United Airlines Holdings, Inc.

Good morning and welcome to the United Airlines Holdings Earnings Conference Call for the first quarter 2023. My name is Silas and I will be your conference facilitator today. Following the initial remarks from management, we will open the lines for questions. At that time, please press pound two to enter the question 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 the 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, Silas. Good morning, everyone, and welcome to United's first quarter 2023 earnings conference call. Yesterday, we issued our earnings release and investor update, which is available on our website, 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. Unless otherwise noted, we will be discussing our financial metrics on a non-GAAP basis on this call. Please refer to the related definitions and reconciliations in our press release. For reconciliation of these non-GAAP measures to the most directly comfortable GAAP measures, please refer to the tables at the end of our earnings release. Joining us on the call today to discuss our results and outlook are Chief Executive Officer Scott Kirby, President Brett Hart, Executive Vice President and Chief Commercial Officer Andrew Nacella, and Executive Vice President and Chief Financial Officer Jerry Laderman. In addition, we have other members of the executive team on the line available to assist with Q&A. And now, I'd like to turn the call over to Scott.

Thanks, Christina, and good morning, everyone. I want to start by thanking the entire United team for delivering exceptional operation this quarter. Given our hub geography, United almost always has the most flights impacted by weather air traffic control delays of any U.S. airline. But despite this in Q1, we had the lowest mainline flight and seat cancellation rates of any airline in the country. That's important not just for the obvious customer and brand impact, but it's also the key to hitting our planned capacity and CASMX target. I'm going to leave the detailed quarterly results and guidance to Jerry and Andrew, but today I'll take a few minutes to talk about four emerging themes that have come to the foreground and I think are important to the United Investment case. One, there appears to be a clear change in seasonality that is causing peak leisure demand months, March through October, to be even stronger, while months that were historically reliant on business demand are weaker. That particularly impacts January, February, and the first half of November and December. We believe demand is just structurally different than it was pre-pandemic, and we're still figuring out that new normal. Second, as we've expected all along, long-haul international is moving into the lead over domestic. Andrew will give more details, but this is a multi-year structural change based on aircraft retirements and pilot downgrades at essentially all long-haul U.S. airlines around the world except United. But my third theme is an appropriately cautionary point. Our guidance and everything we're discussing today is our base case scenario based on what we're seeing right now. And what we're seeing right now is still strong demand. At airlines, the macroeconomic weakness is being offset with a counter trend of consumer spending continuing to rebalance back to services. And by the way, we still remain below our historical GDP relationship, arguably indicating more room to run in the revenue recovery. However, it seems clear that the macro risks are higher today than they were even a few months ago, as demonstrated by the banking scare with Silicon Valley Bank. We saw an immediate drop in close-in business demand that lasted for about two weeks, but now appears to have recovered. Our base case, therefore, remains a mild recession or soft landing, which is consistent with what we're currently seeing in our bookings. But we agree that the tail risk is higher than normal. While we feel good about our 10 to 12 full-year EPS, If the economy softens further, we've prepared for it by, A, having a lot of flexibility in the business on capacity if needed, B, improving our balance sheet to withstand a near-term issue with approximately $19 billion in liquidity and having reduced our total debt, including pension, by $4.6 billion over the past 12 months. And C is actually my fourth theme, which is controlling what we can and hitting our CASMX targets in this new, different, and more challenging operating environment. We can't control what happens with the macro economy, but we can and are doing a great job of controlling our costs. You can't run your airline like it's 2019. It's different and harder now. Cancellation rates are the leading indicator of forward capacity and, therefore, CASMX, and United is leading the way on this front. Jerry will discuss some of the year-over-year tailwinds that will drive lower CASMX in the back half of this year, but we only need CASMX to be approximately one point better in the second half of the year to hit our full-year target. We remain solidly on track. To wrap up, over the last three years, our industry has confronted a rapidly changing environment. United hasn't been perfect, but we've gotten a lot more right than wrong. And on the big picture, we've gotten it right and took the steps in the last three years to thrive in exactly this environment. International is stronger. The operating environment is more challenging, which means reliability is harder, but also at a premium for producing bottom-line results. And we have confidence that our gauge growth and execution are keeping United uniquely on track for our near and long-term CASMX trajectory. That's not to say that there aren't real near-term risks, because we all know there are. But we feel really good about the strategic setup and tactical execution here at United. I want to again thank the entire United team for their hard work this quarter. We have a busy summer season ahead, and I look forward to achieving even more operational and financial records. With that, I'll turn it over to Brett. Thank you, Scott, and thank you to our United team for their hard work this quarter. As Scott mentioned, we continue to see the benefits of running a strong operation. In the first quarter, United led the industry with the lowest seat cancellation rate despite around 20 percent of our flights being impacted by weather, the most out of any of our competitors. This was the first time since 2012 that we led on this metric. Additionally, United was first or second in the quarter for on-time departures at nearly all of our hub locations, including those heavily impacted by winter weather like O'Hare and Denver. Our airline is built to run well and recover fast, and we expect our operation to reflect that in the peak summer season. We continue to navigate the challenges in the current operating environment, specifically constrained industry infrastructure. United is working with the U.S. Department of Transportation and FAA regarding operational disruptions and air traffic staffing challenges. The FAA's decision to consider commercial air traffic when managing the growing number of space launches, combined with the FAA's recent move to give carriers more flexibility in how we all fly in and out of New York area airports, shows that the FAA is listening to feedback and finding ways we can all work together. In March, we took steps to reduce our

and DCA by around 30 daily departures over the summer period to provide the airspace relief requested by the FAA.

