United Airlines Holdings Inc (UAL) — Q3 2015 Earnings Call Transcript

Thank you, Brandon. Good morning, everyone, and welcome to United's third quarter 2015 earnings conference call. This morning, we issued our earnings release and separate investor update, both of which are available on our website at ir.united.com. Information in this morning's earnings release and investor update and remarks made during this conference call may contain forward-looking statements, which represent the company's current expectations or beliefs concerning future events and financial performance. All forward-looking statements are based upon information currently available to the company. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our press release, Form 10-Q and other reports filed with the SEC by United Continental Holdings and United Airlines for a more thorough description of these factors. Also, during the course of our call, we'll discuss several non-GAAP financial measures. For reconciliation of these non-GAAP measures to GAAP measures, please refer to the tables at the end of our earnings release and investor update, copies of which are available on our website. Unless otherwise noted, special charges are excluded as we walk you through our numbers for the quarter. These items are detailed in our earnings release. Joining us here in Chicago to discuss our results are Acting CEO, Brett Hart; Vice Chairman and Chief Revenue Officer, Jim Compton; Executive Vice President and Chief Operations Officer, Greg Hart; and Senior Vice President, Finance and Acting Chief Financial Officer, Gerry Laderman. Brett will begin with some overview comments, after which Greg will provide an update on our operations. Jim will follow with a discussion on the revenue and capacity. Gerry will review our costs, fleet and capital structure, after which we will open the call for questions, first from analysts and then from the media. We'd appreciate it if you would limit yourself to one question and one follow-up. And now I'd like to turn the call over to Brett.

Thanks, Jonathan. And thank you all for joining us on our third quarter 2015 earnings call. As you are no doubt aware, our new CEO, Oscar Munoz, is currently on medical leave while he recovers from a heart attack he suffered late last week. The entire United family has Oscar in our thoughts and prayers. To provide leadership during this period, our Board of Directors has asked me to work with our experienced leadership team and serve as Acting CEO in Oscar's absence. We will continue to push forward the agenda we've laid out over the past six weeks, focusing on customer service, teamwork, and innovation with safety always remaining paramount. Like Oscar, I believe United has the people and the assets to achieve the same or greater margins as our peers. I, along with our management team, will continue to take the necessary steps to get us there. The last several weeks have been very eventful for United, with news of Oscar's heart attack hitting many of us hard. However, I want to assure you that the United team has never been more unified and committed to the goal of making United great again. Turning to our third quarter results. This morning, we reported pretax earnings of $1.7 billion, marking the sixth consecutive quarter of margin expansion. Our return on invested capital was 19.8% over the last 12 months, and we decreased our non-fuel unit costs in the quarter. Our employees' hard work is a significant contributor to these results, and I want to personally thank them for their many contributions to our success. I will now turn the call over to Greg to provide more information on United's operational performance.

Thanks, Brett. And thank you to everyone for joining the call this morning. I'd like to take this opportunity to thank our employees for their tremendous work through the busy summer season. Day in and day out, United employees are showing their commitment to improving our operational performance, and the considerable progress we have made reflects their continued dedication and hard work. Our entire team recognizes that United still has an opportunity to improve its operations, and we are all focused on raising our performance to the level we and our customers expect. However, I do want to highlight the progress we have made this year. Year-to-date, our consolidated on-time performance is five points better than the same period last year. Year-to-date completion grade also improved significantly as we have canceled over 30,000 fewer flights than last year, which translates into 2.7 million. In fact, year-to-date, including both the mainline and express operation, we have a better completion rate than our main competitors in New York and Chicago, and we have better completion in Houston than our major competitor in Dallas. Finally, in September, we set an all-time record for bag handling, and so far this year, our mishandled bag rate is 9% better. Over the past several calls, I talked about the investments we've made to improve operations. The third quarter results showed that these investments, along with the hard work of our frontline employees, are beginning to take hold. I'd also like to highlight our cargo operation. Cargo revenue in the third quarter was approximately flat year-over-year. While this year has been challenging with declining surcharges and increasing industry cargo capacity, the team has done excellent work offsetting this pressure through an intense focus on expanding our market share. Year-to-date, United's market share among carriers improved approximately 10% compared to the same period last year. This led to approximately 8% growth in cargo revenue over the last 12 months, a period in which our major competitor saw their revenue decline. To the entire operations team, I want to thank you for a very good year so far, but we still have a long journey ahead; you should all be proud of the significant progress we've made. With that, I'll turn the call over to Jim.

