United Airlines Holdings Inc (UAL) — Q4 2021 Earnings Call Transcript

Thank you, Brandon. Good morning, everyone, and welcome to United's fourth quarter and full year 2021 earnings conference call. Yesterday, we issued our earnings release, which is available on our website at ir.united.com. Information in yesterday's release and the remarks made during this conference call may contain forward-looking statements, which represent the Company's current expectations or beliefs, concerning future events and financial performance. All forward-looking statements are based upon information currently available to the Company. A number of factors could cause the actual results to differ materially from our current expectations. Please refer to our Earnings Release, Form 10-K and 10-Q and other reports filed with the SEC by United Airlines Holdings and United Airlines, for a more thorough description of these factors. Also, during the course of our call, we will discuss several non-GAAP financial measures. For reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please refer to the table at the end of our release. Joining us today to discuss our results and outlook are, Chief Executive Officer, Scott Kirby; President, Brett Hart; Executive Vice President and Chief Commercial Officer, Andrew Nocella; and Executive Vice President and Chief Financial Officer, Gerry Laderman. In addition, we have other members of the executive team online available to assist with Q&A. And now, I'd like to turn the call over to Scott.

Thank you, Kristina, and good morning everyone. Thanks for joining us today. Before I get into the details of our fourth quarter and how we’re thinking about the year ahead, I wanted to share some brief observations about the recent developments regarding the rollout of 5G. Mostly, I want to thank the White House Secretary, Buttigieg, and the CEOs of AT&T and Verizon for finding and agreeing to an approach that mostly avoided what would have been severe disruption for passenger and cargo operations in this country. This wasn't an issue created by the airlines. Every carrier follows the rules dictated by the FAA. Since we first heard from the FAA about this issue in November, United has been 100% engaged to underscore the severe risks the 5G rollout poses to aviation but more importantly to bring people together and drive consensus around common sense solutions. And while we don't have a final resolution quite yet, I'm confident we'll get there. This problem has been resolved collaboratively, allowing a fulsome rollout of 5G without significant impact to aviation in 40 countries around the world, and we can do the same thing here in the United States. While I wish it had happened earlier, the good news is we now have everyone engaged, the FAA and DOT at the highest levels, the equipment aircraft manufacturers, airlines, and the telecoms. And I'm confident we'll soon have a clear set of objective criteria that will allow a full rollout of 5G without significant impact to aviation. I'll close this part of my comments by once again thanking the administration and Secretary Buttigieg, but also a particular thank you to the CEOs of AT&T and Verizon for voluntarily agreeing to these near-term restrictions near major airports. With that, I'll turn to discussing our results and outlook. Over the last year, the United’s team persevered through the impact of COVID, but also made incredible progress laying the foundation for the future. Omicron is, once again, impacting the near term. But as we've done since March 2020, we're taking action on capacity, and we remain confident in the long-term projections in spite of the near-term headwinds from Omicron. But before we discuss our results and outlook, I want to take a minute to thank and brag about all that the people of United accomplished in 2021. In spite of the historic challenges, United came together as a team to get through the worst crisis in the history of aviation and set ourselves up to be the world's leading airline on the other side. We saw our NPS improved by 30 points versus 2019 and introduced United Next to grow the airline and improve the product for customers. But we also made unique, real and structural changes to our process and technology, which we believe is going to lead to best-in-class CASM-ex performance once we have the full fleet return to service. I think perhaps one of the least understood industry changes is that United is expecting to exit 2022 at a CASM-ex run rate below 2019, an expectation that sounds very different than most others in the industry. It is a transformational competitive change. So, while we can't control the exact timing of course of COVID, we can improve the customer experience and control our costs, and that puts us in a completely different competitive position to outperform in the future. In the short term, however, we're remaining responsive to the risk posed by the Omicron variant. Omicron is impacting demand in the near term, but the biggest impact of the Omicron fueled surge in COVID cases we've seen so far was on our people, and it led to a significant disruption in our operational performance over the holidays. As tough as this period has been, I'm particularly grateful that because of our vaccine requirement, we are no longer losing vaccinated employees to COVID, and we still don't have any vaccinated employees hospitalized. Our vaccine requirement has truly saved lives. As we look to the remainder of 2022, Omicron is impacting near-term demand, and we're reducing our capacity as a result. But bookings continue to be strong for March and beyond, and our base case remains a continued recovery in demand, including international and business. Gerry and Andrew will give you more specifics on what we're changing this year on capacity. But the important point is we remain confident on the long-term CASM-ex target and future of United. We believe and certainly hope that as a company and society, we are moving into the endemic stage of COVID. But we'll continue to manage as we have throughout the crisis and once again this quarter and be responsive to what actually happens instead of what we hope will happen. I'll close by once again thanking the United team. They've done amazing things since the crisis began, and they've laid the foundation for United to be the world's leading airline going forward. And now, I'll hand it over to Brett.

