United Airlines Holdings, Inc.

Good morning and welcome to United Airlines Holdings earnings conference call for the third quarter 2022. My name is Candice and I will be your conference facilitator today. Following the initial remarks from management, we will open the lines for questions. At that time, you may press pound two on your telephone keypad to enter the queue. 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.

Thank you, Candace. Good morning, everyone, and welcome to United's third quarter 2022 earnings 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 SEC by United Airlines Holdings and United Airlines for a more thorough description of these factors. Also, during the course of our call, we will discuss several non-GAAP financial measures. For 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 Commercial Officer Andrew Nassel, 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 the Q&A. And now I'd like to turn the call over to Scott.

Thanks, Christina, and good morning. It's great having everyone on the call today. I want to start by congratulating and thanking everyone at United for your hard work, dedication, and perseverance throughout the last two and a half years. Our people stayed focused on our unique long-term strategies. and we're now beginning to see the strong and differentiated results. Our operation is firing on all cylinders. In fact, based on most metrics, it's running better than ever. That isn't just better for customers. It also reduces costs and leads to strong financial performance that creates the foundation for United Next, really positions United to be the world's best airline. We recognize that the near-term geopolitical and macroeconomic risks and overall pessimism facing the global economy, including airlines, are unusually high right now. However, there are three industry tailwinds prevailing the COVID recovery for aviation and United that are currently overcoming those macro headwinds and we believe will continue to do so in 2023 in increasing order of importance. First, aviation uniquely is still in the COVID recovery phase. To take one example, Japan just opened last week. And regardless of whether you think demand for business travel will ultimately return to 100% or something less, it almost certainly is going higher from here. Second, there's been a permanent structural change in leisure demand because of the flexibility that hybrid work allows. With hybrid work, every weekend can be a holiday weekend. That's why September, a normally off-peak month, was the third strongest month in our history. People want to travel and have experiences, and hybrid work environments untether them from the office and give them the newfound flexibility to travel far more often than before. I'll bet many of you listening today have taken an extra trip or two this year because you can work remotely for a couple of those days. This is not pent-up demand. It's the new normal. And third, the strong demand environment is happening against a supply backdrop that currently has the industry 10% to 15% smaller relative GDP than it was in 2019. And the multiple constraints, pilot shortages, aircraft delivery shortages from both Boeing and Airbus, air traffic control saturation, and airport infrastructure constraints around the world are all real, and they are constraints that will take years to fully resolve. These three trends are why all airline revenues keep surprising to the upside, but they're also real and durable, which is why we're so optimistic about 2023 and the longer term, despite the economic challenges. And for what it's worth, you don't need to believe all three of those trends for estimates to go up. Probably any one of them will do though I happen to be confident that all three are already happening and are sustainable. And in that strong industry environment, United is uniquely positioned to benefit for the long term. United really did chart a different path through the pandemic than any other airline. Differentiated fleet and growth decisions, increased exposure to growing international markets, real technology changes to change the customer experience and run the airline more efficiently. Long-term investments in the infrastructure needed for growth, such as Newark Gates, are building 14 additional simulator bays during the pandemic, founding our own pilot training academy, and a cultural transformation to be fast, creative, innovative, and customer-focused. It is just one quarter, and we know we have a lot to prove, but our third-quarter margin results and fourth-quarter guidance with operating margins above 2019 are early indicators of both the absolute and relative potential of the new United Airlines I am very proud of the United team for executing incredibly well, and I'm confident that we're well positioned for success next year and the years to come after that. With that, I'll hand it over to Brett. Thanks, Scott. I also want to start by recognizing the entire United family for their hard work in the quarter. Our team never fails to pull together, and we couldn't be more proud. During the quarter, our operational performance set records. Our on-time arrival and missed connection rates were the best for a third quarter in company history when excluding the low flying quarters during the pandemic. We saved over 1,500 daily connections on average with our Connection Saver tool. This means over 137,000 additional customers got to their destinations on time. Connection Saver is a unique innovation and customer benefit for United. In addition, our team did a fantastic job helping our customers and their bags get to their destination as seamlessly as possible. In fact, our mishandled bag ratio in September was better than 2019 levels. Our daily controllable cancels, which are driven by maintenance or crew challenges, dropped over 95% in September versus what they were in January. With a reduction in these cancels alone, we were able to add 1% This provides a better experience for our customers, but also leads to much more cost-efficient flying. We look forward to continuing these trends into the final part of the year. Putting that all together, and despite all the challenges around the industry, this was the best third quarter operationally for a full schedule in United's post-merger history. Huge kudos to the team. One of the most significant changes for United operationally and for cost has been the return of the Pratt & Whitney Boeing 777s. As their grounding, we've had to make suboptimal operational and schedule adjustments that have led to a more complex operation. And the work required to return these aircraft to service created a heavy burden on our tech ops organization. For the first time this, for the first part of this year, we had over 500 of our technicians dedicated to this fleet in Victorville, California. with over 175,000 hours of work spent to get these aircraft back into service. This drove inefficiencies in our technician staffing with negative cost and operational impacts. The great news is that this work is behind us, and these technicians have returned to their bases, which has led to the improvement in our performance metrics. With these aircraft fully back in service, our fleet can be more efficiently positioned for both our operation and our customers. I'd like to thank the entire TechOps organization for their significant effort in returning these aircraft to service. We're proud that a career at United remains in high demand. This year, we're on track to hire 7,000 airport personnel, 4,000 flight attendants, 2,300 pilots, and 2,000 technicians. Momentum is high. For example, Ultimately, we expect to welcome 15,000 new team members this year and another 15,000 next year to support our United Mexico plan. And with that, I'll hand it off to Andrew to talk about the revenue environment in more detail. Thanks, Brett.

