United Airlines Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 19, 2021

There are 22 speakers on the call.

Operator

Good morning, and welcome to United Airlines Holdings Earnings Conference Call for the Q3 2021. My name is Brandon, and I'll be your conference facilitator today. Following the initial remarks from management, we will open the lines for questions. 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.

Operator

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.

Speaker 1

Thank you, Brandon. Good morning, everyone, and welcome to United's Q3 2021 earnings conference call. Yesterday, we issued our which represents 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.

Speaker 1

Please refer to our earnings release, Form 10 ks 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 the call, we will discuss several non GAAP financial measures. For a reconciliation of these non GAAP measures to the most directly comparable for GAAP measures. Please refer to the tables at the end of our earnings release. Joining us in Chicago today to discuss our results and outlook are Chief Executive Officer, Scott Curie President, Bret Hart Executive Vice President and Chief Commercial Officer, Andrew Zella and Executive Vice President and Chief Financial Officer, Jerry Leatherman.

Speaker 1

And now, I'd like to turn the call over to Scott.

Speaker 2

Good morning, everyone, and thanks for joining us today. I want to start by expressing my thanks to the team at United for taking care of our customers and each other during an eventful summer. And what we've done in the last 19 months stands out even more than in normal times, as we've also been a part for the humanitarian relief efforts around the world, flying over 160,000,000 doses of vaccine, returning thousands of refugees from Afghanistan and delivering thousands of tons of oxygen canisters and medical equipment to India, among many other things. Despite the personal stress and strain from the pandemic, our people have continued to run a reliable operation and deliver phenomenal customer service, avoiding the significant issues that have plagued far too many in the aviation industry. The United team is emerging from COVID as the leader in global aviation, most prominently leading on safety by effectively and efficiently implementing our early vaccine requirement.

Speaker 2

We kicked off the Q3 with strong momentum as Pennant Leisure demand soared and bookings remained business bookings began moving in the right direction, So we obviously knew that the delta variant was a risk. Andrew will give you more details about the ups and downs of the second half of this year. But from my perspective, The long term recovery remains on track with the opening of Europe, Australia and Singapore and an expected inflection Before we move to the traditional discussion about the near term environment, I want to take a few minutes to at least lay out our view of 4 big picture trends that we believe make United Airlines the airline investment choice for longer term shareholders. Number 1, we will lead on costs. Inflation is high, but within our expectations.

Speaker 2

And we remain on track for CASM ex down in 2022, down approximately 4% in 2023 and down approximately 8% in 2026 versus 2019. I know there are some skeptics on this, but it something that's not happening at United because we really have become much more efficient during COVID. Number 2, Geography becomes a competitive advantage. During the pandemic, United's geography has been a greater headwind than any other U. S.

Speaker 2

Airline, given our largest Business, Coastal Hub and International Exposure. Domestic and Latin Revenues, where United is the smallest in percentage terms, I've been running in the 70% to 90% range versus 2019, while the Atlantic and Pacific, where United is the largest, have been down 20% or more. However, despite those significant geographical headwinds, we've managed to produce results in line with or better than the industry in terms of minimizing losses. But Most importantly for investors, we expect those headwinds to become long term tailwinds as the supply of international wide body aircraft is significantly different in the domestic narrow body supply post pandemic. We expect the Atlantic and the Pacific to significantly outperform the domestic market for many years to come, which will turn a current geographic disadvantage during COVID into a sustainable long term advantage for United's global network.

Speaker 2

Number 3, unlocking the power of United Next and growing our revenue premium. Higher connectivity, a noticeably improving product and the extraordinary service United Professionals, I mentioned at the top, are already driving rapidly improving NPS scores and customer choice. We expect that improvement will accelerate as we take delivery of hundreds of new customer friendly narrow body and retrofit all of our remaining narrow bodies in the next several years. This will make United the airline customers choose to fly and help us drive premium revenue. Number 4, ESG.

Speaker 2

United today is the leader in global aviation with our unique and real, not greenwashing, Commitment to climate change actions and the work we're doing on diversity as exemplified by the United 88 Academy. And this already matters to customers, employees and regulators.

Speaker 3

And I

Speaker 2

think you'll see it reflected in customer choice and perhaps even valuation in the years to come. And all of that leads to our UnitedNext financial outlook. We will absolutely hit our CASM ex target, and we remain on track. And on the revenue front, our UnitedLex target is assumed that it takes all the way until 2026 to return to 2019 RASM well. While we're hopeful and I actually expect that the DRASM trajectory will be stronger than that, that hopefully conservative assumption Still leads to an adjusted pretax margin of around 14% and adjusted EPS of around 20% at our current share count.

Speaker 2

In closing, COVID appears to be playing out remarkably close to what we expected in May of last year. Our expectation back then was that demand would probably remain depressed until Christmas of 2021 and that the business demand Wouldn't start in earnest until January of 2022, but we always believe that total demand, including international, We'll ultimately fully recover. That forecast now looks remarkably pressured, and we found new and successful international markets in India and Africa. We anticipate a robust European recovery, and we're just now beginning to see the openings across the Pacific, starting with Australia and Singapore. United's perspective was singularly unique, both on the depth of the crisis, but also on the ultimate strength of the recovery.

Speaker 2

That put us in a position to make long term decisions on fleet and permanent changes to our cost structure, and we're now uniquely set up to reap the rewards of those decisions. And with that, I'll hand it over to Brett.

Speaker 4

Thanks, Scott. I'd also like to thank our employees

Speaker 2

for their hard work in the quarter.

Speaker 4

July was our busiest month since the start of the pandemic. Despite regularly changing mandates, restrictions and new protocols that have been part of commercial air travel in 2021, High NPS scores year to date. We are now past what we believe is the worst of the booking impact from this wave of the delta variant. And looking ahead, there are some recently announced regulatory changes that are driving momentum in bookings. We were pleased by the announcement that the U.

Speaker 4

S. Entry restrictions on travelers from Europe, U. K, India and other international locations, entering the U. S. We look forward to more specific details, including the effective date of the changes to avoid any confusion about the new requirements for our customers and employees.