Thanks, Scott. I'd like to start by thanking our employees for their hard work in the quarter. In the busiest travel season since the start of the pandemic, our team dealt with disruptions from weather events; changing international travel requirements; and most recently, the impact from the Omicron variant. With Omicron impacting both our employees and the rest of the country over the holidays, our team pulled together to serve our customers, and we are grateful to them. As Scott mentioned, this latest variant has caused a delay in the expected recovery and having an impact on bookings in the first quarter. However, we remain confident that travel will rebound quickly as cases subside. We expect a strong summer and second half of 2022, consistent with our expectations pre-Omicron. While Andrew will outline the changes we've made in the near term on capacity in just a moment, we are confident and committed to our 2023 and 2026 financial targets. With our United Next network plans in mind, we look forward to hiring the next generation of United pilots. Next week, we'll host a grand opening of our United Aviate Academy in Goodyear, Arizona. We're excited about the role our world-class pilot training facility will play in recruiting and preparing the next generation of United pilots. In fact, we welcomed the inaugural class in December, which consists of 30 students, 80% of whom are women or people of color. In the near term, we are making sure we are fully staffed as this is critical to executing our plan as the recovery takes hold. As difficult as the holidays were, we are returning to a normalized operation. We've taken additional steps to ensure that disruptions are minimized for our customers through capacity management and incentives. Regarding the current labor environment, while we have small pockets of hiring challenges, those do not currently impact our ability to operate the mainline and are not impacting our capacity planning for 2022. We feel confident in our ability to achieve the level of hiring at United that supports the growth we are planning in the second half of 2022 and beyond. Despite Omicron's recent impact, we've achieved the highest-ever Net Promoter Score in our history, which is undoubtedly due to the team's service improvements and technological advancements that make flying with us easier than ever. A couple of examples. This year, more than 760,000 customers have benefited from ConnectionSaver. And the percentage of customers that have misconnected in 2021 is the lowest since the merger. Our clubs in the U.S. are back, and we're ready for international travel to return as well, as this includes six Polaris lounges. We made it easier than ever to order onboard with our PayPal QR Code. Also, our expanded beer, wine and snack offering is now available on nearly all flights over two hours. Gerry will provide greater detail on our 2022 costs, but our 2022 budget incorporates the elevated inflationary pressures seen by the rest of the country and fully reflects the labor expense we expect to incur in the year. Importantly, the changes in our fleet and mix of flying, however, give us the confidence that we will reach CASM-ex below 2019 by the fourth quarter of this year, putting us on track to achieve our long-term cost goals in the United Next plan. While the macro environment delayed the recovery, we continued to act on additional initiatives towards our goal to become 100% green by eliminating greenhouse gas emissions by 2050. United is now the largest airline to invest in zero-emission hydrogen electric engines for regional aircraft through a new equity stake in ZeroAvia, a leading company focused on hydrogen electric aviation solutions. We also announced the second round of corporate participants in our Eco-Skies Alliance program. We believe each of these initiatives, among others, further solidifies United's position as the industry leader in sustainability. With 2021 behind us, we're responding to the near-term volatility with areas of the business we can control while continuing to invest in our people and products as we plan for our United Next plan that will transform the airline in the coming years. And with that, I will now turn it over to Andrew to discuss the revenue environment.