Trazen for the third quarter finished up 25.5% versus the same period in 2019, about 10% less capacity. September was our third best transit month in our history, excluding the low flying pandemic months. We saw a number of record revenue days that were more typical of a peak summer period than off-peak. In many ways, September, where we operated with an 86% passenger load factor, five points better than September of 19, was indicative of what we believe to be the new normal, where hybrid work gives customers the flexibility to turn any weekend into a short trip. And we believe because of that, the off-peak periods are now stronger. All parts of the network performed well in the quarter. First, across the Atlantic, United increased capacity by 22% versus the third quarter of 2019, adding 10 new cities and 18 new routes. We also pushed into new regions, becoming a relevant competitor to Africa for the first time. New nonstop service between Washington and Cape Town, in fact, will begin later this year that's subject to government approval. Atlantic Prasm increased 21% versus the third quarter of 2019, which we consider outstanding. United is now the largest airline across the Atlantic, where our strategic partnership with Lufthansa and Air Canada is working better than ever. Last week, we announced yet another Atlantic expansion plan for 2023 of nine new routes. A few weeks ago, we announced a new partnership with Emirates. This partnership will allow United to resume service to Dubai, the largest and best hub in the Middle East after a seven-year absence. Dubai is unique as a hub in the region as it has both significant local markets and a large amount of premium demand, but also massive connectivity. While our Pacific flying is our least recovered so far from the pandemic, we continue to expand capacity as economies open. Overall capacity in the region was down 59% versus 2019, and Pacific CRASM increased 41% versus 2019, and we continue to experience much stronger cargo yields. We'll be focused on resuming the bulk of our Pacific capacity, excluding China, in the next year now that Japan is fully open for business. We continue to build our partnership with Virgin Australia. We will begin new non-stop service to Brisbane from San Francisco in a few weeks. We're the only airline that maintained continued service to Australia from the U.S. during the pandemic, and now United expects to be the largest airline operating to and from Australia this winter for the first time ever. Latin American PRAZEN was up 20% on 4% more capacity than 2019. Domestic PRAZEN was up 20.4% on 10.5% less capacity versus 2019. Our domestic gauge versus 19 also increased 11% as we continue to replace regional jet flying with mainline jets. Gauge increases are being absorbed well without much of a negative impact on PRASM. Carbon volumes were strong even as we faced much more competitive capacity. Yields in the quarter did continue to fall consistent with our expectations relative to the pandemic highs that were 90% greater than 2019. The corporate business travel recovery in the quarter was about 80% of volume of 19 and stable over the quarter. While larger corporations clearly lag the recovery rate, we believe new network patterns and hybrid work environments are having positive and offsetting impacts on revenue. It's also worth noting that business traffic for long-haul segments across the Atlantic have recovered at a faster pace than domestic. It's our observation that a Zoom meeting is simply less practical in a global setting. We remain optimistic that business traffic will continue to get better from this point forward. Our traditional view on business traffic recovery rates relative to 2019 may now be obsolete measurement given the changes in how customers now travel in a remote work environment or business and leisure trips often are combined. New revenue segmentation efforts versus 2019 have been increasingly successful. Premium Plus, our new mid-tier global long-haul product is now 70% of our long-haul capacity producing yields that are twice that of the main cabin. Our efforts to better market and sell main cabin seats have also produced strong results, with seat revenue per passenger up 21% from 2019. September was a strong revenue month, and we are entering the fourth quarter with a lot of momentum, and October is on track today to quickly replace September as our third-best TRASA month ever, excluding the low-flying pandemic months. In fact, we currently anticipate a similar TRASM increase in the fourth quarter as we saw in the third of between 24% and 25% on between 9% and 10% less capacity. While I recognize recent headlines would otherwise indicate our revenue performance should be faltering, I hope this strong revenue outlook puts those thoughts to rest. I wanted to briefly address some of the recent changes on RJ operating costs. We expect that these recent cost changes to alter the balance of pilots choosing a career at United Express versus a ULCC. With competitive pay at United Express versus ULCC for the first time, we'll be better able to staff our United Express operation, albeit at higher costs. United Express pilots who join our ABA program can transition to a United million dollar job in four years, making it the best short-term and long-term career option. We do expect that given the overall pilot shortage today, at non-legacy carriers, it may take a while, probably until 2026, to fully utilize in our 300 to 400 RJs we'd like to operate by our express partners. Finally, a quick update on our Mileage Plus program. I have to say, every key indicator we measure is positive. We've seen a record number of memberships to date with more enrollment so far this year than all of 2021. Mileage reductions this quarter were the highest for any third quarter in our history. and new co-brand accounts were up over 25% year-over-year, and we saw the highest quarter of spend in the history of the program in the third quarter. Momentum is strong, and we expect 2023 to set new records as we continue to grow the program. I wanted to say thanks to the entire United team, and with that, I will hand it over to Jerry.