Speaker 4

Since the announcement, we have seen a 35 point increase This gives us even more confidence in our expectation that summer 2022, particularly over the Atlantic, will be robust. Additionally, we have repeatedly innovated and upgraded our United app, our industry leading tool, which It outlines for our customers the travel recommendations and requirements as it relates to quarantines, vaccination or COVID-nineteen tests. This tool gives United customers an advantage as they navigate the evolving path for the rules and regulations and reduces as much stress as possible at the airport. We are ready for the returning international travelers. Lastly, as Scott mentioned, with the exception of a small number of We're committed to providing the safest environment possible.

Speaker 4

It also means that our customers can book with confidence knowing that United's operation And their travel experience will not be hampered by changes to government vaccine regulations. Speaking of the reliability of our operations, We have been proactive on the hiring front. During the 1st 3 quarters of 2021, we have hired nearly 1,000 pilots, In the Q3, we partnered with Honeywell to make yet another investment that contributes to our journey to become 100% green by 2,050. Last month, we announced the industry's largest sustainable aviation fuel agreement in which we commit to purchase 1,500,000,000 gallons of SAF over 20 years, making our total commitment more than double the combined total of the rest of the world's airlines These are both important steps in our goal of reducing our emissions by 50% on a carbon intensity basis by 2,035 and to net 0 by 2,050. The Q3 was also punctuated by the crisis in Afghanistan.

Speaker 4

We were

Speaker 2

called upon to assist the U.

Speaker 4

S. Military in bringing 15,000 Afghans to the U. S. And troops back home. We've operated approximately 40 Civil Reserve Air Fleet or craft flights to date.

Speaker 4

We also converted our maintenance anchor at Dulles Airport to a temporary shelter where travel weary evacuees could rest, Working as crew members, translators, medics and more. Many volunteers have personal ties to Afghanistan or our military veterans. I want to take this opportunity to extend my heartfelt thanks for their service. We're also helping Afghans begin their new lives in the U. S.

Speaker 4

Through our partnership with Mylan for Migrus, where we have donated 15,000,000 miles and continue to support and incentivize donations from our MileagePlus members. As you can see, the spirit of innovation at United has not been dimmed by the pandemic. In fact, we relied on it to adapt to the changing economic and regulatory environment and put our expertise to work to help those in need. That makes me incredibly proud of this company, and it gives us gives All of us more confidence in our ability to meet the financial targets we've laid out. I'll now hand it off to Andrew to describe in more detail how he plans to do that.

Speaker 5

Thanks, Brett. Before talking about the 3rd quarter results or the 4th quarter outlook, it's important to acknowledge that the impact of the delta variant 19 levels and consistent with pre delta levels 2, positive domestic co brand spend for the quarter, new card acquisitions above 2019 levels Demand for Atlantic travel is consistent with 2019 levels since the announcement of lower travel restrictions, and yesterday, it was up 19%. Are slightly better than domestic business traffic. 7, Brazilian demand is rebounded quickly, matching the strength we've seen for months in near Latin demand. 8, book yields for upcoming holidays are positive as well as early 2022 are positive.

Speaker 5

Nine award booking levels have exceeded 2019 levels this week for the first time. While we believe these leading indicators are solid evidence of a bright outlook for United, another set of positive indicators we've Tracking in recent months is the relative strength of our premium leisure business during the pandemic. These indicators include: 1, Domestic First off revenue reached 2019 levels this summer with payload factors 5 points above. 50% of our revenue in transatlantic 3, paid load factors for Economy Plus increased by 10 points relative to 2019 this summer. And 4, answerable seat revenues in Q3 were a record $9.17 per employee passenger, And that's basically at 2019 levels despite 28% less capacity.

Speaker 5

Whenever I talk about United Next, our long term strategy, I tend to focus on domestic gauge growth of 30% and its importance. However, United Next also grew premium seating counts across our domestic fleet. Is a material incremental revenue source for our long term outlook and has the potential to increase overall leisure yields by 2 to 3 points versus our original long term outlook. While we still believe business traffic will return in full, Our plan will succeed even if it only returns to 85% to 90% of these levels given these yield leisure yield gains if they prove permanent. Further in our revenue segmentation and premium leisure efforts, we've made the decision to outfit our 14 remaining 767-300s with our new mid tier premium plus product so that all 767s now include this product.

Speaker 5

We can also confirm that we'll offer this separate mid tier cabin on future deliveries of the A321 XLR Jet in 2024. Relative to 2019, premium plus performance across Atlantic was our best Our revenue segmentation strategies have always been about offering a range of products customers want to choose, From Polaris to Premium Plus to Basic Economy, effective segmentation makes our business model more durable when faced with elevated levels of competition, I'll now turn to my normal update of performance in the quarter and our near term outlook. Passenger yields were positive in July August versus 2019, but fell by 10% in September given the large The impact of lower pricing and yields will continue into the part of the 4th quarter with October performance Only marginally better than September. Closed in bookings continue to track below 2019 levels but are getting better week over week for the last few weeks. Just as in previous quarters, our cargo operation again delivered a record quarter for United.

Speaker 5

Total cargo revenue was up 84% from 2019, it was the best Q3 on record. United Cargo has once again resumed all cargo flights with available wide body jets for the remainder of the year, which we expect will once again result in leading cargo performance. Turning to our 4th quarter outlook. We now expect total revenue to be down 25% to 30% versus 4Q 2019, with November December at the top end of the range. Though the Delta variant impact on leisure demand is now gone, its impact on business travel and yields in the 4th quarter continues.

Speaker 5

We expect capacity to be down 23% in the Q4 versus 2019, down 13% for domestic and 35% for international. We continue to slowly add back capacity consistent with our capabilities to deliver a consistent operation

Speaker 4

For our customers,

Speaker 5

while also matching our expectations for demand. By December, we expect domestic capacity will only be down We continue to have 57 idle narrowbody jets temporarily grounded. We expect most of these grounded jets to return to service by June 2022 By summer 2022, and business traffic will accelerate early next year. We currently expect capacity for 2022 100 percent of our growth in the international markets, where we expect capacity to be up about 10% versus 2019. As a result, we expect domestic capacity for 2022 to be approximately flat.