Total revenue for the fourth quarter reached the high end of our forecast, but was down 25% compared to 23% less capacity than the fourth quarter of 2019. TRASM for the quarter decreased by 2.5% compared to the same period last year. We are pleased to achieve the high end of our Q4 revenue guidance, though the Omicron variant negatively impacted TRASM by about 2 points and delayed the expected recovery in demand and revenue by several months. Prior to Omicron, we were set to achieve nearly flat unit revenues in the fourth quarter of 2019. As in previous quarters, our cargo operations once again achieved record results for United, with total cargo revenue increasing by 130% from the fourth quarter of 2019, totaling $2.3 billion for the full year. In the fourth quarter, loyalty revenue and other revenue rose 3% compared to the fourth quarter of 2019, amounting to $518 million. Looking ahead to our first quarter outlook, leisure bookings and demand for late February and March are largely in line with our expectations. However, Omicron caused disruptions to leisure demand in January across most regions, resulting in increased cancellations. Bookings and cancellations are now returning to a normal pattern. Business demand saw a sharp decline in January compared to early December. As business travel typically books closer to the travel date, we remain hopeful for a strong rebound as we move through the quarter, although this is closely linked to the situation with the virus. Our revenue projections suggest that business demand will recover by the end of February to levels similar to early December, approximately 40% lower than the same period in 2019. Trends in leisure demand for travel later in the first quarter of 2022 have allowed us to effectively manage our yield quality, especially compared to our experience during the Delta variant surge. Consequently, we remain optimistic that the impact of Omicron, while significant, will primarily affect January and February. While we cannot predict additional widespread variants in the future, we anticipate that the effects of Omicron and any future variants will diminish over time compared to the impact of the Delta variant. We now expect total revenue in the first quarter of 2022 to decline by 20% to 25% compared to Q1 2019, with capacity expected to decrease by 16% to 18%. We have adjusted our capacity plans for Q1 in light of anticipated lower demand due to Omicron. The reduced capacity for Q1, combined with a more cautious outlook, means our latest full-year 2022 plan will reflect lower capacity compared to 2019. This is a revision from the 5% growth from 2019 that we anticipated back in October. We have scaled back our 2022 capacity by decreasing aircraft utilization and postponing the return of certain planes to service. Our grounded 777 jets are expected to return to flight in March and gradually resume service fully by November. Additionally, we have postponed the return of certain narrowbody jets to the second half of 2022 and reduced planned utilization levels for our regional jets for the remainder of the year to address pilot shortages. These adjustments mean that typical mainline aircraft utilization is expected to remain significantly below normal until Q4 of 2022. The gradual reintroduction of this idle capacity, especially from larger jets, along with reduced utilization of regional jets, will noticeably affect our gauge, CASM-ex, and overall ASMs this year, as Gerry will explain shortly. We still expect our international long-haul flights to experience a strong margin recovery compared to the last cycle as we reach the second half of 2022. We expect that new capacity to Africa, India, and the Middle East will largely compensate for the lower capacity to Asia in the foreseeable future. We are carefully monitoring international demand but anticipate a recovery in close-in demand post-Omicron. The booking curve for transatlantic flights was shorter than usual in 2021, and we expect record performance in 2022 as well. Currently, bookings for the Atlantic peak travel season are proceeding as expected, and we've observed some easing of border restrictions to Israel and England. We are collaborating closely with our global partners as we rebuild our international network, and late last year, we established a great new partnership with Virgin Australia. As the leading U.S. carrier to Australia, we believe this partnership will enable us to efficiently and profitably resume our flight schedule to Australia. We are on track to enhance our onboard products by introducing United's signature interior. We have now received 16 737 MAX 8s featuring this interior, and we are progressing towards modifying our remaining narrowbody jets, with the goal of achieving a consistent and superior look and feel across our mainline fleet by early 2025. Our future fleet will feature a larger premium mix, with premium seats per departure in North America expected to rise to 75% by 2026. Notably, in the fourth quarter of 2019, we had already begun breaking records with ancillary revenue generated from seat upgrades by our leisure customers. This trend toward offering more premium products to leisure customers presents significant potential for our United Next revenue plans and can also help mitigate the impact of business traffic if it fully recovers. While several of our major competitors have downsized their business class cabins by around 10% on global long-haul flights, we expect this trend to continue, indicating a structural shift in long-haul international service. At the end of 2021, we were pleased to be recognized in the latest BTN survey conducted among industry procurement leaders. These leaders acknowledged and rewarded our efforts to win their business, distinguishing United from much of the industry. We improved in every category, and we believe these results reflect our commitment to capturing an increasing share of corporate business, which is a key element of our United Next plan. Thanks to the entire United team. Now, I'll turn it over to Gerry to discuss our financial results and outlook.