Thanks, Andrew, and a big thank you to the whole United team for achieving another quarter of profitability. As Brett mentioned, Our recent operational performance has been record-setting, and we believe the worst of the operational-driven cost pressures we've talked about on previous calls are now behind us. Importantly, we've completed all remedial work on our 52 Pratt-powered 777s, and the vast majority are back in service with the last few expected to be online by next month. On previous calls, we have noted the significant hazmatics headwinds driven by the grounded 777s. but it was more than just the capacity implications. We believe, as we pieced together a schedule with a suboptimal mix of aircraft, we also incurred a variety of direct and indirect costs in many of our operating groups as we waited for the return to service of a significant portion of our wide-body fleet. To put in context how impactful it is to have these aircraft flying again, our fleet was able produce over 20% more ASMs for mainline aircraft per day in the third quarters compared to the first quarter. This provides a meaningful improvement in our utilization, which is one of the primary drivers of improved unit costs. Looking at the numbers for the third quarter, we reported pre-tax income of $1.1 billion on an adjusted basis and an operating margin of 11.5%, also on an adjusted basis. This was one point better than our most recent guidance, driven by a combination of stronger revenue and better costs. Our third quarter CASMX was up 14.5 percent versus the third quarter of 2019. This is a 1.5 point better than earlier expectations. The outperformance was driven in large part by improved operational performance. A reliable operation is an efficient operation and a key to our strong unit cost performance today and for the future. As an example of how a strong operation benefits our costs, in September, we saw a 27 percent reduction in the premiums and overtime paid as compared to an average month in the first half of the year. That equates to a $35 million improvement in September alone. This reduction in premium pay is expected to reduce fourth quarter CASMAC by more than a point compared to the first quarter of this year. As we look into the future, retaining top-tier operational performance will continue to be a key element to our execution on costs. Looking ahead, we expect fourth quarter 2022 CASM-X to be up between 11 and 12 percent, with capacity down 9 to 10 percent versus the fourth quarter of 2019. As Andrew mentioned, we expect the revenue environment to remain strong throughout the fourth quarter. As a result, we expect our fourth quarter 2022 adjusted operating margin to be about 10%, exceeding the fourth quarter of 2019. An adjusted saluted earnings per share, a metric we are happy to talk about again, of $2 to $2.25. In the third quarter, we took delivery of 11 Boeing 737 MAX aircraft and one Boeing 787 aircraft. In the fourth quarter, we expect to take delivery of 20 MAXs and four 787s. Assuming these aircraft are delivered for the full year 2022, we now expect total adjusted capital expenditures to be $4.7 billion. Our most recent capacity guidance for next year assumed 179 aircraft deliveries from now through the end of 2023. There's certainly downside risk to that assumption, but under almost any circumstance next year, we expect to take delivery of more aircraft in one year than any other airline in history. We continue to work closely with Boeing and Airbus regarding our deliveries, and we plan to provide you an updated outlook for 2023 in January. Turning to the balance sheet, we ended the third quarter with over $20 billion of liquidity, including our undrawn revolver, which allows us to maintain flexibility as we meet the uncertainties that remain in our industry. We used some of our cash to purchase all of our aircraft delivered to date this year, and we expect to use cash for about half of the remaining deliveries in the fourth quarter. And remember that every aircraft purchased for cash today increases our pool of unencumbered assets, which further protects our future. In addition to aircraft purchases beginning in 2023, we will have the opportunity to prepay a portion of our debt at par. In the current rate environment, it is a tremendous benefit to have the flexibility to prepay debt, continue to pay cash for new aircraft, or access the financing markets opportunistically for new aircraft deliveries. And at all times, we remain committed to restoring our balance sheet and working towards our long-term leverage targets. I again want to thank the whole United team for all we accomplished this quarter. We are executing our plan and making good progress towards our United next goal. And with that, I will turn it over to Christina for the Q&A.