Thanks, Greg. Again this quarter, I'd like to thank our customers for flying with United. Many of you have noted the improvements in our products and our operation, and we are continuing to do more every day to deliver the product you desire. In the third quarter, our consolidated unit revenue declined 5.8% in line with our expectations. The four factors we discussed in our prior earnings call—a strong US dollar, the effects of lower oil prices, pressure as a result of margin-accretive initiatives, and competitive pricing actions—contributed to negative unit revenue growth year-over-year. In the third quarter, we amended our co-branded credit card agreement with Chase and Visa more than two years before the original expiration date. We expect the multiyear extension will generate an incremental $200 million of revenue in the second half of the year and approximately $400 million of incremental revenue for 2016. Turning to the fourth quarter, we expect our unit revenue to decline approximately 4% to 6% year-over-year. The major drivers of the fourth-quarter decline are similar to those in the third quarter. We expect the foreign exchange impact to account for 1.5 points of year-over-year PRASM pressure. Assuming current conditions continue, we anticipate that the impact of lower surcharges, particularly in Japan, will account for approximately one point of weakness. We continue to see degradation from our corporate energy customers, with revenue down approximately 35% year-over-year, representing roughly one point of PRASM decline. We also expect the current competitive pricing actions to drive approximately 1.5 points of decline in the quarter. Finally, the margin-accretive actions we are taking—such as installing slimline seats—are anticipated to drive approximately 0.5 PRASM decline. I'd like to take this opportunity to speak briefly about our presence in China. China continues to be an important and profitable market for United. We are closely monitoring the changing dynamics of its economy. Following the currency devaluation and Chinese stock market decline in August, we saw a brief drop in bookings. However, bookings recovered nicely and have rebounded to near pre-devaluation levels. A second factor we continue to experience is significant competitive capacity growth in China. For the fourth quarter, we anticipate an approximately 35% increase in non-United capacity growth year-over-year. Despite these pressures, our major shipments in the US-China market are assets which will produce returns on our investments now and over the longer term. Results in Chengdu saw meaningful year-over-year improvement, and we are continuing to execute on our China's strategy with our new nonstop service to Shiyan, China. While the current revenue environment is challenging, it is important that we take steps to capture incremental revenue by better meeting our customers' needs. For example, we know that our business customers prefer two-cabin aircraft over single-cabin 50-seat aircraft. We have responded by significantly increasing the number of two-cabin regional jets for mainline aircraft on routes where we previously flew small regional jets without materially affecting capacity. To that end, 79% of United's top 100 business markets are now operated exclusively with two-cabin aircraft on weekdays. This is up from 59% in November of 2013. To put it in a slightly different perspective, 94% of the flights in these markets will be flown with two-cabin aircraft. We will continue this transition in the quarters ahead. While this is just one initiative, it is a good example of how we are listening to our customers and responding appropriately. With respect to capacity, in the fourth quarter, we expect to grow approximately 1% to 2%. This 0.5 point increase versus our prior guidance is due to a higher completion factor as improved operations are driving fewer canceled flights. For the full year 2016, we anticipate growing capacity approximately 1.5% to 2.5%, with a quarter of a point due to leap year adding an additional day to the calendar. In conclusion, as we move into 2016, we will begin lapping many of the headwinds to revenue performance and expect quarter-over-quarter PRASM improvement. We are working to return to PRASM growth, which will be supported by our advancements in our operations, network, and customer service. We want to be the carrier of choice, and we will continue to take the necessary actions to achieve that goal. With that, I'll turn it over to Gerry.

