United Airlines Q3 2022 Earnings Call Transcript

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October 19, 2022

Key Takeaways

  • United delivered its best post-merger Q3 operational performance, with record on-time arrivals, mishandled bag ratios below 2019 levels and its Connection Saver tool saving 137,000 customer connections, reducing costs and boosting satisfaction.
  • Revenue strength continued with Q3 TRASM +25.5% vs Q3 2019 on 10% less capacity, and September marking the third-strongest TRASM month in company history with an 86% load factor, driven by sustained leisure demand.
  • Management identified three durable industry tailwinds—ongoing COVID recovery, hybrid-work–enabled leisure travel growth and persistent supply constraints (pilot shortages, aircraft delivery delays and ATC staffing)—that underpin confidence for 2023.
  • Network expansion included a 22% increase in transatlantic capacity vs 2019 with 10 new cities and partnerships with Emirates and Virgin Australia, while 179 aircraft are expected by end-2023, the highest annual deliveries ever.
  • On the financial front, Q3 adjusted pretax income was $1.1 billion (operating margin 11.5%), Q4 CASM ex guidance is +11–12% vs Q4 2019, EPS is guided at $2.00–2.25, and liquidity ended Q3 at $20 billion.
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Earnings Conference Call
United Airlines Q3 2022
00:00 / 00:00

There are 17 speakers on the call.

Operator

Good morning, and welcome to United Airlines Holdings Earnings Conference Call for the Q3 2022. My name is Candice, and I will be your conference facilitator today. Following the initial remarks from management, we will open the lines for questions. 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, Candice. Good morning, everyone, and welcome to United's Q3 2022 earnings call. Yesterday, we issued our earnings release, which is available on our website at ir.united.com. Information in yesterday's release and the remarks made during this conference call may contain forward looking statements, which represent the company's current expectations or beliefs concerning future events and financial performance. All forward looking statements are based 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.

Speaker 1

Also during the course of our call, we will discuss several non GAAP financial measures. For a reconciliation of these non GAAP measures To the most directly comparable GAAP measures, please refer to the tables at the end of our earnings release. Joining us on the call today to discuss our results and outlook are Chief Executive There's Scott Kirby President, Brett Hart Executive Vice President and Chief Commercial Officer, Andrew Nussella and Executive Vice President and Chief Financial Sir, Jerry Laderman. In addition, we have other members of the executive team on the line available to assist with the Q and A. And now, I'd like to turn the call over to Scott.

Speaker 2

Thanks, Christina, and good morning. It's great having everyone on the call today. I want to start by congratulating and thanking everyone at United for your hard work, dedication And perseverance throughout the last two and a half years, our people stayed focused on our unique long term strategy and we're now beginning to see the strong and differentiated results. Our operation is firing on all cylinders. In fact, based on most metric, it's running better than ever.

Speaker 2

That isn't just better for customers. It also reduces costs And leads to strong financial performance that creates the foundation for United next, really positions United to be the world's best airline. We recognize that the near term geopolitical and macroeconomic risks and overall pessimism facing the global economy, including airlines, are unusually high right now. However, there are 3 industry tailwinds prevailing the COVID recovery for Aviation and United That are currently overcoming those macro headwinds and we believe we'll continue to do so in 2023, in increasing order of importance. First, aviation uniquely is still in the COVID recovery phase.

Speaker 2

To take one example, Japan just opened last week. And regardless of whether you think demand for business travel will ultimately return to 100% or something left, it almost certainly is going higher from here. 2nd, there has been a permanent structural change in leisure demand because of the flexibility that hybrid work allows. With hybrid work, every weekend can be a holiday weekend. That's why September, a normally off peak month, was the 3rd strongest month in our history.

Speaker 2

People want to travel and have experiences and hybrid work environments untether them from the office and give them the Newfound Flexibility to travel far more often than before. I'll bet many of you listening today have taken an extra trip or 2 this year Because you can work remotely for a couple of those days. This is not pent up demand. It's the new normal. And third, the strong demand environment is happening against The supply backdrop that currently has the industry 10% to 15% smaller relative to GDP than it was in 2019 and the multiple constraints, Pilot shortages, aircraft delivery shortages from both Boeing and Airbus, air traffic control saturation and airport infrastructure Strengths around the world are all real and they are constraints that will take years to fully resolve.

Speaker 2

These three trends are why all airline revenues keep surprising to the upside, but they're also real and durable, which is why we're so optimistic about 2023 and the longer term despite the economic challenges. And for what it's worth, you don't need to believe all three of those trends for estimates to go up. Probably any one of them will do, though I happen to be confident that all 3 are already happening and are sustainable. And in that strong industry environment, United is uniquely positioned to benefit for the long term. United really did chart a different path through the pandemic than any Other airline, differentiated fleet and growth decisions, increased exposure to growing international markets, real technology changes to change the Customer experience and run the airline more efficiently.