Thank you, Jerry. We will now take questions from the analyst committee. Please limit yourself to one question and if needed, one follow-up question. Candice, 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 pound two or hashtag two on your touchtone phone. Please make sure your device is unmuted to allow your signal to reach our equipment. Pressing pound two a second time will remove your line from the queue. Once again, if you would like to ask a question, please press pound two on your phone. Please hold for a moment while we assemble our queue. The first question comes from Michael Linenberg from Deutsche Bank.

Oh, yeah. Hey, great numbers. Good morning, everyone. I'm just one quick one here, right? You brought up, you know, 137,000 of saved connections during the quarter. I think you said 1500 a day. Can you just give us a sense of what that translates into savings from a reaccommodation cost perspective? I mean, are we talking about tens of millions of dollars here? Just trying to get a sense of this new technology and how it's helping improve your product. Thank you.

Mike, look, it's a number of things. Yes, the savings is in the millions, but more importantly, it's dramatically improves customer satisfaction. People are comfortable now flying United because they know we're looking after them.

For us, it's much more about MPS and the overall experience. Great.

And then... Are you there, Mike?

We lost you.

Please go ahead. Mike? Mr. Lindenberg, please go ahead.

Oh, sorry. I was muted. I'm back on. Just a quick one on capacity, maybe preliminarily for next year, Andrew. I know, Jerry, you said that January we're going to get an update on kind of how you're thinking about 2023. But, Andrew, the comment that you made that next year it looks like you're preparing for all of Asia Pacific to recover or be back in the plan with the exception of China. I think your prior number was that you would grow no more than 8%. Has that number now been adjusted down by a couple hundred basis points? Any sort of initial view on 2023 capacity? Thanks.

Well, Jerry won't let me tell you, so I'll have to wait. We'll let you know that in due course, Mike, probably in January. You know, what I'll say about Asia-Pacific, just to give you some color on that, is excluding China, in December of this year, our schedule as published is 89% recovered. So, we are already well on our way to flying the full Transpac schedule, excluding China at this point, as we enter into next year, early in the year.

Hey, Mike, the only thing I would add is that, you know, if you're looking at the most optimistic side of what we've said in the past, I would say there's a downward bias to that. If nothing else, You know, I mentioned 179 aircraft scheduled for delivery through the end of next year. I'll take the under on that number.

Our next question is from Ravi Shankar from Morgan Stanley.

Thanks, Morgan, everyone. So if we were to cross our minds back 12 months, I think you and the rest of the industry were sort of struggling with an environment where you were seeing very peaky peaks and very trophy troughs. And I think in your commentary, you sort of indicated that what's happening right now is the exact opposite where even the shoulder seasons are actually kind of picking up and kind of running at similar to almost peak levels. And you also spoke about like a permanent structural change in the leisure and corporate traveler. What does all of this mean for the way United's going to like, you know, build your network and your fleet over the next three to five years? Do you need to make any structural changes to adapt to this new normal, or do you think that you can make it work with the current system?

Well, I think this new normal actually really allows us to become more and more efficient. For example, Tuesdays and Wednesdays are not as much of a trough as they used to be in a traditional week. For holiday traffic, holiday traffic is now spread out more, so it doesn't necessarily peak as much on one or two days. It actually spreads out across a few days, and we see that time and time again. And we also see like secondary holidays are incredibly strong, not just the primary holidays. And ultimately what this could mean is that we operate a less peak schedule. And a less peak schedule we think comes with really enormous efficiency gains and that the marginal cost of an ASM in February is very different than that in July. So a lot more to come on that subject, but I think a really interesting opportunity for United as it transitions from a very peaky schedule to something that's less peaked.

Great. And just a quick follow-up. You said a couple of weeks ago that you expect 2023 transatlantic to be 10% above 2022 levels. If you can just kind of unpack that a little bit more, kind of are you seeing signs in the data that gives that confidence or kind of just what gives you confidence in like a nine-month outlook given the current macro? Thank you.

I don't think I gave that number. Somebody else may have. But look, you know, we announced a number of new routes, I think, just last week going across the Atlantic. Our partnerships are doing really well. Quite frankly, where the dollar stands is incredibly useful from a U.S. origin point of view for transatlantic travel. And this season was incredible based on the numbers we've seen. This fall is also incredible based on everything we're seeing. So just it's full speed ahead across the Atlantic. and we are very bullish on the outlook, not only there, but across our entire global network. There's just a lot of good indicators across the entire network. Once economies open, traffic rebounds very quickly, and we expect to see that in Japan over the coming months.