Thanks, Andrew. Good morning, everyone, and welcome to our first call of the New Year. While we all would have preferred to be further along in the recovery, you will see from our results for 2021 and forecast for this year that we continue to make great progress and are well positioned to achieve the long-term goals we have discussed with you since last June. Turning to the numbers. For the full year 2021, we reported a pretax loss of $2.6 billion and an adjusted pretax loss of $5.8 billion. For the fourth quarter of 2021, we reported a pretax loss of $845 million and an adjusted pretax loss of $679 million. Our CASM-ex increased 13% on capacity down 23%, both versus the fourth quarter of 2019. While CASM-ex was within our guidance range for the quarter, it was slightly higher than the midpoint as a result of Omicron-related expenses. Looking to the first quarter of 2022, there are two major factors impacting our CASM-ex. First, because of Omicron, as Andrew mentioned, we are adjusting capacity downwards to align with demand, consistent with the agile pivoting we've done throughout the crisis. Secondly, we currently expect that our 52 Pratt-powered 777s will mostly remain grounded through the first quarter. This reduction in flying keeps our aircraft utilization down about 16% in the first quarter versus 2019 and does drive additional cost inefficiencies. First quarter 2022 capacity is expected to be down between 16% and 18%, with CASM-ex expected to be up between 14% and 15% versus the first quarter of 2019. The math associated with flying fewer ASMs than originally expected, together with the added Omicron-related expense, is driving around three points of expected CASM-ex pressure in the quarter. By the fourth quarter of 2022, however, our base case assumption is that we are past Omicron and flying schedules with capacity up around 5% versus the fourth quarter of 2019. In this scenario, our utilization would reach near 2019 levels and gauge up about 16% versus the fourth quarter of 2019 and up 11 points versus the first quarter of this year, driven by the return of CASM-friendly 777s and the addition of 787s and larger 737 MAX aircraft. These factors, together with the full run rate benefit of our identified $2.2 billion in structural cost reduction, which we expect to achieve by this summer, would drive a material change in our CASM-ex performance over the course of the year from up 14% to 15% in the first quarter to down around 2% in the fourth quarter of this year in each case compared to 2019. As I mentioned, these figures represent our current base case assumption for our 2022 flying. But as Andrew outlined, we are committed to aligning our operations, and we will continue to be flexible given the uncertainty around the pace of recovery. As a result of this uncertainty, we expect our CASM-ex results for the full year 2022 could fall anywhere in a range of scenarios. You may recall, in October, we set our planned capacity for 2022 would be up around 5% versus 2019, with CASM-ex lower than 2019. Our outlook on CASM-ex remains consistent with this prior outlook, though, since we now expect our capacity for the year to be below 2019 levels, we must adjust our CASM-ex to take into account the impact of fixed costs spread over fewer ASMs. To provide some further bookend, if capacity for the year were about flat to 2019, we expect our CASM-ex would be up 2% to 3% versus 2019. If full year 2022 capacity is 5% below 2019, we expect our CASM-ex will be up about 5% versus 2019. We believe our results will land between those figures on a full-year basis. Most importantly, we expect CASM-ex to improve throughout the year as our gauge and aircraft utilization materially improve in the second half and expect to end the year with CASM-ex below 2019 levels, as I noted earlier. Most importantly, the fourth quarter expected run rate for CASM-ex will put us well on track for our United Next cost plan for 2023 and beyond. Turning to fleet. We currently expect to take delivery of 53 737 MAX aircraft and 8 787 aircraft during the year. As we noted on our previous earnings calls, the 787 aircraft were originally expected to deliver in the first half of 2021. We now no longer expect to take the 787 aircraft until after the summer of 2022, contributing to about 1.5 points less capacity versus our original plan. Given this timing, we now expect our adjusted CapEx in 2022 to be around $4.2 billion, plus about $1.7 billion of adjusted CapEx that moved out of 2021 into 2022 for a total of about $5.9 billion for the full year. To be clear, our total adjusted CapEx plan for the years 2021 and 2022 together have not changed since June of last year. There has simply been a timing shift, driven by aircraft delivery delays. We continue to expect to use a mix of debt financing, leases and cash to fund the acquisition of new aircraft depending on market conditions while tracking towards our United Next leverage target. Importantly, we ended the year with over $20 billion in liquidity, including our undrawn revolver, a strong cash position to continue to navigate the remainder of the crisis. In closing, I'd like to thank my finance team as they have worked countless hours over the last two years to create and manage a flexible financial plan in response to a quickly evolving environment. We will continue to focus on appropriately managing our capacity and rebuilding our business back efficiently. We've observed that the impact of each variant on our business has decreased with each iteration. And we continue to expect COVID-19 to become endemic in the future. We remain confident in our 2023 and 2026 United Next financial target and our trajectory to maximize earnings power for the long term in the coming years. And with that, I'll pass it back to Kristina to start the Q&A.

Thank you, Gerry. We will now take questions from the analyst community. Please limit yourself to one question and if needed one follow-up. Brandon, please describe the procedure to ask a question.

Hey, everyone. Thanks for joining. When we consider United and the opportunities ahead, the international market is clearly a significant topic as the pandemic seems to be winding down. I'm interested in how your expectations have evolved regarding pent-up demand for international travel. It's evident that Asia will take some time to recover, but European countries are beginning to lift restrictions as cases decrease, which is very encouraging for the upcoming spring and summer demand. I'm curious to hear how your overall perspective has changed.

Thanks, Conor. It's Andrew. That's a great question, and we truly believe in what we're seeing. We've added a significant amount of capacity across the Atlantic for this spring and summer in preparation for the recovery. In fact, we're already fully booked in terms of passengers and revenue for those flights this spring and summer. We're ready to resume operations. While we need to get through the current Omicron wave, we remain optimistic about the future. Importantly, we've retained all our widebody jets and are upgrading them with new business class cabins to ensure a uniform experience across our fleet. We operate from the best gateways in the United States, without a doubt. We strongly believe that there are tremendous opportunities for international growth ahead of us. Additionally, we see considerable structural changes, such as smaller business class cabins coming from the U.S. and a reduction in flights, as many of our competitors have retired their larger A380s and 747s. This positions us exceptionally well for the coming year. I must say, we are very optimistic about the Atlantic market specifically. As you mentioned, recovery in Asia will be slower. We anticipate returning in full strength, but in the meantime, we have redirected our planes to other regions of the world, preparing for the slower recovery in Asia. From both a revenue and profits standpoint, we feel confident about this strategy. We're genuinely excited about the future of international growth and believe United has a strong advantage over our competitors in this area.

