyone, and thanks for joining our call today. I'd like to start by thanking our employees for navigating an unprecedented return of customers this quarter. as well as managing through challenges seen around the world in the infrastructure that supports global aviation. It's great to return to profitability for the first time since we started the pandemic, and despite the legitimate worries about rising fuel prices and the growing risk of a slowdown or recession, we expect continuing improvement in revenue, earnings, and margin going forward. We're still short of our pre-pandemic margins, and we remain focused on first getting back to 2019 levels of profitability, and then on achieving our 2023 and 2026 United Next adjusted pre-tax margin targets. During 2Q, three storm clouds emerged that will drive the narrative around United and our industry for the next six to 18 months. And here at United, we're prepared for the risks they pose. First, we've seen industry-wide constraints that have created significant operational disruptions and imposed constraints on the industry's ability to grow. Second, sharply elevated fuel prices. And third, the growing likelihood of an economic slowdown or recession. First, to address the challenges posed by a commercial aviation ecosystem that is straining to handle the number of planes operating today, we've elected to keep United Airlines smaller and overstaffed in order to give us more buffer against these external constraints that we just can't control. We'll also continue to prioritize reliability by overstaffing until the entire aviation infrastructure returns to normal. but it means that there will be cost pressures until that catches up and we can return to traditional utilization and staffing. The second macro trend is, of course, fuel prices. At current fuel prices, United's fuel bill would be $9 billion higher than 2019. For what it's worth, we're building our long-term plans, assuming that this is the new normal for fuel prices. The good news is that rising fuel costs are something that affects all airlines, and at least for United, we've seen this largely become a pass-through expense to date. And finally, there's the question about what's going to happen with demand. We continue to see strong demand, and one thing that is unique for United particularly, and aviation in general, is that we're still probably in the sixth or seventh inning of the COVID recovery. So there are two macro demand trends, recession versus continuing COVID recovery, working across purposes. And for now, at least, the COVID recovery trend is at least canceling out, arguably exceeding the economic headwinds. So where does that leave us as we look to the future? Clearly, all three looming risks, industry infrastructure constraints, significantly higher fuel prices, and an economic slowdown, bias toward reducing capacity over the next six to 18 months. But the truth is, 8% is about as much as we think it's physically possible for us to fly, given the shortfall in regionals, reduction in long-haul Asia flying, and aircraft delivery delays and other infrastructure constraints that are impacting all of aviation. Perhaps what's most amazing about all this is despite the three known storm clouds, however, we remain optimistic about the near and short term. You can see that our three key results are expected to continue to accelerate back towards 2019 margins. Lower stage length does lead to slower ASM growth and pressures chasm X, and Jerry will detail what that means shortly. However, these same factors also lead to higher RASM. In order to hit our adjusted pre-tax margin of 9% next year, TRASM could decelerate by eight points from current levels, and we'd still hit the target. That translates to about $11 per share in adjusted EPFs. And that, perhaps, is the most important point. At United, we will do whatever it takes to hit our margin targets. We made a huge step up in 2Q, and we continue to get closer to 2019 levels here in 3Q. We believe utilization will return to normal, and Boeing deliveries will get back on track, which are the keys to TRASM at But we're going to get to our pre-tax margin next year regardless. Thank you again to our employees for all they've done to help our customers during this busy summer travel season. It's been tough, but I'm encouraged to see the improvement in operating results in customer MPS so far in July. And with that, I'll turn it over to Brett.

Thank you, Scott. I want to start by thanking the entire United team for their hard work the past few months. We are pleased to see how the recovery has taken hold and progress made. and our international business as border and testing requirements began to loosen up. As Scott mentioned, through weather and air traffic constraints have severely impacted the entire industry over the last few months. However, because of the United Team's unwavering hard work, we were able to return to 2019 levels of operational performance in the second quarter for most of our network, with the exception of newer. While June completion was the most challenging since 2019, Our mainline operation was ranked number one among legacy peers for the quarter. The good news is the biggest constraint we have seen at United, congestion at Newark, has improved. But we'll need to operate at lower utilization and higher staffing levels until the broader aviation infrastructure improves. United continues to collaborate with the U.S. Department of Transportation on the operational disruptions and challenges impacting the aviation industry and our customers. By having an active partnership with the government and FAA, we hope to address the main drivers of these challenges and find solutions together. We've seen early signs of progress and are grateful for the partnership and leadership the FAA has demonstrated. Late last month, we received a waiver to proactively reduce our schedule in Newark to ease operational disruption for our customers. Also, our on-time departure performance in Newark has improved significantly. nearly 14 points month over month so far. As we continue to manage the infrastructure challenges that face the aviation industry and the broader economy, we're strategically maintaining higher staffing levels and will need to operate at lower utilization. We continue to adjust our near-term capacity plans to fly the most reliable schedule we can. Finally, we are hiring to support a larger operation so that our new united team members can receive proper classroom and on-job training in advance of when they are needed as we plan to grow the schedule towards our long-term goals. The pilot shortage continues to impact broader airline industry. United remains dedicated to hiring at least 200 pilots a month, and with our international routes, wide-body aircraft, and high career-earning potential, we are confident United is the best place for pilots to build a career. In closing, I want to extend my most sincere gratitude to the entire team at United for their hard work this quarter. Our employees are truly the good that leads the way for our airline. And now, I'd like to hand the call over to my colleague, friend, and our new Chief Operating Officer, Toby Inklis.