Thanks, Jim. Good morning, everyone. Let me also thank our employees for another record quarter, which was a direct result of their hard work and dedication. In the third quarter, our pretax profit was $1.7 billion excluding special items, representing a pretax margin of 16.6%. We increased our earnings per share by 65% year-over-year, generated $1.3 billion of operating cash flow, and achieved a 12-month return on invested capital of 19.8%. Our GAAP net income was $4.8 billion, but this includes a non-cash special item of $3.2 billion related to the reversal of our tax valuation allowance in the quarter. Non-fuel cost performance in the third quarter was excellent, with consolidated CASM, excluding fuel, profit sharing, and third-party business expense, decreasing 1.5% year-over-year. We expect CASM, excluding those items, to be flat to up 1% for the fourth quarter and to be down approximately 0.5% for the full year. Sensible cost management is critical for United's financial success. In the first nine months of this year, we've achieved approximately $600 million in non-fuel savings through our project quality efficiency initiative, and we expect to realize $800 million for the full year. We continue to expect to achieve our goal of $1 billion in annual non-fuel cost savings by the end of next year, a full year in advance of our initial expectations. Turning to fuel expense, we recorded a hedge loss of approximately $250 million in the quarter. For the fourth quarter, we are approximately 23% hedged and, based on the October 15 forward curve, we expect to incur approximately $275 million in hedge losses while participating in approximately 81% of any future price declines. For 2016, we have about 17% of our expected fuel consumption hedged. This hedge is currently in a loss position of approximately $43 million, but allows us to participate in approximately 93% of any future decline in oil prices. Looking ahead to the fourth quarter, we expect to achieve a pretax margin between 9.5% and 11.5% in the quarter, with pressure coming from passenger revenue, offset by improved MileagePlus revenue combined with lower fuel prices and solid non-fuel cost performance. As part of our balanced approach to capital allocation, our top priority is investing in our business. We believe it is critical that our employees are provided the tools to do their jobs efficiently and effectively. Our investments are major contributors to our improving operational performance, and we will continue to look for investments to further advance our progress in this area. In the quarter, we spent over $700 million on capital expenditures and continue to expect to spend approximately $3.2 billion for the full year. Part of this capital is allocated to aircraft. In the quarter, we took delivery of six 737-900ERs, four 787-9, and one new 737-700. We also added 16 additional 76-seat Embraer E175 regional aircraft, and now there are 75 of these customer-pleasing regional aircraft in our fleet. Debt repayment and pension funding were minimal in the quarter, as we made excellent progress, paying down debt and funding our pension in the first half of the year. So far this year, we made more than $900 million in debt repayment and contributed $800 million to our pension plans. Actions like this strengthen our balance sheet and demonstrate our commitment to reducing the financial risk in our business. Additionally, providing a meaningful return to our investors is fundamental to our capital allocation plan. In the third quarter, we spent $262 million on share repurchases. So far this month, we've spent approximately $100 million more to repurchase United stock, and this morning we entered into a $300 million accelerated share repurchase program that will be completed within three months. Furthermore, this program does not prohibit us from making additional open market repurchases of our stock throughout the duration of the program. To wrap up, we are proud of our results this quarter and will continue to focus on delivering strong earnings and allocating our capital in a thoughtful and balanced manner. The investments we are making in our people and our product will ensure a great future. Finally, I just want to reiterate what we said earlier: the thoughts of everyone here are with Oscar and his family. I'll now turn it back over to Brett for closing remarks.

Thanks, Gerry. Thank you again to everyone who joined the call this morning. This has been a challenging few weeks for us, and we are proud of how the United family has come together. Now let me go. We ask our customers and our employees to tell us how we could do things better, and we have heard from thousands of you. We are reading and listening to every single suggestion, and in the upcoming weeks, we will be announcing some changes that are a direct result of your feedback. We believe, like you, that United can be great again. And it is with your ideas, your support, and dedication that we will, as one United team, be successful. I'll now turn the call over to Jonathan to open the call for questions.

Thank you, Brett. First, we will take questions from the analyst community. Then we will take questions from the media. Please limit yourself to one question and, if needed, one follow-up question. Brandon, please describe the procedure to ask the questions.

Yes, Hey, good morning, everybody. Question to Jim. Jim, when you highlighted the sort of the four issues that have been undermining the revenue performance, you talked about the fourth one being this competitive pricing issue. And I know you sort of characterized it as such on this call. But when we look at the guidance that was put out today, I mean, rather than competitive pricing I mean it's referenced as softening of domestic yields and maybe I'm just reading too much into it, but when I sort of see that it tells me maybe this is a bigger issue and maybe it is more of a demand issue rather than just carriers going rogue on pricing. Can you just give us some additional thoughts on that?