The schedule reductions are largely regional jet focused and will be redeployed at our other hubs, minimizing the capacity impact to the system. It is our hope that this will drive improved customer experience while flying United in the New York area and throughout our network. 30,000 employees represented by the International Association of Machinists. We're voting on the agreement expected to be completed by May 1st. We are very proud of the work that our team does daily to support our operation and create a positive travel experience for our customers. Regarding other labor agreements, a new contract with our technicians represented by the IBT was ratified in January. We are still in active negotiations with our flight attendants, represented by the AFA, and our pilots, represented by ALPA. As a reminder, we reached an agreement with our dispatchers, represented by CAPCA, last year. We look forward to sharing further updates in the future. I once again want to thank our team for being the best in the industry. We remain confident in our outlook as we leverage our industry-leading operational performance and network advantages. And with that, I'll hand it over to Andrew to discuss the revenue environment.

Thanks, Brett. First quarter top-line revenues of $11.4 billion finished consistent with our updated guidance of up 51 percent versus 2022. TRASM was up 22.5 percent year-over-year. While we were below our initial guidance, we expect that our TRASM performance in the first quarter will be top tier. As expected, other revenues in the quarter, while strong, are growing at a slower rate than passenger revenues. the opposite trend we saw last year and over the course of the pandemic. While Calgary revenue declined 37% year-over-year, it remains 39% above the same period in 2019. MileagePlus Other Revenue had yet another strong quarter and was up 25% year-over-year, driven by our strategic partnership with Chase. United's credit card continued to set records in Q1, including the highest first quarter ever for card spend new accounts up over 30 percent year-over-year, and account attrition near historic lows. We also welcome Richard Nunn to the United team as the new CEO of MileagePlus. As Scott indicated, we believe we're seeing different revenue seasonality for the United Network post-pandemic, and that change did impact our relative margin in Q1. New seasonality positively impacted March through October of 2022, where new remote work schedules stimulated business, particularly premium leisure. Ultimately, if these trends continue, we expect to be able to operate at a more consistent level of capacity between March and October in future years. However, we believe the new seasonality negatively impacted Q1 in January and February, along with the first halves of November and December. With United's relatively small presence in the Caribbean and Florida, where demand is usually strong in Q1 and over the winter months, The United Network is more reliant on business traffic that is not fully recovered to pre-pandemic volumes in these periods. United's global network and east-west strengths are simply better aligned to March through October post-pandemic where leisure and premium leisure business compensates for less traditional business traffic. As we head into Q2 2023, we are tracking ahead of 2022 in all the ways that we measure business traffic, a really good sign for revenue momentum. While it's still early on, we do see corporate business for May and June tracking well ahead of the previous months at this time. The business traffic rebound we're seeing is strongest in global long-haul markets, where a video conference is not a substitute for an in-person meeting. The recent banking scare did initiate a slowdown in demand across multiple customer types in the quarter. Impact on business demand for domestic flying was the most significant. Impact on domestic leisure was smaller, and impact on overall international demand was actually minimal. In the weeks after the scare, we saw business demand relative to the same period of 2019 decline by eight points after steady progress experience through the quarter to that point. This trend has since reversed back to pre-bank and scare levels. In Q2, we expect total revenue to be up 14 to 16 percent versus the second quarter of 2022, with capacity up approximately 18.5 percent. Our expectations for revenue in the second quarter continue to show strength with approximately 8 to 10 percent growth in domestic revenues and almost 30 percent for international. Second quarter bookings and revenues do look good versus the same point in 2022, with book deals up 13 percent and 31 percent above 2019, respectively. For 2023, we expect to expand international flying by approximately twice the rate of domestic, leaning into the favorable supply-demand balance that we expect. We'll be focused on extending United's leading position across the Atlantic and to Asia and the South Pacific. We believe this capacity deployment plan will set us up to meet our financial objectives given the stronger revenue outlook we are seeing for international flying and the rebound in Polaris Cabin. We'll also pass two critical milestones by this summer, with all United International wide-body jets having the latest generation Polaris seat and a premium plus cabin. While further return to corporate business will help profitability in all quarters, we're not assuming that will occur in our 2023 revenue outlook. United's scheduled capacity this summer is up 39% in the Atlantic, but industry capacity, excluding United, is estimated to be down about 1%. United will operate an average of 207 daily flights across the Atlantic this summer. Across the Pacific, United plans to be up 14 percent, excluding China, with industry capacity down about 7 percent, both versus 2019. Overall, international ASMs will be 46 percent of United's capacity this summer versus 43 percent in 2019. Yesterday, we announced another set of capacity increases to the South Pacific ideally timed for the southern summer later this year. These include the first ever nonstop service from San Francisco to Christchurch, a new service from Los Angeles to Auckland in partnership with Air New Zealand, and to Los Angeles to Brisbane, where we'll connect to our new partner, Virgin Australia. Rebuilding connectivity back to our original 2019 standards in our mid-con hubs in Dulles will also be a long-term focus for our domestic wine. The loss of regional jets during the pandemic without mainline jets to backfill them, cause connectivity to suffer. Peak bank sizes at our high-flow hubs are down 10% to 20% versus 2019. We were able to build connectivity and margins in 2018 and 2019 when we increased bank size connectivity, and we expect to execute a similar strategy in 2023 and 2024. However, this time around, we'll do it with the appropriately sized 737 jets instead of single-class regional jets. As requested by the FAA, we've reduced our planned flights from New York City this summer, including to and from Newark. We believe this will be the first time in years that Newark will operate within the airport's capacity abilities in most hours and consistent with the slot allocations. We're optimistic that between the new terminals and capacity consistent with the runway's capabilities, the customer experience will improve dramatically, and we appreciate the partnership with the FAA to make this happen. United will gain up to 17 new mainline gates in Terminal A and Newark this summer versus 2022, which will improve Newark's reliability and customer experience. Along with the new Newark gates, we'll open a new United club in Terminal A and in Terminal C later this year, adding 38,000 square feet, and we'll be up 161% in club space relative to 2019. As impressive as that club space measurement is in Newark, Our club members in Denver will experience the opening of three United Clubs over the next year that include a total of 97,000 square feet, a 149 percent increase versus 2019. Construction of our new gates in Denver is also almost complete and will have 90 gates up from 66 we had in 2019, which we expect will allow us to dramatically increase bank sizes and connectivity in 2024 and 2025. At United, we remain focused on our high ground, structural strengths focused on global long haul, correcting connectivity issues in our mid-con hubs that surfaced during the pandemic, and of course, gauge, increases that are consistent with our large hub markets. Our capacity plan for this year remains in place without adjustment as we operate with strong operational results. With that, I wanted to say thanks to the entire United team, and I'll turn it over to Jerry.