Next, we have Helene Becker from Cowen. Thanks very much, operator. Hi, everybody. Thanks for the time. Can I just ask a question about the routes that were added this past summer on the North Atlantic? A lot of them were leisure focused and I just wondered how they compared versus your expectations and whether all those routes are coming back next summer or if some of them were below expectations, the new routes that you announced last week, are they kind of replacing them?

Sure. We announced a number of new routes for this past summer, and all of them but one will be coming back for next summer. So I think that just tells me we had a pretty good success rate going across the Atlantic. And so we're, again, we're bullish across the Atlantic, and all but one will be coming back for next summer.

And then are they, just a follow-up on that, are they... Can you talk about relative to system average? Are they better or worse than system average?

I won't give you all the details, Helene, because I don't want all my secrets out, but I will say that one or two of those routes we added were our best routes across the Atlantic.

Next, we have Steve Trent from Citigroup.

Good morning, everybody, and thank you very much for taking my question. Just one for me, I was curious how you're thinking about the Star Alliance going forward. I mean, not to say that you guys are leaving Star or anything like that, but it was intriguing to see your new alliances with Emirates and Virgin Australia, and one of your South American partners seems to be getting involved with Abra. So just sort of on a high level, I'd just love to hear your thoughts about how you think about these partnerships alliances outside of your sort of traditional networks? Thank you.

Sure, I'll give it a try. You know, first of all, our alliance, particularly going across the Atlantic with the Lufthansa and Air Canada is first and foremost, that is gigantic. It's the number one alliance across the Atlantic. And we have the best partners and the best hubs to fly to in Europe. And that is and will continue to be our primary focus. I just want to be clear on that. And, of course, across the Pacific with ANA, down to the South Pacific with Air New Zealand. You know, these are all things we focus on every day here and are key to our global network. That being said, the Middle East was the way we use the term, a white spot for United. You know, our global gateways support all kinds of markets across the globe. And when we looked at the opportunity to do a partnership with Emirates and It did fill in this white spot and allowed us to access a lot of destinations that we could not otherwise access with our existing partnerships. And so that motivated that. And the same is true in Australia where Virgin Australia has a fantastic franchise. We're so excited to partner with them. We were already the largest airline to Australia. Now, I hope to be not only the largest airline to Australia, but the most profitable airline to Australia. And I think that comes with the strong network we have and great partnerships across the board, definitely with Virgin Australia. So we'll continue to look for opportunities that don't interfere with our core strategic immunized alliances. um and that's what these two things uh in my mind represented um uh quite frankly at this point united's global network is pretty comprehensive uh i'm not sure there's many more of those out there in the world but we'll keep looking oh that's super helpful really appreciate the time thank you again our next question is from jamie baker from jp morgan

Hey, good morning, everybody. So, Jerry, the sequential drawdown in the air traffic liability was larger than I would have expected. I'm just trying to square that with the strength in bookings. So how do I reconcile these two metrics?

It wasn't that unusual. It was just seasonal. As we get back to the sort of the normal booking trends that we see over time. So I don't see anything unusual there.

Okay. It was just the sheer dollar magnitude that surprised me. But you're right, if I look at it as a percentage of traveling revenue, I suppose it's not that unique. Second question. So, Scott, there's an airline business model that I would describe as predicated on an abundance of cheap capital, an abundance of aircraft, an abundance of pilots, and a pilot wage arbitrage. Oh, and seating density. So how should we think about that business model in an environment where none of that, save for density, seems to exist any longer?

Everybody in the room is worried about what I'm going to say. I'm sure I'm going to be restrained on this call. We feel, like, obviously super optimistic about where United's headed, but recognize that the market isn't there with us quite yet, and I was going to be restrained. But that's what's read me. Look, I think there's a huge change that's happened that's not appreciated yet. You know, I will perhaps be even more pejorative. I described that business model as a Ponzi scheme. because it is predicated on growing 15% to 20% a year. The only way you keep your cost low is 15% to 20% a year growth, and that is now going to be impossible. I mean, look, I get others are going to get on conference calls next week and say this is a temporary issue. There is a real pilot shortage that is real. It's going to take years to resolve. It's not the only one, by the way. Boeing and Airbus are probably two to three years away from getting back to producing airplanes at the same rate. The air traffic control system, You know, they do a great job at the FAA of trying to manage the system. But we have fewer controllers in the United States than we had 30 years ago. We have about triple the operations. That works sort of okay in September. It does not work in July. And it's not their fault. They do incredible work in the FAA to put their fingers in the dice and try to do their best to manage day to day. but they've been pulled in so many directions. They've had to do drones and space launches and so many more people working on certification and aircraft issues without their budget going up. And until Congress authorizes more controllers, that is going to be a hard constraint on the operations of all airlines during the summer. And so there's just no airline, including us, that's going to be able to grow at 15% to 20% a year anymore. And, you know, I think that's a real advantage for us at United. It is a real challenge for those business models. The whole business model is predicated on three things. One, growing 15% to 20% a year. Two, jamming people in like sardines. And three, it's not nickel and diming them, $50 and $100-ing them to death with add-on fees that they don't know until they show up at the airport. And I think that's a doom

Our next question is from Scott Group from Wolf Research.