Speaker 5

We remain agile to move planes around as needed or even Consistent with our planned international growth for 2022, Last week, we announced 10 new Atlantic routes with a focus on premium leisure destinations such as Bergen, Gazors and Italy. Most of our new routes have comp and theme of premium leisure business as we continue to diversify our global revenue streams, which in the past were very business centric. We're also diversifying our geographic scope across the Atlantic to India, Africa and the Middle East. It's the potential of our leading gateways in New York and Washington. We have one more significant international network announcements planned for later this month as we work towards finalizing our 2022 outlook.

Speaker 5

As a leading U. S. Airline across the Pacific, we do expect slower demand We've seen some really great news in recent days with the partial opening of Australia and Singapore. Most of our capacity across the Pacific in Q4 is being supported by hardware revenues. We continue to expect international long haul fly Not only have many wide body jets been retired across the industry, but we expect that the industry premium seat capacity for the largest Atlantic carriers will be down approximately 10% per departure to 46 seats as many aircraft, including 747s and A380s with large premium cabins have been grounded.

Speaker 5

United's widebody does have an average of 46 Polaris seats, approximately the same number as our primary Atlantic competitors. As we rebuild our global network, our Polaris lounges are now set to reopen over the next few months, starting with our brand new club at Washington Dulles tomorrow. Briefly, I wanted to talk about our United Next Signature Interior. We now have taken delivery of 13 MAX 8s with the Signature Interior, and it's a hit with our team and our customers. Each of these planes has NPS scores materially higher than any other domestic mainline VIPs fly So that by early 2025, the entire mainline fleet has this consistent, superior look and feel.

Speaker 5

Thanks for indulging me in this rather long explanation of where things stand, but more importantly, where we're taking United. I I have to give thanks to the entire United team for delivering this summer in a pretty difficult condition. And with that, I'm going to hand it off to Jerry to discuss our financial results and outlook.

Speaker 6

Thanks, Andrew. Good morning, everyone. Andrew, we truly enjoyed your verbose remarks, but everyone can take comfort in the fact that I will be shorter. For the Q3 of 2021, we reported pretax income of around $600,000,000 and an adjusted pretax loss of around $500,000,000 This was obviously different from our expectations when we spoke to you in July. As Scott and Andrew discussed, this loss is solely attributable to the impact of the delta variant on customer travel in the months of August September.

Speaker 6

The good news is that our Q3 CASM ex of up 15% was better than our guidance, and we are on track for further improvement in the Q4. We currently expect CASMx in the 4th quarter to increase 12% to 14% versus the Q4 of 2019 and capacity down around 23% versus the Q4 of 2019. Looking beyond this year, we are in the middle of putting together our financial plan for 2022 and expect to share more color with you in January. However, I wanted to highlight a few items now that give us confidence in our CASM ex outlook. First, We are exceeding our target on structural cost savings as we have identified approximately $2,200,000,000 in initiatives, which we expect to fully benefit from by next summer.

Speaker 6

As a proof point of this success, we estimate This includes a significant and permanent reduction in management employees. 2nd, we expect to return which will ultimately drive a step function CASM ex improvement as these low CASM and high gauge aircraft return to the fleet. 3rd, Our outlook for 2022 includes the higher inflationary pressure we are seeing today across all aspects of our business, ranging from vendor wage pressures to supply chain bottlenecks. It is for these three reasons that I am confident Our 2022 outlook of CASM ex lower than 2019 is both fair and achievable. Importantly, It also sets a firm foundation for achieving the negative 4% and negative 8% CASM ex goals for and I did back in June.

Speaker 6

Importantly, we are committed to achieving these cost targets while also investing in a superior product and experience for our customers. For example, all our new narrow body aircraft are being delivered with state of the art interiors, including overhead bins that fit everyone's carry on bags and Bluetooth enabled seatback entertainment with a long list of choices displayed on large HD quality screens. We are also retrofitting the rest of our fleet to be consistent with these standards. In fact, I was recently on a new 737 MAX 8 flying home from Newark to Houston as the crew was engaged with everyone from pre boarding throughout the flight and as the customers complained, 15 minutes early by the way. I even noticed several children entertained with our new children's amenity kit.

Speaker 6

After this flight, I was curious about the Net Promoter Score. And sure enough, the NTS for the flight was over 40% higher than system average last year. We will continue to make these types of revenue enhancing as well as our $2,200,000,000 structural cost savings program. Turning to capital expenditures. We currently expect to take delivery of 3737 A number of 787 deliveries previously expected this year are now expected to occur next year, which results in the related CapEx shifted out of 20 We expect to use a mix of debt financing, leases and cash to fund the acquisition of new aircraft, and we'll balance the mix with our United Next financial targets in mind, including adjusted total debt to adjusted EBITDA below 4x in 2023 and below 2.5x in 2026.

Speaker 6

As the recovery progresses, we expect to economically pursue deleveraging for balancing our capital commitments. In the Q3, we made a $375,000,000 voluntary contribution to our pension, which will drive PBGC premium savings and access to returns on the funds added. While we are not required to make any meaningful contributions to In closing, as the impact of the delta variant appears to be receiving, We continue our focus on managing the business efficiently to maximize our earnings power for the long term. Our focus on cost and revenue initiatives We're driving improving margin leading to a 2026 adjusted pretax margin of around 14%

Speaker 1

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. Brandon, please describe the procedure to ask the question.

Operator

Thank you, Christina. And the question and answer session will be conducted electronically. To allow your signal to reach our equipment. Please hold for a moment while we assemble our queue. And from Barclays, we have Brandon Oglenski.

Operator

Please go ahead.

Speaker 7

Hey, good morning, everyone, and thanks for taking my question. So Jerry, speaking of CapEx, can you talk to us about what 2022 could look like here? And then maybe a longer term question for you or Scott, like how do you manage The balance sheet risk here versus what is a very ambitious outlook and obviously trying to improve profitability by leveraging Those things you put out there.