Okay, great. And then, when you embarked on the Mid-Con strategies and laid out United Next, loyalty was a huge component of that. And right or wrong, I think a lot of investors view airline loyalty as just one big pie. So, just curious if you could talk about how new sign-ups or maybe unique sign-ups have been for the loyalty program or credit card, or if you have any conversion figures from other airlines that United has seen as the operations improved over the years and so on. So, thanks again for the time.

We signed up 5.6 million new MileagePlus members this year, which is a record for the airline. We are really pleased with this growth, as it demonstrates the success of the program. People clearly want to be involved with MileagePlus and United. We also saw an increase in credit card account acquisitions in the second half of this year compared to 2019, which is very encouraging. We're genuinely optimistic about these figures. Just a few years ago, we were onboarding 2.5 million to 3 million new members each year, and now we have reached 5.6 million. This growth reflects the strength of United, our destinations, our brand, and the increasing interest from customers in joining the MileagePlus program.

So, the strength in premium leisure is obviously an important topic, but there's some debate as to its sustainability. Are consumers permanently craving a better flight experience and therefore, they'll refuse to ever return to the back of the cabin or if it's just a temporary phenomenon driven by pent-up demand? So, to the extent that it is the former, are you seeing this elsewhere across the travel ribbon? I mean, for example, are club memberships showing commensurate strength? Are new card acquisitions skewing to the infinity card? I'm just wondering how broad the evidence is supporting the thesis that a large segment of your consumers are truly pursuing a better overall experience.

Well, Jamie, what I think I would say is we're going to need some time to prove that out. I think it is somewhat debatable. We feel really good about it. I mean, the numbers have been incredibly strong. Our seat product upgrades in this last quarter have never been higher. And that's even before we begin to transform into the United Next fleet, which has more premium seats onboard the aircraft. And we feel really strongly about segmenting our business and giving people a choice about where they want to sit on the airplane and what experience they want throughout the entire travel journeys. Everybody deserves that choice, and we're going to do it, we're going to do it great. In terms of club memberships, what I would tell you is the bulk of our club memberships come through are premium card to the co-brand portfolio. So, it will be hard to measure that because we've introduced two new lower share cards in year. So, the numbers are skewed by our new gateway card, for example. So, it's a little bit more difficult to particularly answer that question right now. But we've now seen this for two quarters in a row, a really strong premium leisure demand. Everything we see in the first quarter, I would say the same is true. And we also see that in the business class cabin going to and from Europe, where the performance there has been good. And the other thing I'll tell you is that while clearly PRASM has been down throughout this crisis, PRASM domestically in our premium cabins is almost flat, whereas the number in total in terms of PRASM. So again, that's a remarkable number as we go through this crisis in terms of premium demand, in my opinion.

Thank you, Andrew. As a follow-up to that, so a question on pricing. It feels like the booking curve for consumers is increasingly similar to what corporate used to look like. So, consumers are booking closer in, but it feels like business travelers are now booking further out. First, is that a fair characterization? And two, do you think you could still achieve pre-COVID corporate yields? Are sufficient fare fences in place, or does a further booking corporate buyer imply lower yields? I guess, that's the question.

Some aspects are still to be determined, to be honest. Business traffic has decreased significantly. It had improved quite a bit during the same quarter last year. Therefore, the booking patterns are somewhat uncertain regarding where they will be in two, three, or four months. We'll need to wait a bit longer for that. Until demand returns to a level of normalcy across all channels, yield calculations will be somewhat different. However, particularly for business traffic and total traffic, we've already seen a remarkable rebound in the third week of the year compared to the first week regarding total and business bookings. We're making good progress, and I hope to see things return to normal from a booking perspective around mid-February. Additionally, cancellation rates early this week have already returned to levels resembling those of 2019. The situation has changed dramatically just in the last two and a half to three weeks.

I’m curious about the cargo revenue, which seems to be performing better than expected earlier in 2021. There appears to be a significant amount of dedicated capacity being added, and I'm wondering if this is compensating for the lost belly space. What are your expectations for cargo revenue trends this year, and do you think there have been any structural changes in the long term?

Sure, I'll try to take that. I think what we're seeing is there's been a disruption in supply chains around the globe. And so, the use of air freight has increased or the need for it has increased relative to the amount of capacity available, and that's caused yields to go up. As we look into Q1, I think those trends are pretty similar. And in fact, we expect our Q1 performance this year to be in excess of our Q1 performance last year, but it's still early in the quarter obviously, driven by the strong yields. So, and if you talk to our cargo team, they would tell you that the supply chain disruptions, the backups at the ports, these things look likely to continue to some degree for the foreseeable future as we head into 2022. So, we're optimistic that cargo is going to have another great year. And kudos to our entire cargo team because the numbers that we are putting up relative to our competition are just staggering.