Hey, Mike, excellent question. We are not seeing—if I talk about let's break it out, top of the domestic based on your question. We actually see what I would call a lukewarm or tepid demand and really good demand continuing kind of what we have seen in the third quarter, and so far as we head into the fourth quarter. And so that, as we think about our guidance, the items highlighted—whether it be foreign exchange—we still have that impact year-over-year, and if you took today's current exchange rates, you would begin to fully lap that in the second quarter of 2016. Then there is the international jump—there are lower surcharges, but that also flows across to domestic and impacts domestic also, that given current surcharges will lap itself also in the second quarter. And then we are somewhat unique with energy. And in the energy, as I mentioned, we are seeing about 35% declines in our corporate revenue associated with that sector. Quite frankly, we talked about that in 20% in the first quarter, 30% in the second quarter, and 35% in the third. We continue to see a drift towards that 40%. So as I think about the fourth quarter, that would be kind of the demand maybe that you are pointing to that we would see given our presence in Houston that might be what you are alluding to. But at the end of the day, also if you think about the course of the year, our expectations of demand at the beginning of the year were clearly lower as reflected in where GDP has gone through the year. So as we think about next year, many of those elements will start to lap, but we are still focused on where that demand will be versus our expectations. We are planning around 2% to 3% GDP in 2016, but like this year, we want to keep our eyes and monitor on where demand versus expectations go.

Great, very helpful. Then just my second question, and this is to Gerry on the fleet. If I sort of look at your latest fleet schedule and I kind of look back at the last time you published it, it doesn't seem like there's much change on mainline. I think you are holding a 747—you’re holding onto it a little bit longer than maybe what you had previously expected. But when I look at the regional side, it does look like that you’re holding onto some of those airplanes a little bit longer. I think there was a bigger reduction in the regional fleet a few months back. Is that a function of maybe some of the issues that one of your regional carriers is facing, and so in order to maybe backfill for some of that, it makes sense to maybe keep some of these airplanes in the fleet longer? What's driving that?

Mike, it is really just a timing issue on a few aircraft. It doesn't change sort of our long-term view on where the fleet is headed, and you will see over time less regional flying, more mainline flying as we upgauge but I wouldn't read too much into the change in the year-end number.

Hey, good morning, guys. Brett, congratulations on being selected to step up here and my condolences, I know you guys are all close to Oscar. I know you're still getting your feet wet in the role here, but given your customer service responsibility this year, I'm wondering if that's something you would want to talk to. What have you found? Where's the low-hanging fruit and where do we go from here?

Yes, appreciate that, Dan. We have been focused for some time and over the course of the year on improving customer service and identifying areas where we can make an impact and where possible make a difference in the short run. Oscar, certainly coming in and taking the time to talk to customers and employees, is laser-focused on that area as well. And this would be certainly one of those areas where we could say that our efforts are being expedited. I think that you see changes and improvements, and you probably already are in areas like our ability to deal with regular operations. You will see us addressing the boarding process. You will see a number of changes related to the overall in-flight experience. But we should keep in mind that at the very core, operational reliability is really the driver for customer satisfaction. I can ask Greg to add anything that he likes to add on this point as well.

Yes. Oscar is obviously capable of—as Brett mentioned—a laser-like focus on a number of things, one of which was reliability, and it is really continuing the trend we started a little over a year ago in terms of making improvements in operations and rethinking really everything that we do each and every day. The exciting thing for all of us is we are on the front end of a whole host of activities that we've engaged in over the past year to improve operations. We have a wave of things that are coming that will help carry us forward in terms of improvements.

Very good. I guess just a second follow-up here. One message that I'm really hearing from you is 59% of the departures getting a lot better from a margin profitability perspective, just given the RJ restructuring and you're obviously talking about getting back to margins relative to your peers. What are you seeing exactly in that part of the business in terms of profit improvement, and where do we go from here? What is there really with the RJ restructuring?

Hey, Dan. This is Jim. If you think about in two pieces, and we feel a lot obviously strong initiatives introducing the E-175 into the network. And we are very far along in that path, and we finished rolling out that path as we move into 2016, we are very far along. I would say in terms of the regional piece and becoming less dependent on it, if you think about continuing to remove 50-seat regional jets for about halfway in total, when you combine that with where we are in the 76-seater in terms of restructuring the network. So we are very excited about it. You are right; we are seeing the benefits of that product of two-class cabin. It comes in a number of ways. One is just being more competitive in this high business market. Secondly, it introduces the ability to drive ancillary revenue, which has been very successful this year. It introduces that 76-seater we put in mainline when substituting for 50-seaters, first class and economy class. So the network is responding really, really well in terms of, as we gauge the strategy to be much more competitive across the domestic network.

Hi, guys. Thanks for the time. So just one question here with respect to—actually I have two questions. There were some stories in the press this morning about some of the Chinese airlines merging cargo and operations, and then some speculation that maybe some of the larger airlines would merge. I don't necessarily want you to comment on what you can't comment on, but I am just kind of curious. China Southern is a SkyTeam member and Air China is a Star Alliance member, so have you thought about how something like that would affect your operations in China going forward?