Hey, thanks, Maureen. I'm wondering what the better Q3, Q4 CASM means for next year. At this point, do you see more upside or downside risk to the plus 5% guidance on CASM for next year?

Hey, Scott. So, we'll provide obviously more color in January, but what I can tell you right now, As I think I said in my prepared remarks, these numbers just increase the confidence we have in hitting our numbers for next year. So I think that's the way to look at it. And the fact that we are confident in our ability to hit our pre-tax margin target, I think, says a lot.

Okay. And then, you know, just on this idea of like the new normal, so if you're right that there's more leisure demand and better off-peak performance, but perhaps maybe there's less business travel, so what's the net impact of more leisure, maybe less corporate, less peaky schedules? What's the net impact of all this on long-term margins?

Well, I think so far, and you can see by our results over the last 90 days and our outlook for the next 90 days, we think it's a pretty good trend. So, obviously, I would say that it's positive for margin. There's still a lot more to come. And, you know, I have to say that the, you know, business traffic will continue to get better from this point. Should you keep going or keep going? Okay. And so I'm optimistic that all of those like headwinds that United Airlines faced in the pandemic are still in the transition period to tailwinds, and particularly the coastal gateway impact. I think we still have a long way to go, particularly on domestic traffic from our coastal gateways. So I think there's a lot more upside.

Our next question is... Conference recording has stopped. I'm so sorry about that. I'll have that turned off for you right away. Our next question is from Dwayne Fenigworth from Evercore ISI.

Hey, thanks. Why don't we start right there? On corporate recovery, can you offer some thoughts on recovery by market or hub in the U.S.? How would you mark to market or speak to the momentum of the recovery in, say, a New York versus a Chicago versus a San Francisco. And Andrew or Scott, I'd just be really curious, as you look into the future, would really appreciate your thoughts on kind of the Bay Area and how travel patterns may have changed there and kind of, you know, the upside you see into next year.

Yeah, I'll try with a little bit of color here if Scott wants to add in. You know, I will say we track this by hub. We track this by industry vertical. And, you know, the ones that are the biggest for United Airlines are, in fact, the ones that trail the most. So tech trails the most and professional services trail the most. And yet our results, I think, are leading the industry. So I think we've quickly and affirmatively adapted to this new environment. That being said, I still think those are going to recover. And in particular, I'm convinced they're going to recover on global long haul at a faster pace than the recovery on short haul domestic. And I will say, even in the last few weeks, while it has been a radical change, there is a positive slope to the recovery rate that was, I think, really nice to see. So from that perspective, I will say that business traffic in these three coastal gateways in New York and San Francisco still trail that of the interior hubs on average. This conference is being recorded.

Only the main conference is recorded.

And that's why as we go forward, as those tailwinds, you know, get stronger, and we do believe they'll get stronger, you know, I think that uniquely benefits United. given where we are, given we're doing fine today with these new dynamics, I think we'll just do better in the future.

Appreciate those thoughts. And maybe a follow-up for Jerry on the 179 aircraft you plan to take between now and the end of 2023. How much of that financing is in place? How much do you still have to do? And how has your expectation for, you know, cost of capital changed? I mean, Jerry, you've seen a lot of these cycles. So We haven't seen rate momentum like this. How are you thinking about sort of supporting that aircraft book, you know, over the balance of the next couple years? Thanks for taking the questions.

So, good question, Dwayne. So, you know, it's too early to, you know, tell you our entire plan for the mix of financing or paying for cash for next year's aircraft. So, more to come on that will remain, as I said, opportunistic. Yeah, there's no question we're in a higher interest rate environment. But keep in mind that the financing portion of ownership costs for a new aircraft is such a small fraction of the overall cost of that aircraft and the benefit so overwhelms that. Even in the current interest rate environment, it really doesn't have a dramatic impact on us. You know, sure, I love doing double ETCs at 3%, but double ETCs at 6% or a little bit higher, you know, that's what we used to do seven, eight years ago. So, there's nothing new here.

Our next question is from Connor Cunningham from Milius Research.

Hey, everyone. Thank you for the time. Just on the business travel recovery, you talked a little bit about it. What is actually under – what is your assumption for business travel in the fourth quarter that's underpinning your revenue guidance? And then can you just speak to just the international volume side? That sounds great, but I think there's still some work to do on the yield side, and my guess is that that's a pretty good tailwind into 23. So just any high-level thoughts there would be helpful.