Speaker 6

So we'll have some more detail on 2022 CapEx in January, but I can tell you that the bulk of the reduction this year is just shifting into next year. Those 787s in particular That cost reduction this year would just be additive for next year. So when you add those to the 48 narrow bodies we have, you'll see a step up in CapEx. So I think if you took this year and next year together, Blended, it's sort of consistent. But you should assume that most of the CapEx reduction this year Reducing that debt balance and deleveraging.

Speaker 6

We could have done some more if we had more prepayable debt. We simply don't. So we are Going to, over the next few years, focus on reducing that debt as we have the opportunity to economically prepay that debt. That's a critical component of our UnitedLex plan.

Speaker 7

I guess if I can follow-up on that Jerry, is it if you get upside to earnings, you can get margins faster based on Premium and leveraging the international network, is that how you plan to manage the balance sheet and potentially get leverage down faster?

Speaker 6

So we yes, The answer is yes. As we implement the plan and we see the returns, that profitability is going to go directly into paying down the debt. And keep in mind, we also have the flexibility if recovery takes a little bit longer. Over the next few years, we have the flexibility to manage aircraft deliveries and retirements to adjust to whatever the environment is.

Operator

From Bank of America, we have Andrew D'Aura. Please go ahead.

Speaker 7

Hi, good morning, everyone. So Scott or maybe Andrew, I think the consensus out there to this point is that the international as it relates to that 10% international growth next year.

Speaker 5

Sure. I'll take that. Definitely, the growth rate and the recovery will be different by the different regions of the world. And the Pacific is going to be the slowest, and we've said that a number of times. Howard, when you go through all of our data, what I would tell you is that we really need to start to break down our entities into a little bit more detail, Particularly going across the Atlantic, we expect and again, I said already today that our bookings across the Atlantic are now approaching in past 2019 levels.

Speaker 5

We expect a very strong bounce back next year, in particular, starting in the spring summer. And then the second point I'll point out is that a lot of our Atlantic And for example, we have a new flight to Oman. We're flying to Cape Town and Johannesburg, Lagos and Ghana. So our numbers, while appearing elevated across the Atlantic, that we're anticipating. And again, the numbers over the last few weeks have just been or really in the last week have been incredible going across the Atlantic.

Speaker 5

We remain really bullish. We think we have the right plan. We think we've pointed the aircraft to where we can make the most money next year.

Speaker 7

Got it. Understood. And then just my second question, obviously, operational challenges have been increasing at a lot of your competitors, Yet you haven't seen the same type of disruptions. One, what do you think that is? And then I guess more importantly, what do you see as the biggest

Speaker 2

And you're right, it has been uniquely different at United than many other airlines, including all of our large competitors who, The realistic assessment that we had all the way in February in last week of February of last year, because we thought this pandemic was going to last all the way through the end of 2021, It caused a different planning mentality, and it caused a different management process, a very collaborative management process. It drives the evening crazy, I suspect, but we do 3 times a week now, 3 hours, so And in many cases, we just step into each other's jobs if we have to. But that collaborative process in a really complex environment This environment is really complicated when you brought the airline down 90% and then try to bring it back up. That's really difficult to do. None of us in Aviation have experience to do it.

Speaker 2

That process and that realistic assessment set us up well and it led us to make different decisions. We're the only airline out there that went and negotiated a deal with pilots,

Speaker 4

for example. And then because of that,

Speaker 2

we can pull the airline down, keep everyone in their seats, keep everyone in their positions and bring the airline back up without having the kind of crew shortages and avoid some of the conflict that has happened on other airlines around masks. And we had over a 50% reduction in mask issues this year. And our flight attendants have just done an amazing job, an amazing professional. The tone, the environment, it's not that we have 0 issues, but the tone, the environment on United Certainly different than what I read about in the press on other airlines. And we also metered in the growth.

Speaker 2

We didn't try to Get out over our skis and say demand is starting to come back and grow at a rate that we wouldn't be able to support. We view that as risky to our customers, and we've really changed the customer experience during this. And we weren't going to lose it by trying to

Speaker 4

fly a few more flights.

Speaker 2

And so we've just managed it completely different than has happened at other airlines. And you talk about the risk going forward, I mean, I think looking forward, by far, the biggest incremental risk in Aviation in the United States for vaccine mandates. And United, we did our vaccine mandate. Obviously, we did it before it was a mandate. We did we were done with it before Government requirements came in, so we did it purely for safety reasons.

Speaker 2

But listening to other airlines that are now backing off those vaccine requirements And are going to encouraging employees to just all apply for an exemption. And they're likely to have tens of thousands of employees that need to be tested every week. This is a rearview mirror for United. This is not going to be an issue. But can you imagine, tens of thousands of employees, people forget to get their test, I mean, it is going to be a huge challenge for airlines that are not Implementing vaccine requirements.

Speaker 2

Customers can book with confidence on United, we're done with it. You can book with confidence on United. But if you're booking on an airline that doesn't have a vaccine requirement, they got government rules they have to follow and caveat emptor.

Operator

And from JPMorgan, we have Jamie Biggar. Please go ahead.

Speaker 8

Hey, good morning, everybody. Scott, I like the 4 big picture trends that you discussed in your opening remarks. Question on the expectation for the Atlantic and the Pacific to outperform the domestic over the next several years. Is that really a comment on how strong the Atlantic and Pacific might be? Or is it shorthand for we expect the domestic to structurally suffer going forward?

Speaker 8

Why shouldn't I look at it with that sort of devil's advocate view?

Speaker 2

Well, Jamie, I'll let Andrew Mostly supply demand. The supply demand balance is just significantly different in

Speaker 5

We just have this structural advantage when it comes to global long haul, given where our gateways are. And this is the time for us to move forward and deploy our capacity in a way that makes sense and is profitable in those regions of the world. And in some respects, I think we're uniquely able to do it as a U. S.

Speaker 8

Understood. And a follow-up on that, Andrew, while I got you. I just wanted to make sure I hadn't missed any changes In the last year or so as it relates to fuel surcharges. So we do not have a fuel surcharge mechanism domestically, But how broadly do they exist right now in your international markets? How should we think about that?