Thank you, Brett, for that kind introduction. After working for this great airline for over 25 years, and most recently as a Chief Customer Officer, The thing our customers value the most has not changed. We need to get them to their destination safely and on time. Hence, running a reliable operation is critical to our success. And with the recent wave of industry-wide operational disruptions across the globe, you will see innovative tools such as the Connection Saver and Agile Demand from our team that help moderate the stress not only for our customers but for our employees as well. We will continue to innovate and make data-driven decisions to improve efficiency and reliability of our operation in the future. At United, we've been preparing for this bounce back in demand for some time. We were the only airline that signed a letter of agreement with our pilots in the fall of 2020 to ensure that when demand returned, and it has in a more meaningful way than we could have ever imagined, we'd be ready. For example, today we have 10% more pilots available per block hour versus prior to the pandemic. Fertigry broke ground on 12 new simulator bays to support the amount of pilot...

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Thank you, everyone. Sorry, we had some technical difficulties. We're going to start with Toby.

Toby finished.

The people didn't hear. So we're going to start with Toby. All right.

I did really well. Thank you, Brett, for the kind introduction. After working for this great airline for over 25 years, and most recently as the chief customer officer, the thing our customers value the most has not changed. We need to get them to their destination safely and on time. And so running a reliable operation is critical for our success under the recent wave of industry-wide operational disruption across the globe. It was the innovative tools such as Connection Saver and Agent on Demand from our team that helped moderate the stress not only for our customers but for our employees as well. We will continue to innovate and make data-driven decisions to improve efficiency and reliability of our operations in the future. At United, we've been preparing for this bounce back in demand for some time. We were the only airline that signed a letter of agreement with our pilots in the fall of 2020 to ensure that when demand returns, and it has in a more meaningful way than we could have ever imagined, we'd be ready. For example, today we have 10% more pilots available for block hours versus prior to the pandemic. Further, we broke ground on 12 new simulated bases to support the amount of pilot training that we expect will be required in the near, medium, and long term to meet our growth plan. We also began actively addressing our infrastructure needs well before demand started to come back. During COVID, we focused on the big airport infrastructure project to support the future. We completed or broke ground on new projects at Newark, Chicago O'Hare, Houston, and Denver. There are many other infrastructure constraints outside of our control, and we're working with those partners to get them returned to normal. Finally, July 4th weekend was our best completion and CD0 performance for that weekend since 2017. In partnership with the FAA, our Newark operation is significantly improving this month. As of July 15th, we have seen a 78% reduction with the highest post-pandemic month in FAA capacity delay rate, which means an additional 12,000 customers are on time each and every day, and delays are less likely to impact the rest of our system. I look forward to being even more ingrained in the day-to-day operation of this airline Hopefully by the next time I'm on this call, the operational challenge that our whole industry is facing today will be in the rear-view mirror. I'll now pass it on to Andrew to discuss our great revenue results.

Thanks, Toby. I'm pleased to report revenues accelerated in the quarter versus Q1. Tarazan finished 24% higher, with capacity down 15% versus Q2 2019. Top-line revenues for June of $4.6 billion were 12% above our previous best month ever on 14% less capacity. Q2 leisure demand was exceptionally strong, and we successfully revenue-managed our capacity, largely compensating for higher fuel costs and inflationary pressures. Passenger yields were up 20%. Business demand continued rebounding in the quarter to 75% of 2Q19 volume levels and 80% of revenues. Business demand continues to grow, but the rate of progress has slowed in the last few weeks from the growth we thought early in the quarter. With the economy potentially worsening, business travel's recovery is something we'll be watching carefully. Cargo demand remained strong in Q2. Yields remained 107% above 2019 levels, and total cargo revenue was up 95% versus 2019. As we see the industry spool back up to normal passenger schedules, we expect cargo yields will decline in the future months but remain solidly above 2019 levels. I want to also note that our cargo volumes remain strong and are only constrained by available space now being used by passenger luggage. If a drop-off in cargo revenues is an early sign of a recession, we don't see it. Mileage Plus had a strong quarter with revenues up 23% versus 2Q19. Our co-branded credit card broke just about every record you can think of in terms of spend, retention, and new cards issued. Our ancillary and premium revenue streams are also doing great. Ancillary revenue per onboard passenger was up almost 30% versus 19%. Additionally, our seat product revenues per passenger were almost up 40%. As I've mentioned before, premium leisure continues to be a bright spot with the premium cabin domestic revenue growth outpacing the economy cabin in the second quarter. This trend is really important as our United Next capacity plans grows premiums even faster than main cabin over the next few years. For Q2, Pacific Prasm increased 15%, albeit on a capacity down 67%. Atlantic Prasm was up 6%, even the backdrop of a 9% capacity growth versus 19%, and Latin Prasm was up 14% in the quarter on 8% more capacity Overall, international PRASM was up 13%. Domestic PRASM increased 25%, and that's what a backdrop of an 8% increase in gauge versus Q2-19. A material reduction in RJ feeder traffic and many other constraints that limit optimal capacity deployment. The strength of the post-COVID recovery combined with capacity constraints are offset in any macroeconomic headwinds enabling record PRASM results. Now turning to the third quarter, we're focused on carefully managing our capacity, yield, and operation with schedules we can reliably and profitably deliver. We expect third quarter capacity will be down approximately 11% versus third quarter of 19. Q3 TRASM is expected to improve by 24 to 26% versus the same period in 2019. International TRASM is now spooling up further. We're well into the Q3 booking curve and pleased with the revenue trends. We're not counting on a material rebound in business bookings in the quarter to meet our TRASM guide. United's capacity in the fourth quarter will also remain below our original targets at approximately down 11%. The revenue environment for passengers, ancillary fees, domestic premium seating, mileage plus, and cargo are all just materially different in a positive way than 2019. It appears to us that the airline industry revenues are rapidly returning to the 2019 GDP relationship, which is really important to our 2023 capacity plan and outlook. We continue to assess capacity plans for 2023 and now expect United capacity will be up about 8%. To be transparent, our outlook for growth, 8% growth, is significantly lower than our previous plan growth. We at United are going to be able to execute our plan and do it comfortably. We feel 8% growth is the right choice and achievable for United. At United, taking care of our customers is our number one focus, and we believe that moderating capacity growth will allow us to deliver service levels our customers expect. The entire industry faces at least three core challenges over the next 18 to 24 months. One, industry infrastructure shortfalls. Two, high fuel prices. And three, macroeconomic concerns. Some airlines, including United, face a fourth risk, that not all others may face, delivery delays from Boeing. These constraints are clearly having a material positive impact on revenue production. Higher fuel prices and macroeconomic concerns alone may not have impacted industry capacity. However, infrastructure constraints and Boeing delivery delays will take time to fix and cannot be ignored. Pilot recruiting, training, and retention we believe are real constraints for the industry for years to come. As Scott has said earlier, the calculation on how we get to our 2023 margin guidance has changed. We will have higher costs, higher fuel, lower capacity, but most importantly, higher revenues. Thanks to the entire United team, and with that, I will hand it over to Jerry to discuss our financial results.