Along the lines, it's kind of something changing near term, like the cuts to service and kind of some of the small markets, the small markets is a big push for United not long ago. Do you see this kind of issue resolving itself as you get into 2023 or something, or is there kind of a need to change strategy here, at least when it comes to the regional operation of small market operations?

Sure. I'll address that question. I'm handling all questions here and will pass a few to my colleagues. Firstly, I want to express that we are disappointed to reduce service in small communities. We understand the impact this has and notify these communities in advance, recognizing it's significant. Recently, we've had to cut service to 20 communities in the United States. We are aware this is a major issue. Unfortunately, we are experiencing a pilot shortage specifically with our regional aircraft, not our mainline ones, and we anticipate this shortage will persist for some time, likely through the remainder of 2022. Regrettably, this means that there could be additional communities we need to remove from our network, and we are still finalizing those details. We have several aircraft that will remain underutilized for the foreseeable future. Regarding our business plan, which we discussed around seven months ago, we had already acknowledged these trends and planned to reduce the number of regional jets in our fleet. What we're witnessing now is an acceleration of those plans. From a revenue standpoint, we've accounted for these changes, and while the pilot shortage and its effects on the communities we serve are accelerating, this situation was anticipated as something we would be managing over the next year or two.

Gerry, could you help us understand the exit rate of CASM-ex? It seems like it will be significantly better than at the beginning of the year due to some gauge increases. Can you discuss how gauge is increasing sequentially and provide a solid foundation for building a CASM outlook for 2023? I know we are experiencing sequential growth in volume recovery, but I'm trying to differentiate how much of that is independent of volume and how much is related to gauge improvements.

Good question. We've been clear since last June that one of the benefits that's really, in some ways, unique to United with our United Next plan is the increase in gauge. We've been under-gauged on the mainline. And the MAX order, particularly when the MAX 10 starts next year, will help solve that problem. So we will provide going to next year additional color on gauge. This year, just from the first quarter to the fourth quarter, we expect 11% improvement in gauge and then more going into next year. But we'll continue to give you those numbers. But as we've been saying for the last six months, one of the great advantages we have and one of the reasons why we're so comfortable with our CASM guidance for next year is that, as we said, it's just math.

Yes. So sequentially, as we go through the quarters, is there an inflection point when that gauge really kind of pops up tied to the deliveries or schedule change?

Yes. There are two points to note. First, the 777s will begin to affect us in the second quarter. Additionally, the 8 787s are expected to come into play in the second half, along with the 53 MAXes, which will also occur in the second half of the year. Therefore, there is a significant distinction between the gauge in the first half and the second half of the year.

So, oil prices have gone up over $85. And I know there's going to be a lot of fuel efficiency with the newer aircraft that are coming in. But how should we think about the way you're thinking about fuel vis-à-vis pricing and the lag between the two?

Sure, Helane. I'll start. Traditionally, I think we had gotten to the point where we had a high degree of confidence that fuel is a pass-through. And I've said that many times in the past, and I continue to believe that. During the crisis, with the supply-demand equation quite out of balance, I think that that has got out of balance. But as we look into Q2 and beyond, based on what we think is going to happen to demand and where we see supply, hopefully, those relationships come back into place. And we'll continue to make agile decisions on utilization of the fleet, given what the price of fuel is like we always have done in the past. So, I feel like we need a little bit more time to prove back that the equation is still valid, but we're well on our way.

Well, I'll start, Helane, and then let Andrew talk about our specific plans. But what I'd say is on the Asia restrictions, look, governments around the world are all doing their best to manage COVID, and these restrictions are constantly changing. They've had a different set of standards in China, different approach than some of the western. But I don't think there's anything bigger to read into it, other than different countries are all feeling their way in an uncertain environment. So, I wouldn't read any kind of macro geopolitical questions into it. And then, I'll turn it back to Andrew to talk about sort of what our plans for aircraft and timing are.

I would like to mention that we acknowledge that the recovery in Asia appears to be slower. We have relocated those aircraft to other regions, and we believe they will be very productive in their new locations. We look forward to resuming our full schedule to Japan and China at an appropriate time in the future.

I wanted to ask you a couple of questions. One, just on changeability, which is probably where the industry was headed anyway, and you can refresh our recollection there. But obviously, we're in a weird time still. It's improving, but it's a weird time. But there is an impact on operations and perhaps call center resources and things of that sort with respect to changeability. So, are you guys thinking at all about that kind of over the intermediate term? Again, in a more normal demand environment, is some of the pure kind of frictionless changeability maybe too much of a strain to support?