Speaker 5

Jamie, I don't want to get into a lot of details. There are certain countries around the world that do have fuel surcharges. Their government is mandated. In fact, they go up and down with the price of oil, and it's kind of set by that country. So those exist.

Speaker 5

And then in other countries, We take care of it ourselves. I think we have this under control, but the price of fuel, I think, you're going to is Hi. By the way, we view that price of fuel being high as a sign that business demand is recovering as people get to work in factories around the world are making things. So that is a good thing and not just completely a bad thing. And that being said, when can we price through this higher price of fuel?

Speaker 5

It's going to take some time. The supply demand imbalance was broken temporarily. We're getting I think the industry is well, I think United is moving in the right direction. I think the numbers look a lot better as you get into next year, particularly as you get to the Presidents' Today and spring break holidays. So I'm optimistic about yield quality out then.

Speaker 5

And like I said earlier, Our yields for these upcoming holidays and early next year are positive, which is great to see.

Speaker 8

That's great. Thank you, Andrew.

Speaker 5

Thank you, Scott. Take care.

Speaker 9

From Citi, we have Steven Trent. Please go ahead. Good morning, everybody, and thanks for taking my question. Kind of a follow-up to Jamie's question actually. Over the past few months, you guys had doing some domestic point to point flying.

Speaker 9

How should we think about where you are now in the, Let's say gradual process of maybe phasing that out as some of your international spools up and you move more towards domestic capillarity out of your hubs.

Speaker 5

Sure, it's Andrew. We did, during the middle of the pandemic, Optimistically, look at some point to point flying, and we had that out there. As we return to normal, which we are doing rapidly now, We are almost 100% focused on our 7 hubs. For all kinds of reasons, we think our best opportunity is there and particularly our best opportunity for higher margins there. And that's where we're pointing the medals.

Speaker 5

So that's what you'll see. We do have a little bit of point to point flying in our system. It's proved what's left. It's proved very successful, so we'll continue to do that. That is not our strategic focus.

Speaker 5

Our focus is on our 7 hubs.

Speaker 9

Okay, very helpful. I will let someone else ask me a question. Thank you.

Operator

From Raymond James, we have Sabi Eisai. Please go ahead.

Speaker 3

Hey, good morning, everyone. Just on the capacity, I was wondering if you could Help me understand just next year how that progresses from down 23% currently in the Q4. I'm guessing A lot of it comes over the summer, but I was wondering if you could help bridge that kind of getting from down 23% to up 5% next year.

Speaker 5

Sure, Savi. We've timed the capacity to measure or match where we think demand is going to be. So in early part of the year, it is continuing to be a pretty low number. And last part of the year, it is a higher number. We haven't finalized our budget for next year, so we don't have the exact numbers.

Speaker 5

And our overall number is an approximate number at this point, as you can tell. The other thing to note is our deliveries for next year are heavily geared towards the latter part of next year. So that's what really that's In many respects, you really get started with United Next and changing the game's age equation going forward. So we'll have more information on how the capacity metered in Later this year, early next year when we can finalize our budget.

Speaker 3

That's helpful. Thank you. And then if I may, I know we've Not talked a lot about cash flow, and given that we have strong liquidity and The earnings are turning around here, but just kind of curious if you could provide some color on just the cash flow components over the next 12 to 18 months, especially how you're kind of thinking

Speaker 6

Hi, it's Jerry. So we'll provide some more color In January, I would say on ATL, as the war returns to normal, ATL will begin to return to normal as well. You'll see the Peaks and valleys that are driven by seasonality. On sort of other matters, the biggest other thing for us to look at is, as I said Next year, relatively modest year on debt repayment, about 3,000,000,000 About $3,000,000,000 of scheduled debt payments, but we're going to focus on other opportunities to use that cash to manage the balance sheet starting as early as next year.

Speaker 3

Appreciate it. Thank you.

Operator

From Evercore ISI, we have Duane Pfennigwerth. Please go ahead.

Speaker 10

Hey, thank you. Andrew, in your extensive list, you talked about domestic business demand rebounding to 2019 levels. I'll admit I missed the Context on that, was that a premium comment? And kind of where are we on corporate now relative to kind of the exit rate last quarter?

Speaker 5

Yes. What I said was over the last week, we've seen our total bookings for domestic And for the Atlantic, exceeding the same period in 2019, which is great to see. We have not recovered fully on business traffic and have a long way to go. And over the last few weeks in particular. But look, the numbers are heading towards down 50%, but they're not there just yet.

Speaker 5

But just looking at the trends of only the last few days, I would tell you our level of being bullish about this has increased a lot. The numbers for the delta variant caused things to go down quickly. And now that we're past delta variant,

Speaker 10

That's helpful. And then just for my follow-up On non fuel cost, can you speak to the cadence? And I guess the dependency here is when you expect longer stage flying to be more fully restored at these fuel prices. It seems like March is maybe our best shot at the earliest, But is the cost story more of a second half at this point? Appreciate your thoughts there.

Speaker 6

Yes. Sure. So the cost will initiatives next summer. You'll see the second half of the year being significantly different from the first half of the year. You could essentially track the capacity

Speaker 2

to the CASM.

Speaker 5

Thank

Operator

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

Speaker 11

Hi, good morning everyone.

Speaker 3

Maybe a bit of

Speaker 11

a different take on Jamie's question earlier, but Has the current demand backdrop or the competitive capacity backdrop in the U. S. Changed your plans on this domestic expansion at all Since you introduced UnitedLex back in June, like was it your view back then that 2020 domestic capacity would be flat? Or is Just with some of these international border reopenings, has the opportunities have changed? Thanks.

Speaker 5

The latter. The international border opening and overseas and that's what we've done.

Speaker 11

Okay, got it. And then maybe just not sure you can But could you give us any just high level color on what entities are going to drive the 10% international growth? And maybe are you able to The impact some of these new long rig droughts you mentioned are having on that 10% growth? Thanks so much for the time.

Speaker 5

Sure. Our current expectations will that are brand new to United Airlines. In fact, no other U. S. Carrier flies.