Thanks, Andrew, and good morning to everyone. Let's start with our first quarter results. Our pre-tax loss of $256 million was in line with expectations and at the better end of our updated guidance issued last month. We saw losses in January and February due to seasonal weakness, but March turned solidly profitable. Our first quarter fuel price of $3.33 came in at the lower end of our revised guidance range. This was still about 14 cents higher than our expectation at the start of the quarter, due to a spike in jet fuel prices in late January and early February. Turning to non-fuel costs, our first quarter CASMX came in slightly better than our revised guidance range at down 0.1 percent versus the first quarter last year. Our operational performance in the first quarter was truly exceptional, and our CASMX beat is largely due to the cost benefit of a reliable operation. On the balance sheet, we ended the quarter with approximately $19 billion in liquidity. We continued to leverage the flexibility provided by our cash with financing opportunities and paying down debt. We generated over $3 billion in operating cash flow in the first quarter, the highest for any quarter in United's history, and we produced free cash flow of over $1 billion. Over the last 12 months, our total debt, including pension liability, has declined by approximately $4.6 billion, and we remain on track to meet our 2023 target of adjusted net debt to adjusted EBITDA of less than three times. Looking ahead, we expect second quarter CASMX to be flat to up 2%, with capacity up approximately 18.5%, both versus the second quarter of last year. Strong cost performance underpins our confidence in the earnings trajectory of the business, and in the second quarter, we expected just the diluted earnings per share of $3.50 to $4, with a fuel price of $2.80 to $3. As noted in our investor update, this fuel price is based on prices as of April 12th. As others mentioned, our strong operational performance in the first quarter sets the tone for the remainder of the year, and is key to our conviction in achieving our CASMX targets. For the full year, we continue to be on track to keep CASMX approximately flat versus 2022 with non-fuel unit costs in the second half of this year declining versus the second half of last year. To give context as to why we expect CASMX in the second half of this year to improve on a year-over-year basis versus the first half of this year, it's helpful to consider the 2022 cost baseline. With COVID still significantly impacting the business in the first half of last year, we have certain unique headwinds in the first half of this year when comparing costs on a year-over-year basis. Here are two notable examples. Revenue in the first half of 2022 was much lower than the second half of 2022, which meant that distribution costs were also much lower in the first half of last year versus the second half. This drives the year-over-year comparisons for the first half of this year to be immensely higher than the second half of this year. A similar phenomenon exists with maintenance expense. As Omicron abated and the recovery took hold, we ramped up our maintenance activity in the back half of 22 to more normalized levels. Again, the difference in year-over-year costs are much more muted in the second half of this year versus the first half. So, simply put, the two items represent a one- to two-point CASMX headwind in the first half of this year, which won't exist in the second half. These drivers, along with strategic cost management, gauge growth, and running a reliable operation, support our expectation that we will hit our flat CASMX target for the year. When combined with our revenue outlook, we remain confident in our trajectory towards $10 to $12 in adjusted diluted EPS for the full year, whether we face a mild recession or soft landing. As we have left the starting gate for our United Next plan, I'm encouraged by the progress we've made, not only financially, but in our operation and across the entire organization. While we continue to live in uncertain times, I know that we will successfully manage everything under our control as we continue on a path to reach our full-year financial objectives. 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 community. Please limit yourself to one question and, if needed, one follow-up question. Silas, 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 to enter the queue. Please hold for a moment while we assemble our queue. The first question comes from Catherine O'Brien from Goldman Sachs. Your line is unmuted. Please go ahead.

Good morning, everyone. Thanks for the time. So, you know, there's been a lot of investor concern recently around a domestic slowdown, so I think I'll just get right to that. I know United's built to lean into the international strength, but can you just help us think about what's driving the domestic unit revenue performance to underperform international, you know, at least based on, you know, first quarter versus 19? Is there a shift in leisure demand to international from domestic that might be exaggerated right now post-pandemic? Is that international business is stronger, you know, preparing works, something else? And then I saw you had another record first quarter build in the air traffic liability. It would also be helpful just to talk through how much you have on the books, domestic versus international, for this quarter. Thanks so much.

Sure, Catherine. You know, we're getting this question about domestic strength a lot, and we should really address it. You know, the way, when we go about thinking about it, how to describe the conditions of this Q2 case, We have to recall Q2 of last year. Q2 of 2022 was the best domestic tourism quarter ever for United, with tourism up 25% versus Q2 of 2019, which, by the way, was a prior record holder. We simply sent a really hard comp for Q2 of 2023. And also, last year at this time, international markets were not widely open, so travelers, in my view, selected domestic trips out of caution, just creating unprecedented demands relative to the number of seats available to sell. This year's conditions are different. International travel is more or less completely open, and we see customers clearly excited about taking a long-haul trip. Domestic capacity is also now comparable to 2019 levels. So, here are the facts. You know, domestic ASMs at United will be up about 10 percent in Q2 2023 year-over-year, and our TRASM outlook for domestics will be, you know, negative low single digits from what I've said today. Total domestic revenue should finish well above 2022 given our TRASM outlook, on capacity growth of about 10 percent. We're currently booked about 10 percent ahead in gross revenue at this point compared to last year, and we're about 54 percent into the booking curve for the quarter. I just don't see these facts as weak when revenue is on target to again break the record and TRASM is likely to be just a bit behind an amazingly strong 2022. In summary, when Q2 2023 is in the books, It will likely be our second best domestic travel quarter ever with record total domestic revenues. The only thing negative I think I can say is that as good as domestic looks, it's just not matching global long-haul revenue outlook, which is very strong, and where United is focused a majority of its capacity. Melody, yeah. On the ATL, I think it's seasonally moving in a normal way. I don't know if Jerry wants to add anything else on the ATL question.