Speaker 2

Long term investments in the infrastructure needed for growth such as Newark Gates or building 14 additional simulator base during the pandemic, founding our own pilot training academy and a cultural transformation to be fast, creative, innovative and customer focused. It is just 1 quarter and we know we have a lot to prove, but our 3rd quarter margin results and 4th quarter guidance With operating margins above 2019 are early indicators of both the absolute and relative potential of the new United Airlines. I am very proud of the United team for executing incredibly well, and I'm confident that we're well positioned for success next year and the years to go after that. With that, I'll hand it over to Brett. Thanks, Scott.

Speaker 2

I also want

Speaker 3

to start by recognizing the entire United family for their hard work in the quarter. Our team never fails to pull together and we couldn't be more proud. During the quarter, our operational performance set records. Our on time arrival and missed connection rates were the best for a 3rd quarter in company history when excluding the low flying quarters during the pandemic. We saved over 1500 daily connections on average with our Connection Saver tool.

Speaker 3

This means over 137,000 additional customers Got to their destinations on time. Connection Saver is a unique innovation and customer benefit for United. In addition, our team did a fantastic job helping our customers and their bags get to their destination as seamlessly as possible. In fact, our mishandled bag ratio in September was better than 2019 levels. Our daily controllable cancels, which are driven by maintenance Accrue challenges dropped over 95% in September versus what they were in January.

Speaker 3

With a reduction in these cancels alone, We were able to add 1% of incremental capacity to the 3rd quarter. This provides a better experience for our customers, but also leads to much more cost efficient flying. We look forward to continuing these trends into the final part of the year. Putting that all together and despite all the challenges around the industry, this was the best third quarter operationally We're a full schedule in United's post merger history. Huge kudos to the team.

Speaker 3

One of the most significant changes for United operationally and for cost This has been the turn of the Pratt and Whitney Boeing 777s. As they're grounding, we've had to make suboptimal operational and schedule adjustments that have led to a more complex operation and the work required to return these aircraft to service created a heavy burden on our tech ops organization.

Speaker 4

For the first time this

Speaker 3

for the first part of this year, we had over 500 of our technicians dedicated to this fleet in Victorville, California, with over 175,000 hours of work spent to get these aircraft back into service. This drove inefficiencies And our technician staffing with negative cost and operational impacts. The great news Is that this work is behind us and these technicians have returned to their bases, which has led to the improvement in our performance metrics. With these aircraft fully back in service, our fleet can be more efficiently positioned for both our operation and our customers. I'd like to thank the entire TechOps organization for their significant effort in returning these aircraft to service.

Speaker 3

We're proud that a career at United remains in high demand. This year, we're on track to hire 7,000 airport personnel, 4,000 flight attendants, Flight attendant openings received over 5,600 applications in just 48 hours. Ultimately, We expect to welcome 15,000 new team members this year and another 15,000 next year to support our United Next team. And with that, I'll hand it off to Andrew to talk about the revenue environment in more detail. Thanks, Brett.

Speaker 4

TRASM for the Q3 finished up 25.5% versus the same period in 2019 on about 10% less capacity. September was our 3rd best TRASM month in our history, excluding the low flying pandemic months. We saw a number of record revenue days that were more typical of a peak summer period And off peak, in many ways September where we operated with an 86% passenger load factor, 5 points better than September of

Speaker 2

Dean was indicative of what we believe to

Speaker 4

be the new normal, where hybrid work gives customers the flexibility to turn any weekend into a short trip, we believe because of that, the off peak periods are now stronger. All parts of the network performed well in the quarter. First, across the Atlantic, United increased capacity by 22% versus the Q3 of 2019, adding 10 new cities and 18 new routes. We also pushed into new regions becoming a relevant competitor to Africa for the first time. New nonstop service between Versus the Q3 of 2019, which we consider outstanding.

Speaker 4

United is now the largest airline across the Atlantic, where our strategic partnership with Lufthansa and Air Canada is working better than ever. Last week, we announced yet another Atlantic expansion planned for 2023 of 9 new routes. A few weeks ago, we announced a new partnership with Emirates. This partnership will allow United to resume service to Dubai, the largest And best hub in the Middle East after a 7 year absence. Dubai is unique as a hub in the region as it has both significant local markets And a large amount of premium demand, but also massive connectivity.