Speaker 5

So we're really excited about those. But we've also announced more service to the Middle East with Ahmad Jordan. We've announced a lot of service to Africa, which has gone really well so far, so you should expect more of that. So there's a lot going on there. And as well as South America, which we think is on a path to recovery, particularly Brazil in recent days, Given the change there, it has looked really good.

Speaker 5

Across Pacific, again, much slower. We do expect across the South Pacific faster than the North Pacific. But we're going to be really agile across the Pacific and be able to cancel down or grow depending on the demand we see. We now have the best Pacific network of any

Speaker 11

Understood. Thanks.

Operator

From Wolfe Research, we have Hunter Keay. Please go ahead.

Speaker 12

Hey, good morning. So it seems like after Labor Day, a lot of folks went back to the office and they're excited to be there. And now it kind of feels like people are Slowly, it sort of bleeds back to like a lower watermark as the year progresses as sort of the euphoria wears off.

Speaker 5

Underwrite, what I would say is that the Delta variant clearly delayed some offices' return. We definitely see hotspots that some are in and some are not. But people are generally more and more returning to their offices of our end. And what we've been told, although, look, it changes depending on the week, is that we should expect really an acceleration of business traffic Next year, with a lot of end of command, we have a lot of clients that need to get back on the road, and they're anxious to do so. And when they do so, They're glad they have done it.

Speaker 5

And I know I'm excited to get back on the road and have been traveling a lot more in the last few weeks. So It's a TBD. I can't exactly answer that question other than the feedback we get is it's going to be very strong. We We also expect full consumer demand next year after being not able to travel as they would like for almost 2 years. We think it's going to be really strong, including here domestically, by the way.

Speaker 5

We believe our profit maximizing opportunities Across the Atlantic right now into India and Africa and the Middle East, but we also think there's going to be a domestic recovery that's really significantly strong. And in fact, Hopefully, by February, March, April, it's going to overcome this much higher price of fuel. And that's the trajectory on. We feel good about it, and that's our plan.

Speaker 12

Okay. And then how do you expect Andrew Corporates to book travel in 2023? I know that there's a lot of direct bookings right now And 2022 is probably going to be weird too. But is 2023 going to look like 2019? Are you going to have the same mix of GDS channel and TMC is just as relevant.

Speaker 12

How do you expect that to shake out long term?

Speaker 5

Long term, I don't know. Technology is changing What I would say is we have really great CMC partners, and they greatly help us reach our SME market. And we use The GDS is to provide all that content, and we do so successfully, and in agreement with our major GDS contractors up until this point. I don't expect any radical changes. Clearly, there are those in the distribution network that would like to do things slightly different, and we'll let those Companies and other agencies tell us what they would like, and we'll do our best, obviously, with all of our clients and all of our customers to give them the best customer service we possibly can.

Speaker 5

But I do believe the TMC and GDS model are really strong and help deliver high quality revenue to United Airlines.

Operator

Thank you. From Cowen, we have Helane Becker. Please go ahead.

Speaker 13

Thanks very much, operator. Hi, everybody, and thank you so much for the time. Just A couple of questions. One is on the 777s that are coming back. Jerry, what's the cost going to be to bring those And is that included in your CapEx forecast for 2020 or will it be in your CapEx forecast for Q4 and for 2022?

Speaker 6

Yes. The 777s are aircraft that is already in the fleet. There's CapEx component to bringing them back. There is an OpEx component of getting them ready. And so that's included in our forecast.

Speaker 6

What's not included in any forecast is whether there's any Contribution to that from other parties. We're assuming in our forecast that we are incurring that cost.

Speaker 13

Okay. That's very helpful. And then the other question I have is with regard to all these new markets.

Speaker 14

A

Speaker 13

Are you concerned that your alliance partners will be Put off by the fact that you're overflying their hubs to do this on your own. And little letter b, can I give you a list of cities I'd like to go to That are on my bucket list?

Speaker 5

I would have thought with the cities we just added, we got to your bucket list. But let me know. We work with our great alliance partners. We really do have the best alliance partners in the globe. And what I would tell you is about how we came to the conclusion about what City fairs to add, for the summer, many of these City fairs, United and our Star Alliance partners have very low shares.

Speaker 5

So traffic between the United States and those markets are carried by other alliances, not ours. And that's why These markets are great. And the other thing I'll tell you is sometimes you have to make the market. And there's a lot of on United Airlines, not stopping at a New York starting this summer.

Speaker 13

That's great. Very helpful. Thanks, everybody. Have a nice day.

Operator

From Deutsche Bank, we have Mike Lindenberg. Please go ahead.

Speaker 15

Yes. Hey, good morning, everyone. Hey, Scott, back to your Point about the vaccine mandates being the biggest risk. Where are you maybe in conversations with the government and as it pertains to the TSA, which I think Latest data is that I think they're only at like 60%, 65% vaccinated. Are you making any sort of contingency plans or as we

Speaker 2

Well, I have a lot of confidence that TSA will get there. They've been working hard. I think they've been doing a great job to the tens of thousands of refugees back from Afghanistan. So I think we all should Give kudos and credit to the Department of Homeland Security, Secretary Mayorkas and the TSA for everything they're doing. I'm pretty confident that We'll get there.

Speaker 2

I mean, I think they're implementing vaccine requirements correctly. I mean, at United, we have proven that if you just do it, if you put the requirement out there And you're not compromising. You're not wishy washy. You don't waffle. You don't backtrack.

Speaker 2

You can get to over 99%. And I think we'll do the same thing, and we'll get there.

Speaker 15

Okay. Very good. And then just a quick follow-up. Scott, you talked about hitting your targets with I think only 85% to 90% of corporate coming back. And there's a lot of talk about premium leisure travel.

Speaker 15

And I'm just curious, is there something Going on with that passenger segment or is this just United catching up to the rest of the industry and just having premium seats that are on par with everybody else. Thoughts there? Thanks.