Well, Katie, your question about international versus domestic, you're actually the first person to ask us that question, so we'll follow up with you.

Okay, thanks, Katie.

The next question comes from Jamie Baker from JP Morgan. Your line is unmuted. Please go ahead.

Hey, good morning, everybody. I'm just chuckling at Jerry's response to Katie there. On the ATL, Jerry, the build obviously helped with free cash flow generation in the quarter. Presumably, the ATL will incrementally moderate in the second half, as it often does. Do you still think you can cover this year's $9 billion in CapEx and generate positive free cash flow?

Yes, Jamie, I think we can.

Okay, fair enough. Second to Andrew, you know, relative to the international component, you've got a lot of new route activity. Could you speak to sort of like same-store sales or same-store RASM or revenue, I guess, relative to those new routes, and how does it ramp to profitability in all of these new markets compared to that in the past? I mean, are new markets... maturing much faster, or does it take about the same amount of time as it ever did? I'm just trying to think about the read-through as some of these trends normalize next year.

For global long haul, there's virtually no spool-up right now, Jamie, because the supply-demand equation is just not what it's ever been in the past. While United's supply across the Atlantic and Pacific is dramatically up, And we're happy it is dramatically up, obviously. Industry supply is down. So what I would tell you is that the new routes come in very quickly with very strong profitability, which is why we keep adding them. That being said, in terms of same-store sales, I will say that London Heathrow is probably our weakest at this point because there is a large amount of capacity in London Heathrow relative to the rest of the world, and we've grown there. And our connections within Europe in our key hubs have not fully recovered, just like they haven't domestically. And so we actually do see some relative weakness in certain parts of the global network off of a strong base. But the new routes to your question are just coming in with home runs on day one.

Thank you, gentlemen, for the answers. Take care.

The next question comes from Connor Cunningham from Milius Research. Your line is unmuted. Please go ahead.

Hi, everyone. Thank you. Just the 2023 cost x rate seems pretty encouraging. I know you mentioned maintenance and distribution as being a main driver from first half to second half, but it still seems to me that you're holding incremental costs. I mean, that may be the cost of doing business right now, but just curious if you could talk about what potentially rolls off next year as we start to think about CASMX there. Thank you.

So I'm not sure I would call it rolling off, but keep in mind, next year, one of the benefits we're really going to start seeing is that growth in mainline gauge, you know, as the aircraft continue to come in. You know, that process is really just starting this year. So next year, we get the full run rate of, you know, the larger gauge aircraft and take even more next year. So when you're looking sort of where the tailwinds are next year, gauge is one. And the comps year over year are going to be better. You know, I think this year is really finally getting to the run rate of the post-COVID sort of, you know, full operation. So I think as an industry, we're done with a lot of the surprises we all kind of saw coming out of COVID with, you know, some of the cost pressures. So I think from a cost side, the business has become more stable and a little more predictable.

Okay. Okay, that's helpful. And then just on the evolving booking curve and, you know, seasonality that you've been talking about, just curious how you're going to combat those challenges going forward. I mean, Delta's mentioned they're talking about looking at, like, overbooking and, like, tinkering with inventory. Just curious what the strategy is at United if there is one to combat, you know, those changes in the booking curve. Thank you. Sure.

Well, you know, we think we clearly have the best RM system in the world, by the way. That's what I'll start off with. But, you know, while there's been a small change in the number of tickets not flown in the quarter due to the increased flexibility created when United eliminated change fees, it's our view that it's not really material and it's fully accounted for by our RM systems. And I'll add on to that. Our no-show rate is lower as well, and we will not be changing our overbooking levels at this point.

Okay. Thank you.

The next question comes from Savi Saif from Raymond James. Your line is unmuted. Please go ahead.

Thank you. Good morning, everyone. Just a question on the max deliveries. It looks like you had three more deliveries than the prior plan in 1Q, but for the full year kind of slipped a little bit. Just curious how you're feeling about confidence on the max deliveries, especially given the recent news.

Okay, Savi, from what we know on the recent news, we don't think that's going to have much of an impact on us. Certainly won't have an impact on second quarter. And I think you may have seen this yourself, is Boeing's gotten back on track on delivering aircraft. The issues that they had over the prior few years, they've really managed well. And the impact from what we know today for the full year just will be minor.

That's helpful, Zeri. And maybe along those lines, just to follow up on the fuel efficiency, there's a little kind of surprise by kind of what we saw here in the first quarter, maybe a little bit less than what we've seen last year. What's your expectation around how that trends kind of going forward, especially kind of given that that's another part of the kind of the cost benefit in the United Next plan?

Well, as we start seeing more and more of the MAXs, we'll start seeing that improvement that we've sort of talked about on United Next. Remember, we've just started taking delivery of those incremental aircraft, and there'll be a nice pop in that as well once the MAX 10 delivers at some point.

So just from a critical mass standpoint, when do you think roughly that is based on what you know today, I guess?

Yeah, it starts to kick in next year, critical mass, maybe the year after.

Okay. That's very helpful. Thank you.

But you're just going to see the trend, you know, quarter by quarter. All right.