Well, I think the way I would describe that is, we've made a number of changes as we've dealt with this crisis, including the elimination of change fees themselves. And that we think was the right thing to do. We should have done it years ago, quite frankly. We wish we had done years ago. And so, we don't think that's going to change or at least United, we are where we are. And we've adjusted our resources to make sure we can deal with that. Our customers now have the ability to make more changes than they did in the past, and are doing so. And we're kind of pleased to let that happen. And we think it's a great feature for us, and it's going to help us with our relative competitive stance versus other carriers in the country, which again we needed to do long ago. It's about time, and we're fully committed to it.

I don't believe this will lead us into new markets. However, we have identified areas with fewer flights and some that have none at all. We are continuously refining our strategy. For the most part, we expected this, but it's happening more quickly than we thought it would six to nine months ago. This acceleration is powering our United Next plan and shaping our future direction. Unfortunately, some communities may not have United service moving forward, and others will see a reduction in flights, though some will have larger aircraft servicing them. This is our forecast. As I mentioned earlier, we do not anticipate a significant improvement in 2022, and we will assess our situation as we move into 2023.

Two here. One, can you just refresh us on your hiring plans for 2022, more specifically, number of pilots and mechanics? And how is the ramp? Is it spread throughout the year? Is it front-end loaded? Thank you.

Mike, it's Brett. First, I want to highlight that in the second half of this year, we successfully achieved many of our hiring goals. We believe we will have no issues meeting those goals next year, especially for the mainline. Specifically, in the latter half of this year, we hired around 1,200 pilots, and we anticipate this trend will continue into next year. Overall, we expect our numbers for next year to align with our needs, though we are not providing specific figures at this time.

I wanted to revisit the issue of regional pilots. If the regional sectors are facing pilot shortages, do you anticipate that this might eventually impact your mainline hiring plans, especially considering the growth you have ahead? If it does affect your plans, could that pose a risk to your long-term CASM targets?

Maybe I'll give it a try. At this point, we've had absolutely no trouble hiring for United mainline pilot jobs. And the second point is we are working very hard to make sure that the supply of pilots coming into this great business increases. And given where salaries are, the career potential, we're confident that's going to happen. And of course, one of the things we've done, which is highlighted a lot is our Aviate Academy, where we're bringing new students, many of them diverse, into the United Airlines world very, very early in the process. And so, we're all working to make sure that there's plenty of pilots for the long-term supply, which we think is the case. But we do have a year or more where this needs time to get back into proper balance. And at this point, we haven't seen any impact to our mainline hiring abilities.

Well, I'll take a shot at it, Andrew. You've done a great job today on the call, by the way. I appreciate it.

No, I want you to take a shot at it.

I believe this is a significant point. The main difference for us at United is that we focus on creating careers rather than just jobs. Our average flight attendant, ramp worker, and gate agent can earn a six-digit income once they reach the top of the seniority scale with the union contract, along with excellent benefits. It’s one of the few remaining jobs that allow individuals to support a family, send their kids to college, and enjoy great benefits along with job security. Ultimately, this is why we can successfully hire at the mainline—because we provide careers where people can build their entire professional lives instead of just looking at the hourly rate.

I know Scott mentioned on CNBC that you're aiming for profitability in the second quarter. I'm curious if you believe you can achieve pretax profitability for the entire year. Additionally, Scott, in your response, can you address how Russia's typical reaction to sanctions includes shutting down their airspace? Currently, you have some limited capacity to Asia, so it may not be significantly disruptive, but how does this impact your plans for 2022?

In response to the first question, I mentioned during the CNBC segment that we are moving away from focusing on the short-term fluctuations related to COVID because we haven't managed that well. We've been effective at assessing the longer-term trends, but predicting short-term outcomes remains challenging. However, if we maintain the trajectory that Andrew outlined, where bookings improved from a 48% drop the first week to a 25% decline this week, we could return to profitability in the second, third, and fourth quarters. It may be overly detailed to estimate whether the combination of those quarters exceeds the loss in the first quarter. Regarding the situation in Russia, I won’t speculate at this time. United Airlines, as a representative of U.S. interests, will be affected by global geopolitics, both positively and negatively. We monitor these developments closely and have a solid track record in responding to unfolding events. Like everyone else, we are watching the situation in Ukraine and its progression attentively.

Just to be completely clear, are you still reiterating the 9% pretax margin, the CASM-ex down 4 for '23 and also the 4% to 5% capacity CAGR for next year?

Hey Hunter, it's Gerry. Yes, we're confirming all that.