Hey, Helane. This is Jim. Air China is a tremendous partner of ours, and quite frankly, we are continuing to build that relationship as we grow in China. To a lot of degrees here to your questions, obviously China is a very competitive market, and as I mentioned, we see non-United capacity growing 35% in the fourth quarter. I'll tell you it's very profitable for us, and its profitability quarter-over-quarter has continued through the first three quarters of this year, and I expect that to continue into the fourth quarter. And it's built on really strong planning that we've talked about in the past. One is capturing the demand that is very strong out of China. If you think about the demand in China, what we are finding is that although there is a large capacity increase, as the economy grows, it stimulates more traffic. There is also existing traffic from China to the US that many times goes over other connecting points, such as Korea. So it is nonstop coming in, but we are capturing some of that traffic too. So not only is that a market that's growing in new demand, we are actually recapturing some of that connecting traffic over hubs in Korea. That being said, our strategy again is also dependent on the secondary cities—not just the Beijing and Shanghai. A lot of studies have shown that the demand for China will double by 2020, with half of that demand coming from secondary cities. So when we look at our new service out of San Francisco, it's exceeding our expectations and doing very well year-over-year. And that's the heart of that strategy, which is why we are excited about our second secondary city, San Francisco to Shiyan, China. So I know I answered your question; China is an important part of our network, very profitable, extremely competitive whether it's cargo or whether it's passenger carriers, but we think we are really well-positioned to keep building on the profitability that we have there.

Hi, Helane. This is Brett. Just to put a point on that, I think the second part of your question. We are just not in a position to speculate on rumors related to potential mergers.

Okay, no, that's fine. And then I just have a completely unrelated question. How far along are you in—I know this I'm not saying it the right way—but how close are you to the cap on 70 seat aircraft with respect to your scope clause?

Helane, based on what we have in the pipeline, we would hit that cap sometime next year as we bring in the rest of the 175s.

Good morning. One of the things that investors point to continually with United is the free cash flow yield. But you guys don't really talk about cash flow. You don't talk about free cash flow, I don't think you ever guided to, and if you talk with people that believe in your stock, it has the potential to be one of the best free cash flow stories around. Good and even better industrial companies guide to free cash flow regularly, so I guess two questions for you. Why aren't you talking about your free cash flow more and highlighting what can really be sort of industry best in story there? Is it something that we need to know about that maybe we're getting ahead of ourselves, and if you care to put in a guidepost how should we think about free cash generation next year, I would love to hear that too.

So, Hunter, it is Gerry. This year, as you know, has been a great year for free cash flow, and really, kind of the first year that we made terrific progress in that direction. So it is something we look at. I personally get a little bothered by the way it's typically calculated, only because in airlines, there is a significant CapEx exposure to new aircraft. Depending on how we choose to finance new aircraft, that has a material impact on free cash flow. So what we are doing is kind of thinking about the best way to look at that and manage it and work with you and others on how best to deliver that message. But it is a focus of ours.

Okay. And then in the context of capital returns, I know that you guys said that you're going to be ramping up the buyback in the fourth quarter, which is great. It's good to see that certainly, but do we need new leadership to come in and to really sort of bless a more aggressive capital deployment strategy? Or is this something that the current leadership team has the willingness and ability to do on an interim basis in the event that you can be opportunistic on your stock in terms of buying it back, and in the event that you guys do have a bunch of cash coming into the business next year, either be a debt which you’re going to raise for new aircraft acquisitions or the free cash flow itself, is there any reason why the pace of the share buyback should not be materially increased in an all-equal environment as we move through the course of 2016?