The next question comes from Mike Linenberg from Deutsche Bank. Your line is unmuted. Please go ahead.

Oh, yeah. Hey, good morning. When I look at your sort of loads from fourth quarter to March quarter, I mean, you can see that seasonal hit. And, Andrew, when I saw that, I sort of thought maybe it had to do with a higher no-show rate, but you sort of just addressed that, that that is not an issue. As you add more service to places like New Zealand, Australia, South Africa, Brazil, et cetera, we should see improvement in that, right? Maybe you never actually are able to get to the level of, say, an American or Delta from a seasonal perspective, but to some extent you should be able to mitigate that as we think about the seasonality. Is that kind of where we're headed? Do we see that really start to narrow versus the industry?

It's a good question, and our intent is to get it to narrow. But we're simply smaller in Florida due to a lot of reasons that can't be addressed in a matter of a few quarters. They have to be addressed over years. And so while our goal is to narrow that gap in Q1, I don't think, to be blunt, we're going to be able to eliminate it. Clearly, the introduction of counter-seasonal flying to the South Pacific definitely helps put it in the right direction, and we'll be looking for more opportunities, and we'll be looking to grow Florida, I think, faster than probably most of our competitors because we're just so relatively small. But ultimately, I do think Q1 is going to continue to be our weakest quarter, and a recovery of business traffic in Q1 will do the most to help our relative Q1 results.

Okay, thanks. And then just sort of as a follow-on and tied to that, when you look at the announcement that you did make yesterday, I mean, it seems like it's going to need a decent amount of additional capacity. And when I look at your fleet this year, I think you took two 7.8s in the March quarter. It does not look like we're going to see any more wide bodies coming in. How are you funding a lot of that new service later this year? Should we assume that maybe China's not going to come back as much? Are you going to pull from I'm just trying to figure out where you're going to get the aircraft, because some of these routes require more than one airplane just to do daily round-trip service.

It definitely was quite a few aircraft heading towards the South Pacific. What I would tell you is that we just seasonally reduced Europe, and we would otherwise put many of those widebodies into our domestic system and this year our maintenance. And this year those aircraft will be flying to the South Pacific, which we think is their best use. In regards to China, you know, we continue to be stuck at four flights per week. We are preparing to fly more than that, but have been unable to get that done so far. But hopefully later this year we will be flying more to China, and we have the aircraft to do so if the conditions allow us to do so.

Great. Thank you.

The next question comes from Duann Fenningworth. from Evercore ISI. Your line is unmuted, please go ahead.

Hey, good morning. I wanted to ask about one of the themes Scott started the call with on flexibility, and maybe a follow-up to Mike's question just there, but first on seasonal shaping capacity. Given the new normal, is there a greater emphasis recently on seasonally shaping capacity And how does maybe lack of regional lift or lack of ability to kind of flex up on regionals limit your ability to do that, if at all?

It's a really good question. And I am hopeful that after further evidence that we'll be able to operate a more stable schedule all the way from March through the end of October, which I think will definitely benefit our cost structure having less of a peak. However, we're not there just yet. I think we need to make it through this year. We need to see how the remote work schedules continue to play out. We need to, in particular, see how this September and this October do. They were fantastic, obviously, last year. And I think that will help us validate for next year whether we actually change the seasonal shape, as I just described. And hopefully we can. but we're not ready to really jump into the deep end of that pool today. So we will continue to peak the airline in July as we normally do, and we'll see where we go from there. In terms of regional jets, the lack of regional jets has definitely hurt our connectivity. This is an issue. I talked about it, and we're very focused on rebuilding that connectivity with the right jets. going forward. And in fact, you know, we don't intend to ever go back to the fleet of approximately 600 regional jets we had in 2019. We think the economics have changed. We think the business has changed, and we need to change with it. That being said, you know, on the good news front, the regional jet pilot situation has recently, in our mind, stabilized. We're no longer losing pilots at the same rate we were earlier, very early this year or last year. And the production of block hours in our regional jet division at the end of this year will be consistent with the production of block hours that we started the year with. And I can tell you that our original budget for that was not that. We thought we would continue to see deterioration. So the good news there is the regional jets are going to be able to at least temporarily help us boost our connectivity as we wait for all of our mainline jets from Boeing to deliver over the next two or so years.

Thanks, Andrew, for that detail. And then just sticking with the flexibility theme on capacity and the idea that you could kind of take capacity lower if the environment warranted, you know, how much lower could you take it, I guess, relative to the high teens, 20% in the back half? And just conceptually, are we solving for margins this year or are we solving for chasm? Thank you for taking the questions.

I don't think we're ever solving for chasm. We're solving for margin and, of course, the 10 to 12. So that'll always be our focus. And, you know, we're going to maintain the flexibility. You know, like I said, I'm pretty bullish about the international environment, and that's going to generate the large lion's share of our ASM growth this year. And I expect international to be strong all the way through the end of October. And so far it shows that. It's still early, obviously, when we look out that far, but we're very optimistic. And domestically, you know, Jerry set us up with a really good fleet plan where we have a significant number of older A320 and A319 aircraft that we could easily fly less or we could put on the ground if we thought that was necessary as we solve to reach the right margin and right EPS targets that we have for the year.

Thanks for the thoughts.

The next question comes from Helaine Becker from Cowan. Your line is unmuted. Please go ahead.

Helaine Becker Thanks very much, operator. Hi, everybody. Thank you for the time. Two questions. One, did you say what pension contribution would be this year? And if not, could you? And then the other question I had was just on UnitedNext and where you are in 23 versus the plan and what progress is on maybe some of the bigger items. I think you just addressed, Andrew, the regional jet and the narrow-body shift and mix, but maybe connecting smaller cities or connecting bank changes or something like that. Thanks.