Speaker 5

Hey, Mike, it's Andrew. I would tell you, it's probably A little of both, although we have really not started to materially change the aircraft mix from when we announced UnitedLex just a few months ago. So we A lot of that benefit is going to come in 2023 and beyond. But there has been an amazing amount of premium leisure business are Being able to sell premium seats both in the 1st class cabin and even in the main cabin with much higher load factors than we've done in the past, We're anxious to prove out that this is a permanent change, but part of it is clearly that there is more inventory available And we'll have to see where the premium leisure yields are. I think we're going to balance both and come out with a better outcome Given this change, if any of the crews permanent, which we're again, we're bullish that it will be, it's exciting to see.

Speaker 5

It is pretty material in such a short period of time. So we'll have to wait and see for sure, because we need to balance that with the corporate demand when it comes back. But all that being said, in the Recently obvious over the last 3 months as an opportunity to do something a little bit different and get some more revenue on board the aircraft.

Speaker 15

Great. Thanks.

Operator

From MKM Partners, we have Conor Cunningham. Please go ahead.

Speaker 16

Hi, everyone. Thanks for the time. I think you hinted at it in the prepared remarks, but when you think about potential swing capacity in 2022, is it fair to assume That the swing capacity in the domestic market could move lower rather than you be making an adjustment on the international side just given the competitive landscape. I guess that demand dictates all that, but just curious on your thoughts at the high level.

Speaker 5

I was going to add, we have a lot And we look like we're getting back on track and getting back to our normal scheduled deployment, which again is why I said there'll be less point to point flying in the future. But we'll be flexible to do what we need to do, both domestically and internationally, including ground wide body jets if they're not later this year, but we'll wait and see.

Speaker 16

Okay. And then just a follow-up to what Hunter was talking about on the business side. So I'm just curious on what sectors you're seeing the most pent up demand for business travel or maybe like which sectors you're actually most bullish on longer term that you think you can gain share or however you're thinking about that in the current context? Thank you.

Speaker 5

Well, With everything we've done in United, we intend to gain share everywhere to make that really clear to you and all of our competitors. That being said, what we're Right now is, consultants, obviously, very strong, as they get back on the road and start helping businesses all around the globe. But we're also seeing rebounds across the board, but we'll things are moving in the right direction.

Operator

Thank you. And we will now take questions from the media. And once again, please stand by. And from Wall Street Journal, we have Alison Snyder. Please go ahead.

Speaker 3

Hey, thanks so much.

Speaker 14

Yes, I guess one of the big You've heard from customers throughout the industry over the course of the last several months is just sort of about the instability of schedules, Late close in changes and everything kind of being up in the air. And I'm just curious when you think we might see that level out, just see some more stability and get back to kind of

Speaker 5

Hi, Allison. It's Andrew. What I would tell you is that we needed to be really flexible as we went into this crisis. We took the airline down to basically ten within a matter of a few weeks. And we learned a bunch of things about how flexible we can be in our process.

Speaker 5

That being said, to run an airline of this size, we need process, we need consistency, and we need to load our schedules early for the convenience of our customers so they can book with certainty. And we have more or less as of this week or next return to a normal scheduled load process, where we load our schedules 90 days in advance, and their final as close to 90 days as possible. During the pandemic, that number was dramatically lower, and that caused a level of disruption that was unfortunate but necessary. And we did talk to our customers about it, and we did react to it in res, and we reacted to it in every way possible

Speaker 3

Thanks.

Operator

From CNBC, we have Leslie Joseph. Please go ahead.

Speaker 14

Hi, good morning everyone. My question is about Regional Airlines. Do you know if the carriers that fly for you under your name Are going to be subject to the same federal mandate? Or if not, if

Speaker 11

it's under the OSHA rules, do

Speaker 14

you have any operational concerns about getting them into compliance in the next few weeks? And also if you have any information about how you're approaching cargo, just given all the supply chain issues going forward, especially before the holidays. Thanks.

Speaker 2

Hi, this is Bret Hart.

Speaker 5

What we will say

Speaker 2

is that our regional carriers, we know that they're evaluating The applicability of the executive order on their business, and we're in discussions with them. I I think it's pretty clear where we stand with respect to the importance of vaccinations, but they're in the process of working through that now. And we'll certainly be in the process of helping them in that process to the extent that we can. Andrew, do you want to talk to the cargo?

Speaker 5

Yes. In terms of cargo, we've obviously had a record quarter, a record year. We We expect that to continue well into the Q4 and actually beyond. Given where the country stands in terms of the backup of support, But also in terms of consumer demand, we're transporting things by airplanes today that we traditionally have not. And in talking to the entire Cargill team, we expect that to continue well into next year, if not all of next year, Based on where demand is for these products and again, where the ports are and the services that we provide, which are just, I think, second to none on the cargo front.

Speaker 5

And Leslie, if you look at our numbers, you can see it in our numbers every quarter.

Speaker 14

Okay, thanks. Did you ask the regional airlines To appear to the same vaccine mandate that you have, and did they say no? Just for uniformity, names on the plane.

Speaker 4

No. At present, we haven't

Speaker 2

asked or required Our regional carriers to adopt our same policy. And you understand from a legal perspective, we don't have the right to require them to do it. But this is a process that they will work through in the same way that we did. And we know that they're very focused on it, and we're confident that at the end of But we have and are strongly encouraging them, pushing them to do it. We think it's the right thing for them to do as well.

Speaker 2

We just aren't in control.

Operator

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

Speaker 17

Hi, thanks for taking my question. I wanted to go back to the earlier comment about United being the U. S. Flag carrier and that Sort of structural change that you see on the international wide body front and how that makes long haul more profitable. I wanted to get your thoughts on the thesis So because it seems to rest on the idea that other carriers can't or won't add wide body capacity if they can Get some decent yields on that.

Speaker 17

And I just wanted to get your thoughts on that because some of these airlines you've accused in the past of being government subsidized, and

Speaker 5

And how long it takes to get widebody aircraft and configure them and put them in the air. And that is, having here at United, it takes a couple of years. So when you choose to retire aircraft, it's very difficult to reverse that decision, It's the fact that we're flying from what are 7 major hubs here in the United States. And so we just have a structural advantage on this front. We're already the largest international carrier by far.

Speaker 5

We're able to And so we're simply taking advantage of the structural advantage we have at United that we just haven't been able to, in the past, properly do.