So, Hunter, as Brett said earlier, we are moving forward with our plan, and certainly my plan in finance is to balance capital deployment. It has been in place for quite a while. Now granted, in the third quarter, our share buyback may not have been what some people would have expected, but keep in mind that was the circumstances we were dealing with in the third quarter. We just felt it was prudent to maintain the steady pace we were at. But as you can see what we have done this month already, between what we actually purchased in the open market and the Accelerated Share Repurchase program that we entered into, that's $400 million dedicated to the share repurchase this month. So we are absolutely committed to completing our current $3 billion program at or ahead of schedule. So that will continue. And let me talk about the other parts of the capital deployment strategy. It is absolutely essential that we make the investments we have to make in our people and our processes, systems, and our product. It's going to be done sensibly, and these investments need to be margin neutral or margin accretive. I think that those investments will be made within the CapEx guidance that we've been giving out. And then we got continued de-risking of our balance sheet. That's an area that we don't have the luxury anymore of pre-paying substantial amounts of high coupon debt. As you know, we've done all that. So going forward as we continue to manage to the right level of debt, that will be a combination of the debt that amortizes over the next few years, which is billions of dollars. First of all, we manage financing for new aircraft, and then it's an interesting situation because that's an area that we can access capital really, really cheaply, whether it's through the capital market or through the banks. And we continue to manage that, and in the process, while I would expect that we would continue to finance most of our aircraft deliveries, we may not finance them to the level that we have in the past. And that's another way of getting to our goal of de-leveraging. But there is no question, and as you saw given our commitment this month, we are very focused on, as part of that, also doing the right thing with returning capital to shareholders.

Good morning. Thanks for taking my question. Are you guys ready to give a split between the domestic and international growth embedded in the 2016 capacity guide?

Hey, Julie. This is Jim. We've guided to consolidated growth of 1.5% to 2.5%. Right now, as we look at capacity for 2016, we'd be up 1% to 2% on the domestic side and 2% to 3% on the international side, so that's how we would split that 1.5% to 2.5%. And I always say we're going to keep our eye on demand and make sure that we have the best alignment of demand with capacity, but we're really comfortable with that breakout right now.

Okay, great. And then any comments just directionally on how that 2% to 3% internationally was split between the three geographies?

I will give you some direction on that. We recently announced some markets we are very excited about, San Francisco to Auckland, San Francisco to Shiyan, China, as well as San Francisco to Tel Aviv. So San Francisco is a key focus for us to continue to capture the benefit in Asia as well as we have a terrific long history in Israel that we feel really excited about the San Francisco-Tel Aviv flights. So a lot of that is off of the West Coast, or some—there's a little bit of run rate in some areas this year, but that will be things that we are ready to talk about right now. Julie, I think it is a number of things. First point to some of the things that we talked about and the improvement on the operations as we have gone through the year. The operations team has done a tremendous job, and so we are building that reliability that we need to build, and as Greg mentioned, we have more to go and we are going to continue to do that. From a revenue perspective, you can clearly see that when you become the carrier of choice, at the margin you build on that, and you see that incremental revenue come to us. We are very excited about that. The revenue management team, although there is competitive pricing out there, we approach that as not a one-size-fits-all result and, not into a lot of detail, but the revenue management team works extremely hard, particularly at high-demand periods, to make sure that we have the best mix of demand on the aircraft. We are doing a really strong job of that. The network has, as we talked about, has begun our upgauging by introducing two-cabin aircraft into the business market; it is giving us some good results. So, on a number of those things, and yet we do have those pressures—not because of price expansion, but the fact that the energy sector is now, I think the team has done a terrific job in managing through that.

Hi, good morning. A question for Brett. We met with Oscar recently and he indicated, in these are his words, that United had lost its front line. And I for one appreciated the bluntness of that statement. He also indicated that he expected to have the final management bench in place by year-end. I know you spoke about pushing forward with the current agenda, but I'm curious if your views on the front line and the timetable from management clearly are consistent with his.

Yes, I appreciate that question, Jamie. I think first you have to put in the context what Oscar was doing in his seven weeks with the company, and his commitment first and foremost was to get out into the operations, to get down into break rooms or to get out on the ramp to talk to employees and the focus very specifically on what they would like to see change. And he heard it at every location that he went to, and it's very healthy for us to receive that feedback. Oscar had a level of urgency with respect to addressing; getting our employees the tools they need to provide terrific customer service, which is at the end of the day his clearly stated objective. So I think what you may have read from that perspective into Oscar's comments was a real sense of urgency which we all need to have about ensuring that our employees, our front line employees are able to provide the level of service that they would like to provide and, in some respect, we really acknowledge that we can do better and are working very hard on that. I wouldn't misinterpret Oscar's desire to create urgency in that area, which is appropriate, with an outcome perspective to disconnect between our front line employees and management so we are very focused on it and we expect to continue to move forward with the momentum that Oscar brought in that area. As related to the management team, this is a team that has been here through the first quarter, which resulted in record results, and the second quarter, which was already in record results, and the third quarter, which we resulted in record results. We would expect you would expect every new CEO to come and evaluate his management team; that is the CEO's prerogative, and any changes that are made are based upon what's perceived that we needed, and in part what that CEO perceives that he or she needs. So I don't think that's out of the ordinary for a new CEO. I'll tell you that the team that we have here now is fully capable of, and well, in fact, executing the plan for the rest of this year. And we feel very confident about that and we feel very confident about our ability to continue to connect with the front line employees and move forward as a unified organization.