Speaker 4

While our Pacific flying is our least recovered so far From the pandemic, we continue to expand capacity as economies open. Overall capacity in the region was down 59% versus 2019 and Pacific PRASM increased 41% versus 2019 and we continue to experience much stronger cargo yields. We'll be focused on resuming the bulk of our Pacific capacity excluding China in the next year now that Japan is fully open for business. We continue to build our partnership with Virgin Australia. We will begin new non stop service to Brisbane from San Francisco in a few weeks.

Speaker 4

We're the only airline that maintained continued service to Australia from the U. S. During the pandemic and now United expects to be the largest airline operating to and from Australia this winter for the first time ever. Latin American PRASM was up 20% on 4% more capacity than 2019. Domestic PRASM was up 20.4% on 10.5% less capacity versus 2019.

Speaker 4

Our domestic gauge versus 2019 will also increase 11% as we continue to replace regional jet flying with mainline jets. Gauge increases are being absorbed well without much of a negative impact on PRASM. Cargo volumes were strong even as we faced much more competitive Yields in the quarter did continue to fall consistent with our expectations relative to pandemic highs that were 90% greater than 2019. The corporate business travel recovery in the quarter was about 80% of volume of 2019 and stable over the quarter. While larger corporations clearly lag the recovery rate, we believe new network patterns and hybrid work environments are having positive and offsetting impacts on revenue.

Speaker 4

It's also worth noting that business traffic for long haul segments across the Atlantic have recovered at a faster pace than domestic. It's our observation that a Zoom meeting is simply less practical in a global setting. We remain optimistic that business traffic will continue to get better from this point forward. Our traditional view on business traffic recover rates relative to 2019 may now be obsolete measurement given the changes in how customers now travel in a remote work environment, our business and leisure chips often are combined. New revenue segmentation efforts versus 2019 have been increasingly successful.

Speaker 4

Premium Plus, our new mid tier global long haul product is now 7% of our long haul capacity producing yields that are twice that of the main cabin. Our efforts to better market and sell main cabin seats have also produced strong results with seat revenue per passenger up 21% from 2019. September was a strong revenue month and we are entering the 4th quarter with a lot of momentum and October is on track to date to While I recognize recent headlines would otherwise indicate our revenue performance should be faltering, I hope this strong revenue outlook puts those thoughts to rest. I wanted to briefly address some of the recent changes on RJ operating costs. We expect that these recent cost changes to alter the balance of pilots Choosing a career at United Express versus ULCC.

Speaker 4

With competitive pay United Express versus ULCCs for the first time, We'll be better able to staff our United Express operation, albeit at higher costs. United Express pilots who join our AVA program can transition to a united million our job in 4 years, making it the best short term and long term career option. We do expect that given the overall pilot shortage today At non legacy carriers, it may take a while and probably until 2026 to fully utilize in our 300 to 400 RJs we'd like to operate by our Express partners. Finally, a quick update on our MileagePlus program. I have to say every key indicator we measure is positive.

Speaker 4

We've seen a record number of memberships to date with more enrollment so far this year than all of 2021. Mileage redemptions this quarter were the highest for any third quarter in our And new co brand accounts were up over 25% year over year, and we saw the highest quarter of spend in the history of the program in the 3rd quarter. Momentum is strong and we expect 2023 to set new records as we continue to grow the program. I want to say thanks to the entire United team. And with that, I will hand it over to Jerry.

Speaker 5

Thanks, Andrew, and a big thank you to the whole United team for achieving another quarter of profitability. As Brett mentioned, our recent operational performance has been record setting and we believe the worst of the operational driven cost pressures we've talked about Our previous calls are now behind us. Importantly, we've completed all remedial work on our 52 Pratt powered 777s The vast majority are back in service with the last few expected to be online by next month. On previous calls, we had noted the significant CASM ex Headwinds driven by the ground at 777s, but it was more than just the capacity implications. We believe together as we piece together As scheduled with a suboptimal mix of aircraft, we also incurred a variety of direct and indirect costs in many of our operating groups as we waited for the return to service of a significant portion of our wide body fleet.

Speaker 5

To put in context how impactful To have these aircraft flying again, our fleet was able to produce over 20% more ASMs per mainline aircraft per day In the 3rd quarter as compared to the Q1, this provides a meaningful improvement in our utilization, which is one of the primary drivers of improved unit costs. Looking at the numbers for the Q3, we reported pretax income of $1,100,000,000 on an adjusted basis and an operating margin of 11.5 percent also on an adjusted basis. This was one point better than our most recent guidance driven by a combination of stronger revenue and better costs. Our 3rd quarter CASM ex was up 14.5% versus the Q3 2019, this is a 1.5 points better than earlier expectations. The outperformance was driven in large for the future.