Thanks, Andrew, and good morning, everyone. First, I would like to add my thanks to the entire United team for achieving our first quarter of profitability since the start of the pandemic. For the second quarter of 2022, we reported pre-tax income of $459 million, $611 million on an adjusted basis. Our second quarter CASMX ended up 17% versus the second quarter of 2019, which was in line with our prior guidance despite capacity coming in lower than previously expected. But the cost story for the quarter was not about CASMX, it was about fuel, and the ability of our industry while in the midst of recovering from the pandemic to withstand record high fuel prices. The fuel price volatility was exacerbated by unusual pressure on jet fuel prices in certain geographic regions where we had limited opportunity to mitigate air exposure. For example, in April and May, the cost of jet fuel based on New York Harbor pricing was often several dollars higher per gallon than Gulf Coast jet fuel. Nonetheless, Our strong unit revenue performance enabled us to offset most of the fuel pressure as we attained an adjusted operating margin in the second quarter of just over 8%. While lower than our May guidance of 10%, the difference is mostly due to approximately $150 million of incremental fuel expense for the quarter versus what we forecasted in May. Turning to our forward outlook, We currently expect CASMX to be up approximately 16% to 17% in the third quarter, on capacity down 11%, both versus the third quarter of 2019. Our third quarter costs are impacted by the current operating environment. During the recovery period where supply chain issues, labor shortages, and COVID variants create challenges throughout the economy, we are mitigating the impact to our operation and our customers by overstaffing and limiting capacity. While this creates near-term chasm headwinds, we believe it is the right thing to do for our customers and ultimately for our profitability. We also have to manage more closing cancellations due to various infrastructure issues. For example, for several weeks in September, we are reducing our schedule in Newark by about 200 flights per day as a result of runway construction. These types of cancellations result in additional chasm X pressure as many variable costs simply cannot be avoided due to the short lead time for the schedule adjustment. Nonetheless, we once again expect to be profitable in the third quarter and expect our adjusted operating margin to be 10% based on a fuel price per gallon of $3.81. Additionally, we continue to expect an adjusted pre-tax profit for the full year 2022. Looking beyond the third quarter, we will continue to manage our capacity growth into next year prudently. We currently expect our fourth quarter capacity down 10% with our CASM-X up 14%. In addition, as Andrew described, we now expect full year 2023 capacity to be up no more than approximately 8% versus 2019, down from the original United Next goal of 20%. Even at this lower capacity for next year, we feel good about achieving our United Next adjusted pre-tax margin target. After taking into account the impact of lower capacity, causing, for example, fixed costs to be spread among fewer ASMs, and about three points of inflationary pressure we've seen, we would expect CASMX to be up about 5% versus 2019. Using a fuel price per gallon of $3.40 based on the current forward curve, Unit revenue can decline by as much as eight points from current levels, and we would still achieve the 9% United Next adjusted pre-tax margin target. And as Scott mentioned, as our assumptions change, we will do what it takes to deliver on our commitment. Turning to fleet, our new aircraft delivery schedule for this year continues to shift a little to the right. We now expect to take delivery of no more than 46 MAX aircraft and 5787s during the year. We currently expect full-year 2022 adjusted CapEx of about $5.2 billion, which will be lower to the extent fewer aircraft are actually delivered. We finally started taking delivery of our first new aircraft of the year during the last week in June, and in the last few weeks we have taken delivery of four 737 MAX aircraft. We continue to evaluate the most appropriate way to pay for our new aircraft deliveries in the context of our liquidity position, other potential uses of our cash, and the current macro environment. Given that we ended the second quarter with about $22 billion of liquidity, we used cash on hand to purchase the four aircraft already delivered this year, and currently we expect to pay for more than half of our total 2022 aircraft deliveries with cash on hand, though we remain flexible as we continue to monitor the economy and the recovery. Paying for these aircraft with cash while paying down current maturities and opportunistically prepaying certain debt to build our unencumbered asset base, a win-win for the balance sheet. So far this year, we have reduced our total debt by over $1 billion, and with scheduled debt payments between $3 and $4 billion annually for the next several years, we will continue to have the ability to delever our balance sheet through normal amortization. In conclusion, as we execute our network, cost, and balance sheet plans, which form the core of our United Next strategy, we grow more confident every day that we will deliver on our 2023 and 2026 adjusted pre-tax margin targets. And with that, I will hand it over to Christina to start the Q&A.

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

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please press 01 on your touchstone phone. If you would like to be removed from the queue, please press 02. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, if you would like to ask a question, please press 01 on your touchstone phone. We have a question from Mike Linenberg from Deutsche Bank. Please go ahead.