Hey, Jamie, this is Jim. Yes, clearly the competitor pricing pressures that we talked about in Houston, Dallas, and Chicago continue, and so those competitor pricing pressures are more isolated in those markets. I would add that the energy sector becomes a little bit more spread both internationally and domestically where we have seen that demand. But outside of that, we see good demand relative to the—obviously energy—relatively strong demand, and so I think that as we manage price relative to that demand, we will continue to do that. But I think there is a strong demand outside those markets that you refer to.

Thank you. Brett, just on your comments about closing the margin gap between you and your peers, I guess you're a few innings into on the cost side and a fuel-adjusted basis margin gap having to close much so, is the story here that you just have to wait for Houston and domestic yields in the Pacific to get better before the gap starts to close or what are the main levers over the next 24 months that you see closing that gap?

Well, clearly, this is Jim. Clearly the energy is putting pressure on us. And so as that sector moves, whether it softens a little bit more and begins to improve, that will obviously have an impact on us because the corporate energy business and that sector and our hub in Houston is very much affected by that business. In terms of growing margins from a network perspective, I separate that because the network, on a path as I saw, as we kind of referenced what we are doing with two-cabin aircraft becoming less dependent on regional jets, that upgauging strategy is very much a margin-accretive strategy. We are going to continue— that is our path to continue into 2016. In addition, that upgauging is just a piece of that, is slimline activity that we began this year. Remember that we've talked about it before—it comes out of $0.04 to $0.06 rise depending on the fleet in the market and it comes out of about $0.01 to $0.02 CASM depending on the market, very much margin-accretive. So I would summarize that being the team's initiatives going forward are to continue to drive incremental margin, and we are really confident that we can do that. There are some extra things, obviously, such as the energy that put pressure on that. But we are moving forward, the network will continue to contribute to that.

Yes. Joe, it's Gerry. On the cost side, keep in mind that brings next year as we continue with project quality initiatives, we hit that run rate of $1 billion. That's a couple hundred million incremental to this year, so there are some real benefits there. We've got to continue de-leveraging; that helps on interest expense. And yes, don't forget as we continue on reliability initiatives, efficiency is going to drive costs down as well.

Okay, thanks for that. And Gerry, I guess just on project quality, just the $200 million in savings expected in 4Q just given the pace that you guys are moving out, how much upside is there to the $1 billion at this point? And then if you could just—is there an interest expense target that you think is appropriate for next year, just given the de-leveraging?

On project quality, it is too soon to tell sort of pace going forward beyond the initial initiatives. We'll have more color, I think, when we start our talking about 2016 cost guidance in January. But I can tell you that nobody is stopping. The $1 billion will be reached, and the sort of the sensible cost management culture is embedded in everyone's DNA here, so we will continue with those efficiencies. As Jim said, as we update, we are going to get some benefits there on the cost side as well. So we will have more color for you into next year. But we are hopeful that we will continue with the progress we've made. Not really. We're not going to that yet. We'll take a look at where the opportunities are there and will have more color on that in January.

Hey, good morning, everyone, and thank you for taking the question. I guess my first question for Jim certainly appreciates all the color around what you're seeing in China right now. It seems like from a booking standpoint, you aren't seeing much of a change. But with the capacity increases you noted, I guess will unit revenues in the region get worse before they get better, or do you see—can you continue sequential improvement on the Pacific like you're seeing from a system-wide perspective?

Hey, Andrew, Jim. Obviously, that capacity, if you think about China by itself, that capacity does put pressure on unit revenue, and we see that 35% growth in the fourth quarter. But on the other hand, demand is growing strong, but as I mentioned, on the couple of sources of that demand, whether it is traffic that's making it, and it is also the US over other connecting points. So the economies stimulating it. So we are filling much of that capacity, and as you think about going forward, the Chinese carriers continue to use the rights. As we move beyond 2016, given the current allocation of rights, we should begin to see that capacity growth debate.

Great, thank you for that. And my follow-up question. I guess at this time, are you willing to say when you think you could get back to a flat system-wide PRASM?