Speaker 5

As an example of how a strong operation benefits our costs, in September, we saw a 27% reduction in the premiums and overtime paid as compared to an average month in the first half of the year. That equates to $35,000,000 improvement in September alone. This reduction in premium pay is expected to reduce 4th quarter CASM ex by more than a point compared to the Q1 of this year. As we look into the future, retaining top tier operational performance will continue to be a key element to our execution on costs. Looking ahead, we expect Q4 2022 CASM ex to be up between 11% 12% with capacity down 9% to 10% versus the Q4 of 2019.

Speaker 5

As Andrew mentioned, we expect the revenue environment to remain strong throughout the Q4. As a result, we expect our Q4 20 And adjusted diluted earnings per share, a metric we are happy to talk about again of $2 to $2.25 In the Q3, we took delivery of 11 Boeing 737 MAX Aircraft and 1 Boeing 787 Aircraft. In the Q4, we expect to take delivery of 20 MAXs and 4787s. Assuming these aircraft are delivered, For the full year 2022, we now expect total adjusted capital expenditures to be $4,700,000,000 Our most recent capacity guidance for next year assumed 179 aircraft deliveries from now through the end of 2023. There's certainly downside risks to that assumption, but under almost any circumstance next year, we expect to take delivery of more aircraft in 1 year than any other airline in history.

Speaker 5

We continue to work closely with Boeing and Airbus regarding our deliveries and we plan to provide you an updated outlook for 2023 in January. Turning to the balance sheet. We ended the Q3 with over $20,000,000,000 of liquidity, including our undrawn revolver, which allows us to maintain flexibility as we We used some of our cash to purchase all of our aircraft delivered to date this year and we expect to use Cash about half

Speaker 2

of the remaining deliveries in

Speaker 5

the 4th quarter. And remember that every aircraft purchased for cash today Increases our pool of unencumbered assets, which further protects our future. In addition to aircraft purchases beginning in 2023, We will have the opportunity to prepay a portion of our debt at par. In the current rate environment, it is a tremendous benefit to have the flexibility To prepay debt, continue to pay cash for new aircraft or access the financing markets opportunistically for new aircraft deliveries. And at all times, we remain committed to restoring our balance sheet and working towards our long term leverage targets.

Speaker 5

I again want to thank the whole United team for all we accomplished this quarter. We are executing our plan and making good progress towards our United next goal. And with that, I will turn it over to Kristina for the Q and A.

Speaker 1

Thank you, Jerry. We will now take questions from the analyst committee. Please limit yourself to one question and

Operator

2. 2. The first question comes from Michael Linenberg from Deutsche Bank.

Speaker 6

Yes. Hey, great numbers. Good morning, everyone. Just one quick one here. Greg, you brought up 137,000 of saved connections during the quarter.

Speaker 6

I think you said 1500 a day. Can you just give us a sense of what that translates into savings from a re accommodation cost perspective? I mean, are we talking about tens of 1,000,000 of dollars here? Trying to get a sense of this new technology and how it's helping improve your product. Thank you.

Speaker 5

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

Speaker 3

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

Speaker 6

Great. And then

Speaker 5

Are you there, Mike?

Operator

My apologies. We lost you. Please go ahead. Mr. Linenberg, please go ahead.

Speaker 6

Sorry, I was muted. I'm back on. Just a quick one on capacity, maybe preliminarily for next year, Andrew. I know, Jerry, you said that January, we're going to get an update on kind of You're thinking about 2023. But Andrew, the comment that you made that next year, it looks like you're preparing for all of Asia Pacific to recover or be back in the plan with the Of China, I think your prior number was that you would grow no more than 8%.

Speaker 6

Has that number now been adjusted down by a couple of 100 basis points? Any sort of initial view on 2023 capacity. Thanks.

Speaker 4

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

Speaker 5

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

Operator

Our next question is from Ravi Shanker from Morgan Stanley.

Speaker 7

Thanks. Good morning, everyone. So If we were to cross our minds back 12 months, I think you and the rest of the industry were sort of struggling with an environment where you were seeing very peaky peaks And very troughy troughs. And I think in your commentary, you sort of indicated that what's happening right now is the exact opposite where even the shoulder seasons are actually Kind of picking up and kind of running at similar to almost peak like levels. And you also spoke about like a permanent structural change in the leisure and corporate traveler.

Speaker 7

What does all of this mean for the way United is going to like build your network and your fleet over the next 3 to 5 years? Do you need to Make any structural changes to adapt to this new normal? Or do you think that you can make it work with the current system?