Oh, hey, good morning, everyone. Congrats on getting back to profitability. Scott, you sort of touched on the capacity change, and maybe this is to you or to Andrew, but, you know, based on our math, it looked like you were going to probably be up about 20% under the previous plan, you know, from a year ago, and now it's at eight. Twelve points, obviously, that's a lot, and, you know, obviously, it's a sizable headwind for chasm but can you can you give us a little bit more uh you know sort of drill down is that you know maybe a slower improvement or increase in engage is that a more gradual restoration of bringing back triple sevens like what you know what what's driving those changes if you can just dig into that thanks hi mike it's andrew let me let me give it a a shot here um

You know, as we looked out into the year, there are a couple big buckets that are different and get us from the 20% that you are referring to to where we're currently projecting. The first one is the change at United Express where we're simply flying dramatically fewer airplanes and we're flying them at lower utilization. So that's definitely lowered our ASMs. And think of that as four to five points in total. There is, as part of that 45 points, because that's really substantial, is the fact that United mainline aircraft have taken over flying on many of these shorter-haul routes, and those shorter-haul routes simply produce less ASMs. So that explains, I think, one of the bigger buckets of the difference. The second significant bucket of difference is our assumptions about global long-haul flying and the recovery of our Asian network and our ability to overfly Russian airspace. So relative to what we originally thought in terms of the recovery in Asia and our ability to overfly Russian airspace, think of it as another three, potentially four points of difference as we take the aircraft that were flying very, very long-haul routes and now have them fly what are much shorter-haul routes. They simply produce fewer ASMs, although a similar number of departures. Those are the two big buckets that represent a material difference there. relative to what we expect in the second half of next year. So we do plan on flying the full airline in the second half of next year, but those two buckets, you know, materially change the structure of our ASM productivity. And it's worth noting, you know, that we were going to get to this point on the RJs anyway in the United Index plan. This is where we were going, so this is an acceleration. So it does not change. Our 2026 ASMs, our CASM-X are the productivity of the airline then. And the second thing that I think is really important, the certain parts of the Asian network that have not come back, and we don't believe they'll be coming back in the near future, while they had very low CASM, they also had lower RASM. And so while we look forward to bringing these routes back, we look forward to bringing them back in such a way that they come back at a higher margin. And, in fact, if you look at our Asian performance and our Tratham performance in the quarter, you'll notice that's exactly what we're doing. So we think those are two moves. They don't change the endpoint at all, which is a critical part of the answer here, to where we'll be in 2026. The United Express part is an acceleration, and the long-haul global route is just a deferral given some of the geopolitical issues that we face today.

Okay, great. And just a quick follow-up, just the pre-tax target for next year and CASM guide, that assumes a pilot deal is done. Is that right or not? Thank you.

So our CASM numbers assume all the costs that we would expect for next year. Okay. Okay, thanks.

Yeah, it includes labor deals. Great. Thanks, Scott. Thanks, Jerry. Aaron, Drew.

Our next question comes from Helene Becker from Cohen. Please go ahead.

Thanks very much, operator. Hi, everybody. Thanks for the time. Could you talk a little bit about the new routes that you started, the leisure-focused Atlantic routes and how they're performing relative to expectations and whether or not that part of the strategic plan to increase capacity in other markets like that We'll continue.

Hi, Elaine. It's Andrew. Let me give that a try as well. You know, we started those routes at the beginning of this last season, and they're all new, and they're all spooling up. And one of the things I'll note is I think they all did incredibly well for their first few weeks of operation, including us never flying to those destinations in the past. When you look at our RASM guide, TRASM guide for the next quarter, And embedded in that is an acceleration of international RASM, you know, where we are spooling up and catching up, and it looks really good as we go into the third quarter. So we're pleased with how they're tracking. We wanted to try something a little bit different given where business traffic was heading in this summer, and we think it's going to be successful. And we think you can see that based on our Q3 guide where international RASM growth is accelerating.

Got it. Thank you. And then just on the Newark runway situation, how is that going relative to their plan and the construction at Terminal A that I think was also impacting operations? I'm not sure where they are relative to when they were thinking they would be finished.

Well, I'll let Toby correct me if I missed something wrong here, but... The runway construction is going to take one of the runways out of service for a few weeks in September. It's a big chunk. We're going to take 200 flights a day out during that time in September. So that's a reasonable chunk of our capacity. Obviously, the costs basically all stay in place when you do that. And we have our fingers crossed that while it's been delayed several times, that there won't be any more delays for the new terminal, which is a beautiful new terminal. It's going to be great for our customers when it's done. But that airport is you know, already got 10 pounds in a five-pound bag and trying to do it with one fewer terminal is a nightmare. And so hopefully it will be on schedule for the fourth quarter.

That's perfect. Thank you.

Thank you. The next question comes from Andrew DeDora from Bank of America. Please go ahead.

Hey, good morning, everyone. So, Andrew, I think you mentioned in your prepared remarks maybe some softer corporate bookings of late. How do you think the operational difficulties across the industry influence the way corporates are traveling or booking right now? I guess you or Scott, have you had any conversations with your big corporate clients concerned about the dynamic that's going on right now?

We have, and I can tell you there's a level of frustration out there, particularly with the London Heathrow situation, where we have a large amount of, you know, 22 flights per day out of London Heathrow. And this is clearly having some level of impact on bookings. That being said, you know, our bookings are still off the chart good going across the Atlantic, and our RASMs are accelerating. So we look forward to this getting resolved. But I do think it's having a negative impact on the return to business. And the short run, those headlines are just really disturbing to read. And we at United are, you know, taking the appropriate action to make sure that we can get our customers to where they want to be on time and safely, obviously. And we hope that these airports quickly catch up.

Got it. And just on your corporate business, sorry if I missed this in your prepared remarks, how much recovered was it in 2Q and Sort of what are your expectations as we head into 3Q in the back half of the year?