Well, Hunter, forever is a long time, so I don't plan to say it's forever. Clearly, for the foreseeable future, we expect to have a smaller presence across the Pacific, and those airplanes will be redeployed to areas where they can be more effective for the business. This situation will continue for a while, and when conditions in Asia improve, we will be ready to return. We have strong partners in Asia, especially with ANA in Japan and Air China in China. So, we are prepared for when demand picks up, but predicting that is challenging. Undoubtedly, we performed well in the business class section to Asia, but I can assure you we did just as well across the Atlantic and to South America, which is one of our strengths. We feel optimistic that Asia will remain restrained for the next few years from United Airlines' capacity viewpoint, but we will allocate that capacity to areas where it can be beneficial for the business, particularly in the business class segment. As I mentioned earlier, we are observing our main competitors globally using smaller wide-body jets. This results in not only reduced overall capacity but also significantly less capacity in the business class segment. Thus, as you navigate through various factors, I can tell you that capacity and demand are both fluctuating. There are numerous scenarios wherein business travel across the Atlantic might be below 100%. However, if supply is significantly less than 100%, everything may still balance out.

Hi. Thanks so much. I'm just curious, talking about issues with the regionals and the pilot shortage there, how are you thinking about kind of the financial health of all your regional carriers? Is this something they can all survive, or do you anticipate any consolidation or any kind of substantial turmoil there?

Alison, it's Andrew. I'll let our regional carriers explain their own financial situations. I can't respond to that.

I was curious if there are any incentives that you're having to offer around the country in various workgroups to track workers? And if there are any markets that are getting higher wages or signing bonuses, where are those? And where do you see that trend going throughout the year?

Yes. Hi. This is Brett Hart. We are taking it market by market. And certainly, we are seeing some parts of the country where there is some more difficulty in small pockets for hiring, and we're making necessary adjustments in those markets. But our approach is to take it. And just that way, we determine what needs to be done in a specific market. We try to maintain consistency across our organization, but we understand that there are different macro and micro economic factors at play, and we're adjusting to those. But at this time, what we can call out specific markets, I mean, I think we're being impacted in the same way that other employers are, both in our industry and, quite frankly, across other industries. And that information is pretty readily available.

This might be a question for Gerry, I'm not sure. But as far as the full year capacity plans, I'm wondering if you could discuss a little bit about where the various buckets of that are coming from in terms of the regional pilot issues, the variant demand issues, Boeing 787 delays and those sort of things being pushed back. Could you sort of discuss which areas are contributing to that and in what ways? Thanks.

So, Justin, it's Andrew. I'll try. I'm not sure if I completely understand the question. There are several factors that caused us to deviate from the original 5% guidance for 2022. The first is demand, particularly the impact of the Omicron variant on the industry. We needed to adjust our plan to reflect that, and we have done so. When considering the different factors affecting us, I don't have the specific numbers in front of me, but one major aspect is the 777s, with 52 grounded aircraft, which typically represent about 10% of our overall business. These will be flying at full capacity in Q4 this year, unlike the first three quarters. Another factor is the delayed return to service of several narrowbody aircraft in storage, which I believe is around 50 for Q4, with a slightly lower number in Q1, but still significant. This also plays a key role in our ASM services. Lastly, regional jets have a minimal impact on our capacity plan due to their size and short-distance flights. Additionally, we are experiencing lower utilization, reflecting the current demand environment. Those are the main factors, unless there's something I've overlooked. Does that answer your question?

Andrew, I know you'd rather talk about Polaris, but a broad swath of travelers out there are on a budget and slide basic economy. I wonder if you could give an update on the trends you're seeing in Basic Economy. It's been a while since you released any kind of figures on like what percentage of bookings are in Basic Economy. And I'm wondering whether that's changed at all since the pandemic waivers are lifted and they're no longer changeable. And related to that, I wonder if you guys have any plans like Delta did to extend travel credit beyond the current deadline.

Good to hear from you, Dawn. I would like to mention that during the crisis, the percentage of tickets sold at United varied quite a bit. Currently, it's in the high single digits for domestic travel, whereas it dropped to as low as 4% during the crisis and was over 20% before the crisis. This number fluctuates due to various factors. At this point in time, it accounts for a smaller portion of our domestic ticket sales compared to historical levels before the crisis. That's about all I can share for now. We are assessing the ticket situation, and I will have more information to share later. For now, our tickets remain valid until the end of this year, so customers have plenty of time to utilize their credits with United Airlines.

I have a question about the international routes that you announced, the five new routes, I think it was earlier in the fall. What kind of bookings are you seeing from them so far? And are they tracking with international bookings overall, or are they a little bit off from the main?

International bookings for travel in April and beyond are exceeding 2019 levels, and all of our new markets are meeting their expectations. Each new market has a unique booking pattern based on our destinations, but they are performing according to the booking curves we anticipated. We have not observed any significant impact from the virus, including Omicron, on our long-haul demand across the Atlantic for upcoming travel.

I think there's a lot yet to be determined. There are modest impacts still from the rollout of 5G. They're not nearly as significant as they were scheduled to be without the agreement that was reached. But more to come. It's still very real time. We will work, hopefully, with the telecoms and the FAA through the whole process to further reduce the impact. But I don't know the full answer yet.

Thank you, everyone, for joining the call today. Please contact Investor and Media Relations if you have any further questions. And we look forward to talking to you next quarter.