Speaker 4

Well, I think this new normal is actually really allows us to become more and more efficient. For example, Tuesdays Wednesdays are not As much of a trough as it used to be in a traditional week. For holiday traffic, holiday traffic is now spread out more. So it doesn't necessarily peak as much On 1 or 2 days, it actually spreads out across a few days. And we see that time and time again.

Speaker 4

And we also see like Secondary holidays are incredibly strong, not just the primary holidays. And ultimately, what this could mean is that we operate a less Peak schedule. And a less peak schedule, we think, comes with really enormous efficiency gains And that the marginal cost of an ASM in February is very different than that in July. So a lot more to come on that subject, but I think a really Interesting opportunity for United as it transitions from a very peaky schedule to something that's less peaked.

Speaker 7

Great. And just a quick follow-up. You said a couple of weeks ago that you expect 2023 Transatlantic to be 10% above 2022 levels. If you can just kind of unpack that a little bit more, kind of are you seeing signs in the data that gives that confidence or kind of just what gives you confidence in like a 9 month outlook given the current macro?

Speaker 4

I don't think I gave that number. Somebody else may have. But look, we announced a number of new routes, I think just last week going across the Atlantic, our partnerships are doing really well. Quite frankly, where the dollar stands is incredibly useful from a U. S.

Speaker 4

Origin point of view for transatlantic travel and this season was incredible based on the numbers we've seen. This fall is also incredible Based on everything we're seeing. So just it's full speed ahead across the Atlantic, and we are very bullish On the outlook not only there, but across our entire global network. There's just a lot of good indicators across the entire network. Once economies open, traffic rebounds Very quickly, and we expect to see that in Japan over the coming months.

Operator

Next, we have Helane Becker from Cowen.

Speaker 8

Thanks very much, operator. Hi, everybody. Thanks for the time. Can I just ask a question about the routes that were added this past summer on the North Atlantic? A lot of them were leisure focused.

Speaker 8

And I just wondered, How they compared versus your expectations and whether all those routes are coming back Next summer or if some of them were below expectations, the new routes that you announced last week, are they Kind of replacing them.

Speaker 4

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

Speaker 8

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

Speaker 4

I won't give you all the details Helane because I don't want All my secrets out, but I will say that 1 or 2 of those routes we added were our best routes across the Atlantic.

Operator

Next, we have Steve Trent from Citigroup.

Speaker 9

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

Speaker 4

Sure. I'll give it a try. First of all, our lines Going across the Atlantic with Bill of Tonza in Air Canada is 1st and foremost that is Gigantic, it's the number one alliance across the Atlantic and we have the best partners and the best hubs to fly to in Europe and that is and will continue to be our Primary focus, I just want to be clear on that. And of course, across Pacific with ANA, down to the South Pacific with Air New Zealand, These are all things we focus on every day here and are key to our global network. That being said, the Middle East was The way we use the term, a white spot for United, our global gateway support all kinds of markets across the globe.

Speaker 4

And when we looked at the opportunity to do a partnership with Emirates, it did fill in this white spot and allowed us to access A lot of destinations that we could not otherwise access with our existing partnerships and so that motivated that. And the same is true in Australia where Virgin Australia has a fantastic franchise. We're so excited to partner with them. We were already the largest airline to Australia. Now I hope to be not only the largest airline to Australia, but the most profitable airline to Australia.

Speaker 4

And I think that comes with the strong network we have and great partnerships Across the board, definitely with Virgin Australia. So we'll continue to look for opportunities that don't interfere with our core strategic immunized alliances. And that's what these two things in my mind represented. Quite frankly, at this point, United's global network is pretty comprehensive. I'm not sure there's many more of those out there in the world, but we'll keep looking.

Speaker 9

That's super helpful. Really appreciate the time. Thank you again.

Operator

Our next question is from Jamie Baker from JPMorgan.

Speaker 10

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

Speaker 5

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

Speaker 2

Okay. It was just the

Speaker 10

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

Speaker 2

Everybody in the room is worried about what I'm going to say. Moron is going to be restrained on this call. We feel like obviously super optimistic about where United is headed But recognize that the market isn't there with us quite yet and I was going to be restrained. But that's where it's read me. Look, I think there is Huge change, that's happened.

Speaker 2

It's not appreciated yet. I will perhaps be pejorative, I describe that business model as a Ponzi scheme, because it is predicated on growing 15% to 20% a year.