Thanks. It was 80% on volume and 75% on revenue. And while it is still improving, the rate of improvement has slowed for domestic. The rate of improvement for international still looks really good, even with the headlines about London Heathrow. So we're really excited, obviously, about the international network and how it's going to perform in the quarter. So, again, it is frustrating. As I said in my prepared remarks, you know, we weren't counting on to reach our target some type of heroic change in the current trajectory in September. While I do think there's some upside there for a bigger rebound in business based on the feedback we've gotten when the kids go back to school, again, our TRASM outlook does not count on a significant change. We're assuming it's going to be slow at this point. That's great. Thank you.

Thank you. Our next question comes from Savi Seid from Raymond James. Please go ahead.

Hey, good morning. Thank you. You mentioned, you know, regional shortfall is one of the factors impacting the 2023 outlook, though maybe not really different versus 2026. I think we've all been expecting labor inflation, but recently one of your competitors provided a very large pay increase that essentially eliminates the historical pay gap between regional and mainline pilots, which I thought was an important component of making the economics on those routes work with those small aircrafts. I was curious what your view was on the impact of this, assuming the rest of the regional industry also follows suit.

Sure. Savi, I'll say that, you know, this is a big change, but a change that we anticipated. So, you know, RJ ASMs used to be 7.5, I think, percent of our ASMs. As we head to 2026, think of it as 3.5 to 4 percent of our ASMs because the economics of this business were going to change. We didn't know exactly how and when it would happen, but now we know. And so I think we've prepared for this. We've planned for this. And we're not going to be relying on RJs as much as we used to because the economic profile of the aircraft has materially changed. And that means service to small communities is going to be different. Here at United, it means more mainline aircraft with lower scheduled depth. And we think that's a profit-maximizing opportunity. And we also think that our customers in those markets are going to appreciate the mainline aircraft at the end of the day. So, you know, we're on plan, but the size and scope of RJ operations and their profitability will have changed. And the smaller communities' ability to offer, you know, have differential yields that can support these high-cost structures will be stressed and strained to the point where we don't think it makes sense to fly as many RJs in the future as we did in the past. So this is a shift. We think it's a permanent shift. This is not a temporary, you know, cost increase for RJs. This is a permanent cost increase for RJs.

That's helpful, Andrew. And if I might follow up, just, you know, much of the United Mix plan is really kind of a lot about up gauging. And I guess, but do you have enough kind of small and narrow body aircraft then to address that regional market? Or, you know, do you have the right fleet mix to address it?

You know, as we looked at our fleet mix, and we can always make a change to it, and we looked at the profitability by aircraft type and what we need to do to hit our financial targets, we will simply have a different shaped network in 2026 than we did in 2018 or 2019. And again, very small communities will have less frequency but bigger aircraft, and we think that is the profit-maximizing opportunity. And so we are not anxious to jump into a 120-seat narrowbody. to fill this gap at this point. Obviously, we can change our mind at any time, but at this point in time, we think the max 10 and the 321 are the way to maximize our profitability, and we will make the appropriate adjustments to our network to make sure we can do that. And there may be some cities, and we've already shut down 17 or 18 because of lack of RJs, that we can't fly to. It's an unfortunate outcome of where we are, but that is what the outlook looks like at this point.

Got it. Thank you. Thank you. The next question comes from Jamie Baker from JP Morgan. Please go ahead.

Oh, hey, good morning, everybody. And Andrew, just continuing on Savi's topic, was scope relief initially envisioned as part of United Next?

United Next, in our plan, never had more than 255 76-seat RJs in it.

Okay. So I guess that would explain why there was no change in scope as part of the TA, right?

You know, we asked for what we need, and we collaborate to get to the right answer. And, you know, I'm going to say, you know, as a team, we figured this out. a number of years ago, and we got it right.

Okay, yeah, yeah, no, cool. Okay, no, I just wanted to double-check that. Second question for Jerry. Cutting planned growth and actually reducing capacity are two different things. Obviously, I'm not suggesting that United should be shrinking in the current environment, but my question is whether the operational strains, you know, the training pipeline, simulator time, you know, all the pressures that exist right now, does that make it harder or easier to actually reduce capacity if there was some need to do so, if that makes sense?

You know, those are temporary issues. And, you know, the key for us is ensuring that we have full utilization of all the aircraft on premises. So any aircraft that we have, we want to fly the appropriate amount of hours. So really reducing capacity is all about the fleet mix. And as we've said before, we have plenty of flexibility there. If Andrew decides he doesn't want as many aircraft flying, we will look at the retirement of the oldest aircraft, and we'll look at the flexibility we have on adjusting the delivery schedule and care of it that way.

Well, let me ask the question slightly differently, if I may. If you think in the past, the level of economic strain that had to be applied to an airline before they decided to reduce capacity, where does that bar rest today or relative to where it was in the past. It seems higher to me, but I'd like to hear what you have to say.

Jamie, I'll let you try on this. I think the constraint is more physical constraint. I mean, Andrew sort of hinted at it, said it in his capacity for us and everyone else in the industry is not so much about trying to maximize next quarter's profitability or margin. It's We would be more profitable if we were flying more right now. This is about physical constraints. The physical constraints on being able to fly are the current constraints. They happen to, at the moment, align with what everyone's worried about on fuel prices and the economy, but the physical constraints are the factor. Got it. Okay. Thanks for the call, gentlemen.

Take care.

Thank you. The next question comes from David Vernon from Bernstein. Please go ahead.

Hey, good morning, guys. So, Andrew, you mentioned you were encouraged by what you're seeing in bookings in 3Q. Can you talk a little bit more about how that's shaking up areas of strength or weakness and anything out of the ordinary relative to what you might normally see in a September quarter?