Hey, Elaine. Yeah, we did not say anything about pension. Nothing's changed from our recent disclosures. We expect no pension contributions this year. Our pensions are in good shape. both with the pension calculations that can be made and interest rates having nicely reduced the liabilities, we wouldn't expect any pension contributions actually for a couple of years.

Oh, that's great to know.

On the United Next comment, as I indicated a bit earlier ago, my number one focus domestically is this connectivity issue. We can clearly see it when we look at our RASM by flight, by market, that we're missing a lot of connectivity relative to where we were. And so as we go forward, we're going to be very focused on rebuilding that connectivity and getting the bank sizes back to where they were hopefully in 2019. But it is going to take some time. But we're optimistic just like we did it in 2017 and 2018. that we're going to do it again, and it's going to be very accretive to margin, profitability, and, of course, to RASM as we build back the connectivity. So it is a really important focus of our domestic flying, and we're ready to get that implemented as soon as possible.

That's very helpful. Thank you.

The next question comes from Ravi Shankar from Morgan Stanley. Your line is un-muted. Please go ahead.

Thanks, everyone. I think despite the tough macro outlook, pretty clear what you got, you're expecting that things are fine for now, but there's high probability of a tail risk event. Can you help us with what data points you're looking at to determine if these tail risks are either receding or materializing? Are these kind of airline specific data points or these broader macro data points and if the latter kind of, what are some of those data points you're tracking?

Well, maybe I'll start and talk about it from a business traffic recovery and what we're seeing in there. Because I do think one of the most common questions I get is, is business traffic recovering and what is it going to look like? You know, and I, first of all, I wonder whether the old methods of measuring business travel will be the same in the future. But for now, it's all we really have to really benchmark against 2019. I will say that as we look at business traffic three different ways, the first is from larger corporations that have a contract with United. The second set of demand is from agencies that specialize in business traffic. And the third is based on ticket attributes. The third is clearly the most encompassing view, as it includes small and medium-sized businesses that don't have an agency or don't have a contract with United. So in Q4, the revenue recovery rate was between 70% and 85% for these three categories. In Q1, the revenue recovery rate for these three measurements ranged from 85% to 97%. And for the first two weeks of April, the recovery ranged from 95% to 101%. I think this data in the last two weeks of April was a surprise to us as we've seen more conservative measurements start to approach 100%. The fact that large corporations are getting close to 100 percent is a nice tailwind to United. As many of you know, this is a critically important component to our revenues. I'll also say that the recovery in global long-haul business is a few points ahead of domestic, and all these measurements are just a good sign that our planned international revenue increases or capacity increases are moving in the right direction. We obviously need more time to see if this trend will hold, But what I can tell you in the last week or so after reviewing this data, I've become a lot more positive, even as many of the headlines continue to predict a recession. As I said in my opening statement, the trends for May look ahead of March. I can also confirm in absolute dollars, the last 14 days have been the best booking days for business traffic revenue that we've seen since the pandemic. I'll also add, since this step up in business demand is very recent, we've not incorporated it into our revenue outlook for the quarter.

That's incredibly helpful. Thank you for the color there. And since my follow-up question was going to be about SMB versus Enterprise Corporate, I'll switch it up and ask you about the cargo business. Obviously, a small portion of the business is probably very volatile, given that that was one of the bigger kind of pandemic era winners. How are you seeing that evolve through 23 and 24, and what's the normalized level there?

Yeah. So, I mean, cargo stepped down in Q1. It stepped down exactly what our plan, still well ahead of 2019, which is nice to see. But we are seeing very low prices, low yields across the system, particularly outside of United. I think we've done a great job of holding yields where they're at through our really the best cargo team in the world, in my opinion. But not only is air freight challenging now, but also sea freight, where rates are incredibly low. So, you know, we're holding our own. I think, again, we're executing consistent with our plan, and we've got this baked in for the rest of the year. We do expect to see more and more pressure on cargo yields going forward. But the United team is executing in an amazing way. Our relative size to our primary competitors, you can see it in the numbers. And so I'm still actually... bullish about the business relative to 2019. But look, it's, you know, last Q1 in particular, we reached an unbelievable high based on where we were with the pandemic and COVID. We didn't expect we would be able to re-achieve that number, and we didn't. But again, we're on plan.

Thank you.

The next question comes from Sheila Kyoglu from Jefferies. Your line is unmuted. Please go ahead.

Good morning, everyone, and thank you. Scott, I wanted to ask you maybe a cost question. You've been fairly outspoken about airlines needing more employees for the same level of operations, and your ASMs per employee are now just 3% below 2019 versus 6 to 7 in the second half of 22. And presumably, there's some advance hiring as you're preparing for new aircraft. Is there room to further close the gap versus 2019 on this basis as we think about ASM mix and new aircraft deliveries?

Well, I guess we'll see. But I feel really good about what we've done with running with higher resources than we did pre-pandemic. It's leading to the best operation that anyone in the country has run, the best operation, frankly, that we've ever run. That's great for our customers. That's great for our brand. I also think it's turning out, at least right now in this environment, to be the lowest chasm outcome. that by being able to run a reliable operation, the most expensive thing to do is cancel the flight, and being able to run a reliable operation is what is giving us the best CASM results in the industry and giving us confidence about CASM results going forward. So I think we're at the right place at the moment. It's obviously very, you know, if the operating environment gets easier down the road, it's obviously easy to adjust. or two, and you're right back to where you were. So easy to adjust, but I feel, you know, I'm really proud of how the team has done operationally, and I think it has been the lowest chasm outcome we could have had by running reliable operations.

And if I could just ask a question about your premium performance, which was pretty good. Premium relative to 2019 up 25% compared to total domestic up five. You know, can you break that out in any sort of way, whether it's RASM or yield performance, how we should think about the continued growth there.