Andrew, this is Jim. I am not. I talked a little bit about kind of the pieces that are moving, foreign exchange that is giving current levels of foreign exchange, the negative impact of PRASM will begin to fully lap in the second quarter. The lower surcharges will lap fully in the second quarter given where they are at today. The energy business is the one that we are watching closely. We've seen it soften a little bit more from the second quarter, and we talked about being 35% down in the third quarter. Based on the pricing structure today, that would lap itself in the third quarter of next year. So it is difficult to pinpoint when that PRASM would be flat year-over-year. But we think those pressures—the negative pressures—begin to update as we move towards that. And the last piece is that, as I mentioned in earlier comments, that we are going to keep our eye on demand. Demand at the beginning of this year was expected to be greater than what we’ve seen. And so it makes it difficult to pinpoint that; but as I mentioned, in my comments, we do see that quarter-over-quarter sequential improvement as we head towards growing PRASM.

Thank you very much. Brett how does your vision or the initiatives you will introduce to realize that vision differ at all from Mr. Munoz's vision or initiatives?

Hi, Geoffrey. They don't differ at all. We have a plan in place, and we are going to execute that plan over the course of the next couple of months to finish out this fiscal year. Oscar's focus and what he brought to us during the time that he was here was a renewed focus on our customers, on getting our employees the tools they need to succeed in providing excellent customer service. Making sure that our systems and processes are geared towards those objectives, and he had a very strong focus, first and foremost, on safety. We are using what he provided in terms of his vision as a lens for executing on our plan for the rest of this fiscal year. So those perspectives are entirely aligned, and there would be no dramatic changes.

Great, thank you very much. In line with that, what is on the table beside a new tone that will United conclude contracts with its flight attendants and its maintenance technicians, and then if you may, is there anything that's going to be a game changer to the in-flight experience and plans that you guys are taking now?

So on the first part of that question, we remain very focused on achieving joint collective bargaining agreements. We think that Oscar's focus again was on connecting immediately with our front-line employees and with our labor leaders, and we will continue that process. So obviously, we strive towards achieving agreements that are fair to our employees and fair to the company over the long run, so we remain focused on that. In terms of the in-flight experience, I'll allow Greg to—Greg or Jim, to provide perspective on that.

Hey, Geoffrey, Jim. On the products, let me jump on the product side, and I think what you are going to see is when I think call it cadence, and we have been doing a deep review of our product and, quite frankly, listening to our customers and our employees being involved in that conversation about different things we can do. So it is cadence, and I would say that we are down to three choices of premium coffee, and that was something we heard loud and clear. I think we are really, really close. We kind of go through that process bringing our employees quite frankly into that process, and our customers are going to enjoy that so forth. It is a small example of cadence that you are going to see across the company. Relatively quickly, I want to say this is going to come slowly. Recognizing our best customers, our flight attendants today are doing a terrific job of offering a free drink to some of our best customers in the economy cabin when they don't get their upgrade. So, that's another example of cadence and things from a product point of view. I put all that we have a number of product things happening. Whether as to the continuation of rolling out Wi-Fi, whether it's the reconfiguration of our aircraft and growing flatbed seats, newer San Francisco and newer LA will be 100 flatbed seats beginning on October 25 with our PS service in New York. So, a number of product things are going to be happening as well as the things that we are hearing from our customers and employees.

I was going to ask pretty much the same thing about the in-flight experience. How quickly are you going to have more details on that? There were some references to some other initiatives coming out and maybe some guidance in January. When do you expect to have more details on anything additional on in-flight experience?

More details are coming over the next week, and we will be starting—we will announce more of those details. Again, it is a cadence that a cadence as we can implement them. Some items take longer to implement and plan, but as we move through the next several weeks and through the end of the year, you will hear many of those details.

And anything you can say more on the boarding process? I mean that's something that carriers constantly tinker with; is it just part of that fleet that's giving you problems or you are looking at everything and what might you change?

It is interesting. After all, who is looking at the boarding process, because that's one of the things, quite frankly, that we hear a lot about and how we can improve it. We are actually doing some testing of that boarding process here in O'Hare beginning this week, changes to it. So nothing to announce yet, but again an example of that. There is a lot of activity happening based on what we are hearing from our employees and what from customers. You will hear more on that where we describe how that testing went. We are going to try—you will hear we will be experimenting with some different boarding processes, give some better details on how we can improve that.

Brandon, this will conclude our call. Thanks to all of you on the call for joining us today. Please call me at relations if you have any further questions. And we look forward to talking to you next quarter. Good bye.