Sure. You know, we're almost two-thirds through the booking curve here for the quarter, so we have a lot of visibility into what we're looking at. And, you know, I think the first, the biggest thing I would say is we do see the acceleration on our international network across the board, which is great to see. You know, second, I'll really point out Asia. You know, Asia is leading the way. I think we're bringing that back in a way that it comes back more profitable than where we were in 2019. And for me, that's absolutely critical. to close in the margin gap that we had historically had of international versus domestic by bringing back Asia equal to the rest of it, or in fact, maybe even better. The other thing I would tell you as we go into September, which I think everybody is looking towards is this pivotal moment where we switch from less leisure-focused demand to more business-focused demand. As we go into the September month, I can tell you all of our curves are better than they were for July and August and even June. So as we approach September, we approach it better booked with better yields. And so we remain really bullish and optimistic. And we gave you, I think, a really fantastic Trasm guide for the quarter that September is shaping up really well right now. Obviously, we have a long way to go. But what I can tell you is the leading indicators right now are, I think, really positive. The only place where we see lower yields in the quarter are in a cargo division, and that's simply a reflection of a lot more wide-body capacity coming back into the marketplace, causing a little bit lower yield in that environment, but still substantially higher than where we were in 2019 by many times. So hopefully that gives you some color, but really good, great, and fantastic momentum from a Traverson perspective as we head into this quarter, in my opinion.

All right. Thank you for that. And then, Jerry, as we're taking down sort of capacity expectations or at least shifting some of the targets for when capacity comes in as part of United Next, is this going to have an impact on the timing of CapEx across the plan, or are you guys going to keep the fleet plan kind of as is?

No, we're going to keep everything as is. Now, having said that, as everybody knows, we don't have necessarily – 100% confidence in the aircraft delivery schedule, which is the bulk of the CapEx. So I would expect, my opinion is we're not going to take as many aircraft this year. Some shift to next year. Some of next year shift to the following year. So you'll see some of that. But everything else is on track. We need to make those investments now because the airline is going to be as big as we expected. in the timeframe that we laid out. All right. Thank you.

Thank you. The next question comes from Christopher Stephanopoulos from Susquehanna International Group. Please go ahead.

Good morning. So, Scott, you sounded fairly confident in your ASM guide for next year. You know, the guy assuming here a slowdown and of the domestic upgaging that you outlined last year in your plan, how much of that is realistically achievable in a recession? And should we assume any of the points? I think it was two points from new routes and frequency that those really are ultimately a moving target here or derivative of what happens with the economy. Thank you.

Yeah, I'll try. I'm not sure I'll get the question. I understand the question exactly, and then Andrew can correct me as well, or you can tell us if we didn't answer the question. I think the risk to our capacity guide for next year is Boeing deliveries primarily. And so we'll see. But, you know, we have attempted on this call, I think, to rip the Band-Aid off on what we think is realistic about capacity for the next 18 months and get to a baseline that we're going to hit. are clearly exposed to Boeing delivery delays. I think the point that is perhaps we haven't explained as well and somewhat is getting lost in all of this is a huge, there's so many moving parts in capacity in Chasm X, but a big part of it is two things that Andrew talked about. We have a lot less long haul flying to Asia, which lowers our stage length, and that is very low chasm flying. It's also low RASM flying. And the other thing is mainline airplanes are now flying shorter haul, which means lower utilization routes that used to be flown by RJs. That also has an increase in chasm. So a lot of what is happening is just the mainline airplanes are being used differently. They're not flying to Asia, and they're now flying short haul routes that are very high chasm. They also happen to be very high rasm. You can just lead across the industry, you know, think eight or nine quarters in a row on TRASM. Part of that is, you know, we're proud of what we're doing, but part of that is just the change in how the airplanes are flying and staging. So some of what's going on here is that switch, which we expected to happen, as Andrew said, over a longer period of time, you know, to sort of gradually come in between now and 2026, but now it's happening immediately. And that's a big headwind to CASM, and it's a big tailwind to RASM. I think you see that reflected in our margin results. You know, if you strip out things like differences in fuels or refineries, our results are at least amongst the best, if not the best kind of relative to 2019, our acceleration quarter to quarter is. If you look past the headline single statistic, I think you see what's most important to us is the margin development and that happening. But a lot of it is because of what is just the airplanes are being used differently. in the moment and in 2023 than we originally expected.

Okay. Great call. Thank you. And so, Scott or Jerry, second question. In a recession, what are the three or five data points you want on your desk every morning? Is it cash sales, cancellations? I'm just curious what those are and then versus or how they compare to what you look at every morning currently. Thank you.

I can start.

Sure.

I just look at Andrew's expression that tells me what I need to know.

Look, I'll give you an answer that you're not going to like, which is I look mostly at the same thing. Right now, the thing I look most at is what's happening operationally to us, because we are focused on the long term. We're going to have recessions, you know, they're going to happen. They end And, you know, I'm glad that Jerry has built us up a great, you know, set of liquidity and balance sheet. I'm glad we're paying down debt. But, you know, we're just nowhere close to, like, looking at those kinds of metrics. And because of that, we are staying – we will stay focused on the long term. We're not going to yank the airline back and forth. That's how you screw up because of what's going to happen in the next six months and For us, by far, by far, by far, our number one priority is running a great operation. Look, I'm really proud of the team. To be clear, you know, we were better in every operating metric that I look at than our legacy competitors. But that was in a tough environment. And it's hard on our team. And, you know, newspapers have it hard on aviation. While our team did prepare for it, and I think they've done a great job, and it's not good enough just to be better than the others. You know, we've got an even higher standard that we want for customers. And so the number one metric I don't only look at in the morning, I now look at it five or six times a day, is our operating metrics and how we're doing and how we're setting up for the future there.

Great. Thank you.

Thank you. Our next question comes from Sheila Kayalu from Jefferies. Please go ahead.

Hi, good morning, guys. Thank you so much. You've talked about 2023 pre-tax margin guidance being maintained at 9% with the implied TRASM to decelerate by eight points versus the current levels to keep that guidance. That's still well above 2019 levels. So can you maybe provide a little bit of color about how you're thinking about that, about the industry supply-demand environment in 2023? Okay.