David Wilson- Sure. I mean, I've been really happy, actually, with our progress on the premium side in all of our cabins, but particularly for Polaris. We've been just making a ton of progress in the Polaris cabin, given the rebound in business traffic, but we still have more to come. In March, for example, our load factor was up 10 points year-over-year and five points versus 2019. We sold a lot of seats, but we sold business travel seats, accounted for seven points down year-over-year, and premium leisure traffic compensated for that by being up seven points. So it just offset it, but that came at a lower yield. So we're carefully also trying to keep the increased premium leisure demand and revenue created since the pandemic while accommodating more and more of traditional business traffic. There are lots of puts and takes with this given our load factors, but we do think that there's potential to get this done, particularly as we continue to integrate the new 737s, which come into our fleet with a large amount of premium seating. Most of our growth is tilted towards premium seating at this point, particularly as we retire the single-class regional jets from the network. And so, well, as I said, I think we're just hidden on all cylinders on this front. And the progress we're seeing in Polaris in particular with higher load factors backfilling temporarily, at least with premium leisure, and ultimately as long-haul business traffic, as I said earlier, is coming back faster, we were optimistic that we're going to get Polaris completely back to where it was in terms of relative profitability margin later this year.

Great. Thank you.

The next question comes from Scott Group from Wolf Research. Your line is unmuted. Please go ahead.

Hey, thanks. Good morning. So when I look at domestic capacity for the second quarter, it's back below 2019 levels. It's only up marginally from Q1, which is, you know, a lot less than normal. When you go back to the plan from the beginning of the year, is this a change in how you're thinking about domestic capacity? Is this a sort of a one-off quarter, or is this more of a multi-quarter, more prolonged view of domestic capacity?

You know, I do think it is a little bit lower than Q1. I think you're absolutely correct on that. It's where the numbers shook out. We clearly leaned as hard as we could, as quickly as we could into global long haul. which really turns on in March and April. And that's what shook out for domestic because we thought that was the best place to put the capacity. But you should see a little bit more domestic ASM growth in the second half than what we're seeing in the second quarter.

Okay. And then I know it's early. You talked about next year another focus on mainline gauge. Any early preliminary thoughts on how you're thinking about overall capacity growth in 24?

I don't think we're prepared to give our guidance for 24. You know, we're excited to continue implementing United Next. And most importantly, for domestic, we're excited to make sure that we rebuild the connectivity as quickly as we can back to where we were pre-pandemic. And I think that's our biggest driver of domestic RASM next year. And, you know, that's really all I can say at this point.

Thank you.

The next question comes from David Vernon from Bernstein. Your line is unmuted. Please go ahead.

Hey, thanks, guys, and thanks for fitting me in here. Two questions for you guys on the new seasonality. Andrew, can you maybe talk a little bit more about some of the short-term challenges and opportunities you're dealing with from a revenue management perspective, things like overbooking and how you're sort of managing yields? with this sort of shift in customer behavior, which seems relatively new. And then, Scott, I'd love to get your long-term perspective on what do you think United might need to do a little bit differently if we're going to be relying more on the leisure market? You know, things like do you still get the same bang for the buck out of like a Polaris lounge, for example, if this shift continues longer term? Thank you.

Sure. You know, what I would say is the booking curves have adjusted. They're both The international and domestic are booking further out. The international is more extreme than domestic. And so we are, you know, RM systems have adjusted for this very, very quickly, and we're booked ahead in our global long-haul system based on the change in the booking curve. Domestic has also moved out. There's, I think, four points greater outside of 21 days than there is inside of 21 days right now. And, again, RM systems have adjusted for that. That being said, we are managing to keep yield domestically as close as possible to where we were last year. And as we look at this, we expect we're going to run lower load factors in our domestic entity in Q2 as a result. That's part of our plan. We think it's the right strategy, and we do think, you know, we'll be able to fill up some of these seats who are closer in to higher yield in business. And the fact that business has had this significant recent recovery in the last two weeks makes me even more bullish that we've executed the right strategy there and that we do have capacity available to accommodate closer in business demand to the extent it materializes in Q2.

And on the longer term, it's an interesting question. First, I think I wouldn't conclude that business, you know, we'll see what happens with business demand. In the near term, though, the most obvious things we can do are the things that are happening in revenue management. Andrew talked about we have the best revenue management system and team in the industry. That is true. We made huge investments coming into the pandemic, concluded it during the pandemic. And a team is just, you know, really like none of these things. They're generally not that. Really appreciate fully the shift, but the revenue management system is working well. And that's one of the obvious places. Andrew talked also about pivoting the network. It's another one of the straightforward things to do. Fly more to Florida, fly to more leisure destinations. In terms of things like Polaris class, Andrew also talked about the fact that while we have less business traffic flying internationally, we have a lot more premium leisure. So I wouldn't anticipate, at least in the near term, any radical shifts in the strategy. It would mostly probably come in terms of capacity deployment more than anything, which one could think about having a bunch of assets, but that's relatively easy for us to do.

We will now switch to the media portion of the call. If a member of the media would like to ask a question, please press pound two to enter the queue. Please hold for a moment while we assemble our queue. The first question comes from Claire Bushy. Your line is unmuted. Please go ahead.

Hi. I wanted to ask about summer operations. You mentioned cutting flights in New York earlier in the call. I wanted to ask about what other operational changes United's making this summer to avoid a repeat of the disruptions of last summer.