Speaker 11

The only way you keep your cost low is 15%

Speaker 2

to 20% a year growth, And that is now going to be impossible. I mean, look, I guess, others are

Speaker 11

going to get on a conference call next week and say this is

Speaker 2

a temporary issue. There is a real pilot shortage that is real. It's going to take years to resolve. It's not the only one, by the way. Boeing and Airbus are probably 2 to 3 years away from getting back to producing airplanes at the same rate.

Speaker 2

The air traffic control system, They do a great job at the FAA of trying to manage the system. But we have fewer controllers in the United States than we had 30 years We have about tripled the operations. That works sort of okay in September. It does not work in July. And it's not their fault.

Speaker 2

They do incredible work And the FAA to put their fingers in the dice and try to do their best to manage day to day, but they've been pulled in so many directions. They've had to do drones and space launches and many more people working on certification and aircraft issues without their budget going up. And until Congress authorizes more controllers, That is going to be a hard constraint on the operations of all airlines during the summer. And so there's just no airline, including us, that's going to be able to grow at 15% 20% a year anymore. And I think that's a real advantage for us at United.

Speaker 2

It is a real challenge for those The whole business model is predicated on 3 things. 1, growing 15% to 20 Sure. 2, jamming people in like sardines and 3, it's not nickeling and diming them $50 $100 ing them to death With add on fees that they don't know until they show up at the airport and that's a doomed business model.

Operator

Our next question is from Scott Group from Wolfe Research.

Speaker 12

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

Speaker 5

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

Speaker 12

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

Speaker 4

Well, I think so far and you can see by our results over the last 90 days and our outlook for the next 90 days, we think it's a pretty good trend. So obviously, I would say that it's positive for margin. There's still a lot more to come. And I have to say that the business traffic

Operator

will continue to be The recording has stopped.

Speaker 4

Business traffic will continue to get better from this point. Should you keep going or? And so I'm optimistic that all of those like headwinds that United Airlines faced in the pandemic Are still in the transition period to tailwinds and particularly the coastal gateway impact. I think we still have a long way to Go, particularly on domestic traffic from our coastal gateways. So I think there's a lot more upside.

Operator

Our next question I'm so sorry about that. I will have that turned off for you right away. Our next question is from Duane Pfennigwerth from Evercore ISI.

Speaker 13

Hey, thanks. Why don't we start right there? On corporate recovery, Can you offer some thoughts on recovery by market or hub in the U. S? How would you Mark to market or speak to the momentum of the recovery and say New York versus Chicago versus San Francisco.

Speaker 13

And Andrew or Scott, I'd just be really curious. As you look into the future, would really appreciate your thoughts on kind of the Bay Area And how travel patterns may have changed there and kind of the upside you see into next year?

Speaker 4

Yes. I'll try with a little bit of color here if Scott wants to add in. I will say we track this by hub. We track this by Industry vertical, and the ones that are the biggest for United Airlines are in fact the ones that trail the most. So tech trails the most and professional services trail the most.

Speaker 4

And yet our results, I think, are leading the industry. So I think we've quickly and affirmatively adapted to this new environment. That being said, I still think those are going to recover. In particular, I'm convinced they're going to recover on global long haul at a faster pace than they recover on global or in 3rd haul domestic. And I will say even in the last few weeks, while it has been a radical change, there is a positive slope to the recovery rate that was I think really Nice to see.

Speaker 4

So from that perspective, I will say that business traffic in these key coastal gateways in New York and San Francisco still trail That of the interior hubs on average. This conference is being recorded.

Speaker 1

Only the main conference is recorded.

Speaker 4

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

Speaker 13

Appreciate those thoughts. And maybe a follow-up for Jerry on the 179 aircraft you plan to take between now and the end of 2023. How much of that financing is in place? How much do you still have to do? And how has your expectation for Cost of capital change.

Speaker 13

I mean, Jerry, you've seen a lot of these cycles. So, we haven't seen rate momentum like this. How are you thinking about Sort of supporting that aircraft book over the balance of the next couple of years. Thanks for taking the questions.

Speaker 5

So good question, Duane. So it's too early to tell you our entire plan for The mix of financing or paying for cash for next year's aircrafts, more to come on that, will remain, as I said, opportunistic. Yes, there's no question we're in a higher interest rate environment. But keep in mind The financing portion of ownership cost for a new aircraft is such a small fraction of the overall cost Of that aircraft and the benefit so overwhelms that. Even in the current interest rate environment, it really doesn't Have a dramatic impact on us.

Speaker 5

Sure, I love doing AATCs at 3%, but AATCs at 6% or a little bit higher, That's what we used to do 7, 8 years ago. So there's nothing new here.

Operator

Our next question is from Connor Cunningham from Melius Research.