I'll give it a try. There is a lot of uncertainty, in my opinion, about industry capacity next year. And I fully expect that we're going to hit our number. We've looked at it carefully. But I also fully expect that the rest of the industry won't. I don't even know what the numbers are for the rest of the industry at this point. In the normal year, we would know. We would have an educated guess. But I think it's going to be a relatively small number. And, again, as I said in my opening comments, when I look at GDP, where that's going to be, where I look at our capacity is going to be, and where I look at OA capacity likely will be, again, highly speculative at this point because I just think that whatever most airlines are saying they think they're going to achieve next year is probably significantly less than that number. We've ripped the Band-Aid off, as Scott eloquently just said. And, you know, I'm just not sure others have. But we'll wait and see. So we do think that the GDP ASM numbers match up to what we just described as the appropriate numbers to get to the tourism outlook.

Cool. And then I just wanted to follow up on the 777s just to clarify, as those come back in, you know, how does that change your incremental capacity? And does that have any impact on the cost structure?

Well, we've made a decision for the remainder of this year and the first half of next year that kind of overrides that. The 777, they're just part of the rest airline. There's a few of them not flying because they're waiting for their final maintenance retrofits to get back up in the air. But the bigger issue are the structural constraints that are applying to our business over the next few quarters. And that is causing us to underutilize all aircraft types. The 777 is just one of many at this point that are being underutilized. However, you know, as we said, we are pointing towards June 1st of next year for the summer of 2023 to get these aircraft all flying at full utilization. And that's what, as a team, we're 100% focused on. And that'll deliver the 8%, assuming that Boeing also delivers the planes to us.

Sure. Thank you.

Thank you. The next question comes from Duane Venenworth from Evercore ISI. Please go ahead.

Hey, thanks. Appreciate the question. Is it fair to say that the growth plan for next year is lower, but the capital plan is the same? I understand, you know, a lack of confidence around deliveries, but could we just set a mark for where you think total capex will be in 2023?

So the answer is yes. So, you know, aircraft deliveries are the dominant part of it. So non-aircraft I would expect runs about the same as this year, you know, in that sort of billion and a half range. We haven't done our capital plan yet, but just based on what we're seeing and sort of what we know we spend, you know, basically take aircraft deliveries and then add about a billion and a half of non-aircraft.

And so the existing, what is it, six and a half, seven, is the right way to think about it on the aircraft side?

No, it's higher than that. I'm sorry. It's about seven to seven and a half billion for next year. No, that's aircraft. Total aircraft is about seven to seven and a half billion.

Okay. Thank you. And then just on other revenue, you have good growth there relative to 19 despite no change fees. And so can you just comment on what are the biggest drivers to other revenue growth? You know, how much lack of change fees are you offsetting? And is there anything sort of non-recurring about that?

I think the simple answer is we're offsetting all of the change fee loss. which is with all the ancillary fees we do, particularly luggage and seats, and seats have been obviously just a boom. I give all the credit to our digital team and our app and how we're marketing those things, and we're accelerating on that front, so we're very excited about it. But the answer is it's 100%, and it's not something that's going to change in Q3. In Q3, in terms of some of the other revenues, cargo in particular, I think, We already talked about the yield issue there, but our ancillary revenues look incredibly strong.

Okay. Thank you.

Thank you. And at this moment, we will switch to take questions from the media. As a reminder, if you have a question, please press 01 on your touchstone phone. If you would like to be removed from the queue, please press 02. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, if you would like to ask a question, please press 01 on your touchstone phone. We have a question from Allison Sider from the Wall Street Journal. Please go ahead.

Hi, thanks. You guys, you've been outspoken on the issues you're seeing with, you know, staffing and other issues at air traffic control. And, you know, they've been fairly strong pushing back against that. I guess, you know, like how is the relationship with the FAA right now? Like is there any progress behind the scenes or, you know, is there any deterioration there?

So, look, we certainly have had challenges. And by the way, like, Everyone in the economy has had challenges. So that's not a criticism. But it's really, really important. The airline cannot run without air traffic control staff. But what I'd say is really encouraging, by far our biggest issues have been, by far, by far, Newark was the most delayed airport in the country in 2016, 2017, 2018, 2019. It's structural. There's only two parallel runways. 79 operations per hour is all the airport's designed to handle. And when it's scheduled at more than that, it's a problem. The good news is the FAA was really responsive. You know, when we pointed out the problems and the challenges, they, A, let us reduce the schedule right now by 50 flights per day, which we very much appreciate. It's led to huge improvement in performance at that hub and the ripples throughout the system. They've really gone to extraordinary lengths to make sure the Newark air traffic control desk is staffed, including, you know, overtime and having management employees sit desks and do things. And I forget the exact number, but, you know, 70-something percent reduction in air traffic control delays so far in July compared to where it was just a couple of months ago. So they've been very, very responsive. That's all you can ask from any partner, including the government. And so we're appreciative of that. And we have our fingers crossed that that is going to continue. You know, this is a challenge that affects them, that affects us, and we can only solve it together. And they are working together with us on the solutions.

Got it. So, I mean, do you feel like that whatever staffing issues that they have been facing, you know, some of those facilities have been addressed, or is it still an ongoing issue?

I think everyone is tight everywhere. Not unique to them. Everyone is tight everywhere. But the fact that they're focused on it, you know, is really important. And the fact that they're willing to go to extraordinary lengths when they do have higher COVID sick calls or something happen is really what is critical. You know, the U.S. economy broadly is probably not going to get to a place where we're staffed at comfortable levels for quite some time. But they're doing a good job of being responsive and that's the most we can hope for.