Speaker 17

Thank you.

Operator

From CNN, we have Chris Isador. Please go ahead.

Speaker 18

Getting back to the cargo and supply chain issues, are you still flying any all cargo flights? And are you Considering any purchases of freighter air traditional freighter aircraft either used or new as you're seeing more cargo demand.

Speaker 5

I'll take that. We stopped we had stopped

Speaker 2

Our plan

Speaker 5

is to stop all cargo flights, as we were going through the summer because of the rebound in traffic And the lack of our Pratt and Whitney 777 supply. As we went through the delta variant phase and demand fell, We did allocate a small number of wide bodies to our cargo team, and they've taken them. And they are flying as all cargo through the end of this year, and that is doing extremely well. We will likely bring that to an end, again, sometime late this year, early next year. All that depends on the return to service of our Pratt with E 777s.

Speaker 5

So we do see a lot of demand on the cargo front. The team is doing a great job, And we're going to have a record year.

Speaker 18

And for your aircraft, is that something that you're weighing and considering? Or is That's just not something that you see being a mix long term.

Speaker 5

Sure. We have a fleet of about 220 or so wide body jets at United Airlines. For years where that makes sense are a few individual routes. But the fact that we operate, I think, the 2nd largest widebody fleet in the world, We have a ton of belly capacity that more than meets our needs.

Operator

We have David Koning. Please go ahead.

Speaker 4

Hey, thanks very much. Scott, following up on your Karyan and Tor comment earlier, I wondered if you have any evidence that people are booking to United because of your mandate. And I guess, are you counting on some of your rivals struggling to have enough staff over the holidays?

Speaker 2

Well, the story I think it'd be hard to sort that out even if it was happening. But I would also say, I don't want that to happen. I mean, I don't Because I want everyone to get vaccinated. I mean, that's the right answer for safety. That's the right answer for the country.

Speaker 2

I hope that every airline We'll stop backtracking and we'll, in fact, get everyone vaccinated like United Airlines has done. And so that it will not be a competitive advantage for us because it is, without question, The right thing to do.

Speaker 4

Is it a competitive disadvantage if they seem to settle for less and have some sort of testing Alternative

Speaker 3

to vaccination?

Speaker 2

Well, look, again, I hope that they will again, backtrack and get all their employees

Speaker 16

Okay, thanks.

Operator

From Reuters, we have Rajat Ping, please go ahead.

Speaker 19

Good morning, everyone. I want to I have two questions. First, I want to clarify your comments on 777s, you said that you expect them to return to service in the first half of next year. Is that your Jumpsun OR has FAA cleared the ground fleet to return to service in the first half of twenty twenty two?

Speaker 5

Hi, this is Greg. We haven't heard that from the FAA, but we have

Speaker 20

been working tirelessly with Boeing, Pratt Whitney and the FAA over the past 6 months, and we do expect the aircraft to return to service in the Q1 of next year

Speaker 19

My second question is about supply chain bottlenecks. You alluded to the supply chain And your comments on emplacement, etcetera. Can you share some color and details on these bottlenecks? And how are you navigating from there?

Speaker 6

Hey, it's Jerry. So I'll say, we're not Seeing anything different from what others are seeing and where we are seeing Shortages or potential shortages, we're just trying to stay ahead of it. So it's not at all impacting The operation or the product, but it does have some impact just on cost. It's just more expensive, as the whole world is seeing, sometimes to get, the supplies that you need.

Operator

And from Washington Post, we have Hannah Sampson. Please go ahead.

Speaker 21

Hey, good morning. On the question of premium increased demand for bivior customers for premium products, how are you seeing that play out? Are they just kind of booking those upfront? Are they using miles for upgrades? Are they getting free upgrades?

Speaker 21

I guess I'm curious, have leisure travelers been like dying to book these seats all along and just didn't have the chance? Or do they have more cash to work with now? What do you see playing out there?

Speaker 5

Well, we'll let this is Andrew speaking. We'll let this play out over time. But what we've seen over the last Across the Atlantic, we've seen a better rebound in our business class cabin to our People a lot of consumers have saved up some money during the pandemic and maybe are spurring a little bit. But it's also these are great upgrades to customer, and we can provide products across that range, and that's exactly what we're doing. We expect to do more of that over time, by the way.

Speaker 5

And we actually know that there are certain customers that want that elevated experience, while there are others that don't. And we will offer a range of product types that allow us to do that.

Speaker 21

Okay, thanks. And then if I could slip another one in real quick. How are you feeling prepared for the holidays, not just pilots and flight attendants, but across the board, gate agents, people to answer the phone if people have questions or problems. How prepared are you feeling for that?

Speaker 2

We're in good shape, and customers can book with confidence at United Airlines.

Operator

Thank you. We will now turn it back to Christina Munoz for closing remarks. Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining.

Operator

You may now disconnect.

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Key Takeaways

  • United is targeting CASM ex reductions of about 4% in 2022, 4% in 2023 and 8% by 2026 versus 2019, backed by $2.2 billion in structural cost‐saving initiatives and fleet optimization.
  • Management expects its current international “disadvantage”—with heavy Atlantic and Pacific exposure—to become a long‐term competitive advantage as global wide‐body capacity tightens post‐pandemic.
  • The United Next program, featuring hundreds of new narrow‐body deliveries, retrofits, Polaris lounges and Premium Plus cabins, is driving higher NPS scores, growing premium‐leisure yields and an anticipated permanent 2–3 point leisure‐yield lift.
  • Q3 saw an adjusted pretax loss of ~$500 million primarily due to the Delta variant, while Q4 revenue is forecast down 25–30% versus Q4 2019 with capacity down ~23%; full‐year 2022 capacity is planned up ~5% versus 2019 and CASM ex below 2019 levels.
  • United has led on ESG and safety by pioneering an early employee vaccine requirement, flying 160 million vaccine doses worldwide, securing a 20-year, 1.5 billion-gallon sustainable aviation fuel deal and pledging net-zero carbon by 2050.
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Earnings Conference Call
United Airlines Q3 2021
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