Hey, Karen. This is Toby. Well, we've done a lot. Let's talk about Newark and New York first. So we work with the FAA. FAA gave us a waiver for the summer, so we are down. about 30 flights per day in Newark, and at peak times, that's going to make a big difference. Also, like Andrew said, we're not the only ones. So for the first time in a long while in New York, we actually will be scheduled to, on a blue sky day, at least what the capacity of the airport can actually hold. So we're really bullish on that. And on top of that, and Andrew mentioned this in his remarks as well, we're actually going to have 17 new normal flights mainline gates in the brand-new Terminal A in Newark. And if you guys haven't been there, it's a fantastic terminal. I mean, it's a world-class terminal, replacing a 1969 Banjo terminal that we were in last year. So, just right off the bat right there, that's going to be a huge improvement. The other thing, again, United actually did, if you guys remember, we actually did pretty well last year, last summer. I think the biggest issues we had was actually the infrastructure, especially in the transatlantic. And I'll actually, we just, in Europe, two weeks ago and talked to our biggest airports there, Heathrow, Frankfurt, and Munich, and they are one year ahead of all the hiring and all the other things there. So, again, it's summer. It's peaked up. It's not going to be perfect, but we are in a much, much, much better place than we were last year, and we reached a joke. I mean, all the terminals in Europe is actually open this year. You know, we had large terminals in Europe last year, both in Amsterdam and Heathrow and others that wasn't even open. And they are wide open and open for business this year. So again, we call it summer readiness. We are not taking it lightly. Summer is our Super Bowl. It's the toughest time to operate. It's going to have some tough days, surely, with weather and things, but we're going to be in a much, much better place than we were last year.

I just, you know, Delta said that they You know, they were flying less than they had expected. They were trying to reduce the turnaround time for maintenance on aircraft. Is there just any of that detail that you can share with us?

Well, I would just, I'll take that. We've already done that. So we, you know, when we talk about we're not building our own like it's 2019, we built those buffers in prospectively and in advance. And that's why we ran the best operation in the country because we were ahead of the curve. And perhaps others are catching up to that, but we were ahead of that curve. And that's what led to the best operation in the country that we scored.

Thank you.

Our next question comes from Leslie Josephs. Your line is unmuted. Please go ahead.

Hi, thanks for taking my question. I'm just curious on the retrofits, how many of those do you expect to get this year and how many were you expecting before and what was the outlook for 2024? And then it's been almost seven years since you've launched Polaris and just curious if you are and how are you thinking about kind of the successor to that?

Okay, well, that's a great question, and I will not answer the latter question other than the teams are always working on innovations at United across all of our business functions, and I'm sure somebody somewhere is working on something great when it comes to seats, and we'll leave it at that. In regards to retrofits, and I don't have the numbers here. We'll have somebody call you back, but the reality is the supply challenges across the board whether it be IFE systems, chips, seats, and many other things are just more challenging than they've ever been in our business. And while we converted our first A319 a few weeks ago, it should be flying hopefully any day now in the new interior. And we have multiple lines that we'll be doing this summer. So you'll see a rapid increase in the number of aircraft with the signature interior through retrofits and through new aircraft. The total time to convert all the aircraft is just going to be longer than we expected, unfortunately, probably by a year or two, to be frank. So we will get there. It will just take a little bit longer than we had originally intended. But you'll see material progress. We'll get some of the numbers out to you separately by the end of this year.

And do you expect that to hurt your revenue premium at all for people that are booking up or choosing United because it has those features?

No. What I would tell you is that the increasing odds of getting on an aircraft with the United Signature interior is going to go up rapidly. It's just the tail of this is going to take a little longer to get done. So our investment in our brand and our products and our services and how we're differentiating ourselves from our competitors, I think our customers already see it, and they're going to see it a lot more in the coming quarters. It's going to be a little bit slower than we had hoped. but I know people are noticing it already. We can see the NPS scores on these converted aircraft, or definitely the new aircraft, and we're excited to get it done as quickly as we possibly can.

Thank you.

The next question comes from Alice Insider. Your line is unmuted. Please go ahead.

Thanks. Yeah, I was wondering if you could Talk a little bit about, you know, anything that United might be doing kind of in the wake of the handful of near collisions that the industry has been seeing, you know, are you, are there any particular steps that you're taking to respond to that? Or like, do you have any theories about what's been going on?

So, uh, I am, uh, I'm proud of the whole aviation industry. for the level of safety that we have, which is at least an order of magnitude higher than any others, appropriately so. And when aviation professionals talk about safety as our number one priority, that is something that is deeply embedded in the DNA of everyone, not just at United, but across the industry. And United Airlines in particular is at the tip top of that pyramid in terms of safety. Our team, I think, is doing a really good job of saying in today's environment, you know, where you're coming back out of COVID and there's new people working in airports or new air traffic controllers or whatever it is, and increasing the amount of training, the time in training, quality of training, we're spending more money and a lot more time and resources there. And in fact, we put a vice president, a guy named Mark Champion, who's been a champion for safety for his entire career, into a new role where he is exclusively responsible for safety and quality of training for our aviators. And I think we're leaning on that and continuing to push to make the system what is already the safest system in the world, even stronger. And I feel good about the path we're on and Mark being charged with that responsibility and having really as many resources as he needs. He's the one person that doesn't have to live to his budget because he can do whatever he needs to do to make sure that we achieve, keep this good interest rate as high as it's always been.

So when you look in some of your own data, do you see any kind of trend or any sort of connection between sort of the newness of people and incidents or potential incidents or anything like that?

Well, one of the great things about aviation is we use and we share data. We have great safety systems where our own employees can report without repercussions to them. That encourages reporting. You know, because it's been, I guess, well over a decade since there's been a fatal accident in the United States. What that means is we have to look for, you know, things that are close to the out of tolerance or out of tolerance to find it. And sharing that data across the industry is a strength that I think is unique to aviation and what leads to our higher safety standards. So we have teams of people and our competitors have teams of people. And on this one, we don't compete. We share the data with each other on doing that. And they're always, always, always looking for, no matter how good we get, what's the next place that we can go and get even better. That process works well. It's continuing to work well. I think they have an even elevated sense of responsibility right now as we're coming out of COVID and feel great about where we're headed. Thanks.

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