Speaker 14

Hey, everyone. Thank you for the time. Just on the business travel recovery, you talked a little bit about it. What is actually under what is your assumption for business travel in the Q4 that's underpinning your revenue guidance? And then Can you just speak to just the international volume side?

Speaker 14

That sounds great, but I think there's still some work to do on the yield side. And my guess is that's a pretty good tailwind into 2023. So just Any high level thoughts there would be

Speaker 4

helpful. Yes. When we did the forecast, it's pretty much flat. So we're not expecting a significant recovery on the traditional way we measured it. I'm not sure that's the right way to measure it anymore, to be clear.

Speaker 4

So We'll be agile on that as we go forward from this at this point.

Speaker 14

Okay. And then Just to piggyback in the Yes,

Speaker 4

I didn't finish your question. On cabins, I think your perspective is somewhat correct there. We've seen incredible strength in the new Premium Plus cabin and in the Coach cabin. We've also seen really good strength in the Polaris cabin, but not as good, I have to say as the back of the airplane. And so as that business continues to come back, we will hopefully likely see, I think further strength in the front section of the aircraft.

Speaker 4

Again, the numbers are pretty downright strong from a load factor point of view, But the more leisure oriented nature of some of the Polaris traffic today does fly at a lower yield Then it had traditionally been in that cabin. So as that returns to normal, however, fast or slow that occurs, that will continue to provide, I think more of a tailwind going forward.

Speaker 14

Okay. And then just to piggyback on Scott's question Earlier, just the bending the cost curve, all that stuff, we're trending in the right direction, it seems. And just from a high level, I know there's a lot of unknowns on the capacity But when I think about the buckets of the headwinds and tailwinds as we go into 2023, less disruption costs, Less 777 maintenance, but pay is obviously trending higher regional expense. Just can you bucket any other like high level things that we may be missing out there as we think about 2023 overall? Thank you again.

Speaker 5

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

Speaker 5

And I think we've been pretty clear what all the components are.

Operator

Our next question is from Dave Vernon from Bernstein.

Speaker 15

Hey, good morning

Speaker 11

guys. So Andrew, I wanted to follow-up on that point you made about running a less peaky schedule. If I look back sort of historically or think back historically anyway, 1st

Speaker 4

and 4th quarter load factors that drop off

Operator

Mr. Bernstein, we're

Speaker 11

looking at the earnings. Yes, you're going to

Speaker 6

be. Can you hear

Operator

me?

Speaker 4

We can now try again. We got the first sentence or 2, but you cut out after that.

Speaker 11

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

Speaker 4

Exactly true. In fact, one of the good examples will be our European schedule for this winter. We would use to Cut off Tuesday or Wednesday, a non peak day on many of our transatlantic flights from New York. And this winter, if you look at them, I think a higher percentage of them Operate daily throughout the entire week. And the other example is the 1st 2 weeks of December.

Speaker 4

So after Thanksgiving, But before Christmas, we're already booked to 2.3 points ahead of where we expected to be and versus 2019. Again, that off peak period is doing swimmingly well. And so more and more will digest all this. And to the extent we can Run an operation that has fewer peaks in it, particularly having the summer peak not be so much higher than the rest of the year. That creates a dramatic amount of efficiency because when you think about it, we staff our pilot workforce for the fly in that we do From June 15 to like August 15.

Speaker 4

And if we can staff for a much larger chunk of time, that should be incredibly efficient.

Speaker 11

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

Speaker 11

But I was just trying to think like, Is there any way?

Speaker 4

Well, you have to separate it domestically versus internationally. On the international front, We have almost all of our aircraft that have gone through the Polaris mod. I think we're down to 1 or 2 787s that need to be done. And Both of our 767-400s, we have 1 or 2 of those done. And so we'll be done with that Polaris mod shortly.

Speaker 4

Versus 2019, We also have the Premium Plus cabin, which was just had been started, but was not significant. And today, I think it's about 7% of our long haul ASMs. So that is out there. I think the big tailwind comes domestically, as these United Next Aircraft arrive with Dual class cabins plus a large premium section in Coach. And as you can already see from our Per seat sales, which I think were up about 20% in the quarter, as we replace single class RJs with those jets, I think there's a lot more of that ancillary revenue to come.

Speaker 4

So I think domestically, there's just we've only just Started would be my take on that front. Internationally, I think our premium distribution in terms of seats in Polaris It is at this point pretty stable given where we are just finishing up the reconfigurations.

Operator

We will now switch to the media portion of the call. Please hold for a moment while we assemble our queue. Our first question comes from Alison Slider from The Wall Street Journal. Hi. Thanks so much.