Yeah, we – when we did the forecast, it's pretty much flat. So, we're not expecting a significant recovery on the traditional way we measured it. I'm not sure that's the right way to measure it anymore, to be clear. So, we'll be agile on that as we go forward from this at this point. Okay. And then, just to get you back in line. Yeah, I didn't finish your question. I think your perspective is somewhat correct there. We've seen incredible strength in the new Premium Plus cabin and in the Coach cabin. We've also seen really good strength in the Polaris cabin, but not as good, I have to say, as the back of the airplane. And so as that business continues to come back, you know, we will hopefully and likely see, I think, further strength in the front section of the aircraft. Again, the numbers are pretty downright strong from a load factor point of view, but the more leisure-oriented nature of some of the Polaris traffic today does fly at a lower yield than had traditionally been in that cabin. So as that returns to normal, however fast or slow that occurs, that will continue to provide, I think, more of a tailwind going forward.

Okay. And then just to piggyback on Scott's question earlier, just the you know, bending the cost curve, all that stuff, we're trending in the right direction, it seems. And just from a high level, I know there's a lot of unknowns on the capacity side, but when I think about the buckets of the headwinds and tailwinds as we go into 23, you know, less disruption costs, less 777 maintenance, but, you know, pay is obviously trending higher, regional expense. Just can you bucket any other, like, high-level things that we may be missing out there as we think about 23 overall? Thank you again.

I don't think you're missing anything. You know, the inflationary pressures are there. I think we're pretty comfortable that we have a good handle on that, and that's been incorporated into our thinking all year. You know, we have, you know, the tailwinds from, you know, the return of the 777s, the tailwinds from, you know, this record-setting operation that we have going on. you know, there isn't any magic to it. I think we've been pretty clear what all the components are.

Our next question is from Dave Vernon from Bernstein.

Hey, good morning, guys. So, Andrew, I wanted to follow up on that point you made about running a less peaky schedule. You know, if I look back sort of historically, or think back historically anyway, first and fourth quarter load factors that drop off in those . Can you hear me? We can now. Try again.

We got the first sentence or two that you cut out after that.

Sorry.

So I guess, Andrew, I'm trying to dig into this idea of running a less peaky operation and wondering if the quarterly drop offs from sort of 3Q to 4Q, 1Q, if that should be a little bit more moderate kind of coming out of the pandemic because of some of the changes you're making in terms of scheduling the airline and just building to the new normal.

Exactly true. In fact, one of the good examples will be our European schedule. For this winter, we would use to, you know, cut off Tuesday or Wednesday, a non-peak day on many of our transatlantic flights from New York. And this winter, if you look at them, I think a higher percentage of them operate daily throughout the entire week. And the other example is the first two weeks of December. So after Thanksgiving, but before Christmas, you know, we're already booked to 2.3 points ahead of of where we expected to be and versus 19. Again, that off-peak period is doing swimmingly well. And so, more and more, we'll digest all this and to the extent we can run an operation that has fewer peaks in it, particularly having the summer peak not be so much higher than the rest of the year. That creates a dramatic amount of efficiency because when you think about it, we staff our pilot workforce for the flying that we do from June 15th to like August 15th. And if we can staff for a much larger chunk of time, that should be incredibly efficient.

Outstanding. Thank you for that. And maybe just as a quick follow-up, can you help us kind of orient where we are on premium product inventory, sort of from the hard aspects of service in terms of seats and cabins, that kind of thing, from where we were in 2019? I'm just trying to get a sense for how much more runway there is in that premiumization. I know it's a long runway. There's a lot of room to catch up, but I'm just trying to think, like, is there any way

Well, you know, you have to separate it domestically versus internationally. On the international front, we have almost all of our aircraft that have gone through the Polaris mod. I think we're down to one or two 787s that need to be done. And the bulk of our 767-400s, we have one or two of those done. And so we'll be done with that Polaris mod shortly versus 19. We also have the premium plus cabin, which just had been started but was not significant, and today I think it's about 7% of our long-haul ASMs. So that is out there. I think the big tailwind comes domestically as these United Next aircraft arrive with dual-class cabins plus a large premium section in coach. And as you can already see from our per-seat sales, which I think we're up about 20% of the quarter, as we replace single-class RJs with those jets, I think there's a lot more of that ancillary revenue to come. So I think domestically, we've only just started would be my guess. take on that front. Internationally, I think our premium distribution from the seats in Polaris is at this point pretty stable given where we are just finishing up the reconfigurations.

We will now switch to the media portion of the call. If you would like to ask a question, please press pound two or hashtag two on your touchtone phone. Please make sure your device is unmuted to allow your signal to reach our equipment. Pressing pound two a second time will remove your line from the queue. Once again, if you would like to ask a question, please press pound two on your phone. Please hold for a moment while we assemble our queue. Our first question comes from Allison Sider from the Wall Street Journal.