Thank you. The next question comes from Mary Schlangenstein from Bloomberg News. Please go ahead.

Hi, thank you. I wanted to see if you could talk a little bit about what sorts of supply chain issues you continue to face beyond any pilot shortages at the regional level. Are you still facing a lot of shortages of just basic equipment that you need on the planes every day, parts that you need every day? And if you see any indication of when those types of shortages might ease in the future?

Hi, it's Jerry. The answer is no, not really. Our supply chain teams have done a good job of preparing for that. We recognize where lead times were going to be extended, and so we've done everything, particularly for anything essential for the operation, to make sure that we were sort of ahead of the game on that.

And does that include provisioning supplies for aircraft and What about like airport personnel that affect your operation on a daily basis?

Yeah, look, you know, and I'm probably not the best person to talk about this, but there are, you know, certain parts of the country where we all know there are more labor challenges than other parts. So I wouldn't tell you that every airport is fully staffed, but, you know, we've been managing, I think, pretty well through the process. At the margin, let's say for food, we don't get necessarily everything we want all the time. We've had to make some changes, maybe one cracker instead of another cracker, different type of cheese, but that's not affecting the operation at all.

Thank you.

We have a question from Leslie Joseph from CNBC. Please go ahead.

Hi, thanks for taking my question. I'm just curious how you're thinking about the network for the rest of the year and into 2023, just given some of the softness in the corporate sector, Apple and other big names lately. And also curious where things stand with pilot negotiations now that it seems like the last TA is kind of on ice. So curious how that's going and how labor relations broadly are, how you characterize those now. Thanks.

Leslie, from a network perspective, you know, obviously the schedule is, I would use the word, the term thinner. They will be thinner in the fourth quarter and early next year as we have the capacity that we have available to fly reliably. So it will be a little bit different. We are appointed still a little bit more leisure-focused than we were in 2019. We also think that's appropriate until we see business return to 100%. And we also have the issues on regional jet flying from our express partners, as I said earlier, which are causing even thinner schedules in the smaller communities we serve. I don't think we have any more communities that we're going to have to cease service to for the remainder of the year based on the current plan. our operation prior to today. So it is a bit different of a network, and it's not our run rate network, and it won't be our run rate network until next summer.

And on the pilot question, I'll save my more substantive answer for our employees and our pilots. But the short answer, I think the important point is we created a unique partnership with our unions and have Great relationships with our employees. Our people feel good about the company where we're headed. We were the only ones to do a deal with pilots during COVID. We got a deal done in four weeks of negotiations with our pilots. The first airline to even come close to something. It turns out that there were a few things in there that I think enough of the pilots didn't like that we and the union agreed we ought to fix those things. And so this is not something that's on ice. We're trying to quickly get this back and get it back out to the pilots.

Okay. And if I could just ask one follow-up, where the booking curve stands now for leisure and corporate travelers and how that compares to early in the pandemic or even 2019?

What I would say is the booking curve today is very similar to the booking curve of 2019. They're really the same.

Thank you. Thank you. The next question comes from Lori Aratani from the Washington Post. Please go ahead.

Hi, thank you. I know Allison already touched on this, but I wanted to see if you could respond. I know that you've gotten some pushback from the FAA and concerns you've raised about their staffing and its impact on your operations. You know, they're sort of saying it's not us. Yes, we have issues, but it's the airlines, and the stats from the Bureau of Transportation Statistics seem to bear that out. So I'd like to hear your thoughts on that.

Well, first of all, I'd say all airlines are not created equal. When I've at least read their comments, they've been airline industry, and all airlines are not created equal. And, you know, we have staffed the airline up. We have 10% more pilots. You know, our issues – what we've had to deal with has been different than what others have dealt with, and I don't think – I've never heard them dispute that. I think if there's anything that we did that I – you know, that – we didn't mean to have it characterized the way it got characterized, was when we sent a note to our employees talking about 75% of our delays were from air traffic control delays, which is true, but normally it's 50% because of weather, because weather is included in all of that. And so that's kind of what you expect. And so the difference between those two, you know, it wasn't that 75% were air traffic control staffing delays and, you know, I don't think it read that way to our employees, but it certainly read that way to some people on the outside, and I actually apologize to Secretary Buttigieg for that because that's not what we intended. But there was an incremental set of air traffic control delays. It was due to staffing. We've read about it up and down the East Coast. It's not a secret to anyone. But the really good news is once we started talking about it, he gave the directive, and he's he's personally keeping up with what's happening in those challenged areas of the country on the East Coast. And we've seen big improvement, you know, in July so far, you know, even with like the issues that are, like Heathrow is a disaster. And, you know, with those kinds of issues, we're actually running a better airline than we did in 2019. So, you know, incredibly responsive and glad we had the open, honest conversation and appreciate the partnership and the ability to talk, openly and honestly and move forward together.

Good. Do you see, I know that you've said that they've been very responsive, and do you see this issue continuing, though, for the rest of the year into next year?

Well, look, I think the whole system is strained. I mean, there's tight staffing everywhere. I mean, that is the reason that we're pulling our capacity down and waiting to grow until the whole system catches up. It's not unique to the FAA. I mean, it's everybody. everything that touches, well, I mean, almost everything in the whole economy, certainly a big chunk of things that touch aviation are tight. And, you know, while you're theoretically scheduled, if it's a good weather day and nobody calls in sick, that everything can work, there is weather and people do call in sick. And sometimes the jet bridge breaks and the power goes out for 20 minutes and like stuff happens. And the system just doesn't have any buffer to deal with that. And that's why at its core, that's why we've pulled the schedule down to create more buffer, more resiliency for our customers.

Thank you. And now I would like to turn the call over to Christina Munoz for closing remarks.

Thanks for joining the call today. Please contact Investor Media Relations if you have any further questions. We look forward to talking to you next quarter.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.