Operator

Scott, I wanted to ask

Speaker 16

you about your comments on the FAA and TC Staffing, you mentioned talking to Secretary Buttigieg earlier this week. Like how are those conversations going? Because publicly, he still And to say most of the problems come from the airlines and like are things more constructive behind the scenes?

Speaker 2

Well, you had a really good call with the Secretary on Monday, as you referenced, because this is really Something that we need to help them solve. It's not the FAA's fault. And so I think when you talk about construct, that's probably the most important point. This is an agency that's done an incredible amount of work over the last couple of decades and they've been asked to do far more. The asks of the age the number of people at that agency that are working on drones, space launches, aircraft certification programs It is just massively higher than it was before and they were forced to fund that by taking headcount Out of the operational budget, the day to day operational budget.

Speaker 2

And it's hard to just look at the basic fact that there's Fewer controllers today than there were 30 years ago. It's like that sort of doesn't pass the smell test for anyone, I don't think. And but that's not their fault. That's an issue that we have to help them solve in FAA reauthorization. So that's the conversations are about.

Speaker 2

How can we help You saw that. I've had one conversation with someone from the administration, three conversations with people on the Hill just in the last 24 hours about that Subject. And our goal in the airline industry is to help solve that problem. Because until we it's a supply problem. Until you fix the fundamental issue, it's going to be challenging.

Speaker 2

It'd be mostly works okay in a month like September. But we're going to always have struggles in a month like July until we get staffed up to a level that's More reflective of the amount of airline operations that are in the sky today. And so I think we're aligned between us and the FAA On the need to work in a bipartisan way on the FAA reauthorization bill to increase their strapping to be commensurate. By the way, this is about we've made 100 of 1,000,000,000 of dollars investment in infrastructure. This is the human infrastructure that goes along with All of that concrete that we're building.

Speaker 2

We had it this Sunday in Denver where we have 114 operations per hour, beautiful big airport, Four parallel runways, Bill, but wound up with something like a couple of sick calls and the airport operation on Clear Blue Sky Sunday was cut from 100 and 14 to 68. We don't get to use our infrastructure unless we have the human capital

Speaker 3

to support it and it's

Speaker 2

about to get the human capital to support all the

Operator

Our next question is from Leslie Joseph from CNBC.

Speaker 16

Hi, good morning. Just wanted to clarify, you said 15,000 new employees this year and 15,000 next year. That's way ahead of, I think, what the goal was By 2026 with United Next, how much of that is to replace people retiring and maybe some Tricia and then also if you have any update on the pilot negotiations, do

Speaker 7

you expect

Speaker 16

to Raise the pay compared with the original TA that was sent out? Thanks. Yes.

Speaker 3

Hi, this is Brett Hart. So, our hiring is actually right on schedule in terms of what we expect Across the next 4 to 5 years with respect to United Next.

Speaker 2

And sure, some of that

Speaker 3

Is to replace people who are no longer with the company, but the vast majority of that is geared towards Meeting our overall plan.

Speaker 5

And by

Speaker 3

the way, we're having no trouble finding terrific talent throughout the system. We are convinced at this point that we are definitely an employer of choice. So we'll have no issues meeting our needs And we expect to continue to hire as we said earlier. With respect to the pilots, our discussions with our pilots are Obviously ongoing, as they are with our other unions. So we don't typically comment Much beyond that, but we're continuing to make what we hope will be progress in that area.

Operator

Next, we have David Schaeffer from NPR.

Speaker 15

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

Speaker 4

Sure. I'll give it a try. We are definitely seeing a lot of strength for the holidays. We're obviously approaching the Thanksgiving time period and our bookings are incredibly strong. And as I said earlier and as you indicated, the bookings are a little bit different this year and that they're more spread out across multiple days, than they were on Any single day, it's been very, very close to the holiday in the past.

Speaker 4

So that definitely is a new travel pattern for us. And we're also seeing that develop for the Christmas time period as well. The price points, there definitely is this inflationary pressure in the country And everybody can see it as they're booking a hotel room and booking or even going to the grocery store quite frankly. And we're managing our prices to make sure that we can produce the results we need to do and also provide great value and benefits to our customers, We're putting back in a lot of that money back into the customer itself as we invest in these new aircraft, which are going to be fantastic, whether they're with seat back videos or WiFi and board and so on and so forth. So I'd like to think that money is going to great use to create a much better experience on board United Airlines as well as, as you can see, in great operations to make sure we're getting our customers for Thanksgiving or Christmas or any time

Operator

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

Speaker 1

Thanks for joining the call today. Please contact Investor and Media Relations if you

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