Hi, thanks so much. Scott, I wanted to ask you about your comments on the FAA and ATC staffing. You mentioned talking to Secretary Buttigieg earlier this week. How are those conversations going? Because publicly he still tends to say most of the problems come from the airlines. Are things more constructive behind the scenes?

Well, I had a really good call with the Secretary on Monday, as you referenced, because this is really – you know, something that we need to help them solve. It's not the FAA's fault. And so I think, you know, when you talk about construction, that's probably the most important point. You know, this is an agency that's done an incredible amount of work, you know, over the last couple of decades. And they've been asked to do far more. I mean, the asks of the agency, the number of people at that agency that are working on drones, space launches, aircraft certification programs is just massively higher than it was before. And they were forced to fund that by taking headcount out of the operational budget, the day-to-day operational budget. And it's hard to just look at the basic fact that there's fewer controllers today than there were 30 years ago. That sort of doesn't pass the smell test for anyone, I don't think. But that's not their fault. That's an issue that we have to help them solve in the FAA reauthorization. So that's what the conversations are about. How can we help you solve that? I've had one conversation with someone from the administration, three conversations with people on the Hill just in the last 24 hours about that subject. And our goal in the airline industry is to help solve that problem. Because it's a supply problem. until you fix the fundamental issue, it's going to be challenging. It mostly works okay in a month like September, but we're going to always have struggles in a month like July until we get staffed up, you know, to a level that's more reflective of the amount of airline operations that are in the sky today. And so I think we're aligned between us and the FAA on the need to work in a bipartisan way on the FAA reauthorization bill to increase their strapping, you know, to be commensurate. And by the way, this is about, we've made hundreds of billions of dollars investment in infrastructure. This is the human infrastructure that goes along with all of that concrete that we're building. You know, we had this Sunday in Denver where we have 114 operations per hour, beautiful, big airport, four parallel runways built, but wound up with, something like a couple of sick calls, and the airport operation on clear blue sky Sunday was cut from 114 to 68. Like, we don't get to use our infrastructure unless we have the human capital to support it, and this is about getting the human capital to support all the infrastructure that we're building.

Our next question is from Leslie Joseph from CNBC.

Hi, good morning. Just wanted to clarify, you said 15,000 new employees this year and 15,000 next. That's way ahead of, I think, what the goal was by 2026 with United Next. How much of that is to replace people retiring and maybe some attrition? And then also, if you have any update on the pilot negotiations, do you expect to raise the pay compared with the original TA that was sent out? Thanks.

Yeah. Hi. This is Bret Hart. Our hiring is actually right on schedule in terms of what we expect across the next four to five years with respect to United Next. And I'm sure some of that is to replace people who are no longer with the company, but the vast majority of that is geared towards meeting our overall plan. And by the way, we're having no we are convinced at this point that we are definitely an employer choice. So we'll have no issues meeting our needs and we expect to continue to hire as we said earlier. With respect to the pilots, our discussions with our pilots are obviously ongoing at the hour with our other unions. So we don't typically comment much beyond that, but we're continuing to to make what we hope will be progress in that area.

Next we have David Shaper from NPR.

Hi, good morning. I'd like to ask a question that's kind of maybe been a little bit addressed already, but that is about the holiday travel season from a passenger perspective. What are you expecting in terms of demand for holiday travel? How is it different? I think you've addressed this a little bit about being a little more spread out. And also the pricing. With prices going up, not just airline prices, but prices for everyone, how do you expect the demand to continue, especially with fears of not just inflation but a recession?

Sure, I'll give it a try. You know, we – we are definitely seeing a lot of strength for the holidays or obviously approaching the Thanksgiving time period. And our bookings are incredibly strong. And as I said earlier, and as you indicated, the bookings are a little bit different this year and that they're more spread out across multiple days than they were on any single day, very, very close to the holiday in the past. So that definitely is a new travel pattern for us. And we're also seeing that develop for the Christmas time period as well. You know, the price points, you know, there definitely is this inflationary pressure in the country, and everybody can see it as they're booking a hotel room and booking or even going to the grocery store, quite frankly. And we're managing our prices to make sure that we can produce the results we need to do and also provide great value and benefits to our customers. You know, we're putting back in a lot of that money back into the customer itself as we invest in these new aircraft, which are going to be fantastic, whether they're with CPAC videos or Wi-Fi on board and so on and so forth. So I'd like to think that money is going to great use to create a much better experience on board United Airlines, as well as, as you can see, in great operations to make sure we're getting our customers for Thanksgiving or Christmas or any time home to see grandma on time with their luggage as they expected.

I will now turn the call back over to Christina Munoz for closing remarks.

Thanks for joining the call today. Please contact Investor Media Relations if you have any further questions, and we look forward to talking to you on the next quarter. Thank you, ladies and gentlemen. This concludes today's conference.