United Airlines Holdings Inc (UAL) — Q3 2022 Earnings Call Transcript

Thank you, Candice. Good morning, everyone, and welcome to United’s third quarter 2022 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 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 a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please refer to the tables at the end of our earnings release. Joining us on the call today to discuss our results and outlook are Chief Executive 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 on line available to assist with the Q&A. And now, I’d like to turn the call over to Scott.

Thanks Kristina, and good morning. It’s great having everyone on the call today. I want to start by congratulating and thanking everyone at United for your hard work, dedication, and perseverance throughout the last two and a half years. Our people stayed focused on our unique long-term strategy, and we’re now beginning to see the strong and differentiated results. Our operation is firing on all cylinders. In fact, based on most metrics, it’s running better than ever. That isn’t just better for customers. It also reduces costs and leads to strong financial performance that creates the foundation for United and positions United to be the world’s best airline. We recognize that the near-term geopolitical and macroeconomic growth and overall pessimism facing the global economy, including airlines, is unusually high right now. However, there are three industry tailwinds prevailing the COVID recovery for aviation and United that are currently overcoming those macro headwinds and we believe will continue to do so in 2023. In increasing order of importance: First, aviation uniquely is still in the COVID recovery phase. Take one example; Japan just opened last week. And regardless of whether you think demand for business travel will ultimately turn to 100% or something less, it almost certainly is going higher from here. Second, there has been a permanent structural change in leisure demand because of the flexibility that hybrid work allows. With hybrid work, every weekend could be a holiday weekend. That’s why September, a normally off-peak month, was the third strongest month in our history. People want to travel and have experiences, and a hybrid work environment has untethered them from the office and given them newfound flexibility to travel far more often than before. I’ll bet many of you listening today have taken an extra trip or two this year because you can work remotely for a couple of those days. This is not pent-up demand. It’s the new normal. And third, the strong demand environment is happening against the supply backdrop that currently has the industry 10% to 15% smaller relative to GDP than it was in 2019 with multiple constraints. Pilot shortages, aircraft delivery shortages from both Boeing and Airbus, air traffic control saturation, and airport infrastructure constraints around the world are all real and they are constraints that will take years to fully resolve. These three trends are why all airline revenues keep surprising to the upside, but they are also real and durable, which is why we are so optimistic about 2023 and the longer term despite the economic challenges. And for what it’s worth, you need to believe all three of those trends to estimate the upside. Probably any one of them would suffice, though I happen to be confident that all three are already happening and are sustainable. In that strong industry environment, United is uniquely positioned to benefit for the long term. United really did chart a different path due to the pandemic than any other airline. Differentiated fleet and growth decisions, increased exposure to growing international markets, real technology changes to change the customer experience and run the airline more efficiently, long-term investments in the infrastructure needed for growth such as newer gates, or building 14 additional simulator bays during the pandemic, founding our own pilot training academy, and a cultural transformation to be fast, creative, innovative, and customer-focused. It is just one quarter, and we know we have a lot to prove. Our third-quarter margin results and fourth-quarter guidance with operating margins above 2019 are early indicators of both the absolute and relative potential of the new United Airlines. I am very proud of the United team for executing incredibly well, and I’m confident that we are well positioned for success next year and years to come. With that, I’ll hand it over to Brett.

Thanks, Scott. I also want to start by recognizing the entire United family for their hard work in the quarter. Our team never fails to pull together, and we couldn’t be more proud. During the quarter, our operational performance set records. Our on-time arrival and misconnection rates were the best for the third quarter in company history, when excluding the low-flying quarters during the pandemic. We saved over 1,500 daily connections on average with our ConnectionSaver tool. This means over 137,000 additional customers got to their destinations on time. ConnectionSaver is a unique innovation and customer benefit for United. In addition, our team did a fantastic job helping our customers and their bags get to their destinations as seamlessly as possible. In fact, our mishandled bag ratio in September was better than 2019 levels. Our daily controllable cancels, which are driven by maintenance or crew challenges, dropped over 95% in September versus what they were in January. With a reduction in these cancels alone, we were able to add 1% of incremental capacity to the third quarter. This provides a better experience for our customers, but also leads to much more cost-efficient flying. We look forward to continuing these trends into the final part of the year. Putting that all together, and despite all the challenges around the industry, this was the best third quarter operationally for a full schedule in United’s post-merger history. Huge kudos to the team. One of the most significant changes for United operationally and for cost has been the return of the Pratt & Whitney Boeing 777s. With their grounding, we’ve had to make suboptimal operational changes that have led to a more complex operation. The work required to return these aircraft to service created a heavy burden on our tech-ops organization. For the first part of this year, we had over 500 of our technicians dedicated to this fleet in Victorville, California, with over 175,000 hours of work spent to get these aircraft back into service. This drove inefficiencies in our technician staffing with negative cost and operational impacts. The great news is that this work is behind us and these technicians have returned to their bases, which has led to the improvement in our performance metrics. With these aircraft fully back in service, our fleet can be more efficiently positioned for both our operation and our customers. I’d like to thank the entire tech-ops organization for their significant effort in returning these aircraft to service. We’re proud that a career at United remains in high demand. This year, we’re on track to hire 7,000 airport personnel, 4,000 flight attendants, 2,300 pilots, and 2,000 technicians. Momentum is high. For example, a recent announcement for flight attendant openings received over 5,600 applications in just 48 hours. Ultimately, we expect to welcome 15,000 new team members this year and another 15,000 next year to support our United Next plan. And with that, I’ll hand it off to Andrew to talk about the revenue environment in more detail.

Thanks, Brett. TRASM for the third quarter finished up 25.5% versus the same period in 2019 on about 10% less capacity. September was our third best TRASM month in our history, excluding the low-flying pandemic months. We saw a number of record revenue days that were more typical of a peak summer period than off-peak. In many ways, September, where we operated with an 86% passenger load factor, 5 points better than September of ‘19, was indicative of what we believe to be the new normal where hybrid work gives customers the flexibility to turn any weekend into a short trip. We believe the off-peak periods are now stronger. All parts of the network performed well in the quarter. First, across the Atlantic, United increased capacity by 22% versus the third quarter of 2019, adding 10 new cities and 18 new routes. We also pushed into new regions, becoming a relevant competitor to Africa for the first time. New nonstop service between Washington and Cape Town will begin later this year, subject to government approval. Atlantic PRASM increased 21% versus the third quarter of ‘19, which we consider outstanding. United is now the largest airline across the Atlantic, where our strategic partnership with Lufthansa and Air Canada is working better than ever. Last week, we announced yet another Atlantic expansion plan for 2023 with nine new routes. A few weeks ago, we announced a new partnership with Emirates. This partnership will allow United to resume service to Dubai, the largest and best hub in the Middle East, after a seven-year absence. Dubai is unique as a hub in the region, as it has both significant local markets and a large amount of premium demand and massive connectivity. While our Pacific flying is our least recovered so far from the pandemic, we continue to expand capacity as economies open. Overall capacity in the region was down 59% versus 2019, and Pacific PRASM increased 41% versus 2019, and we continue to experience much stronger cargo yields. We’ll focus on resuming the bulk of our Pacific capacity, excluding China, in the next year now that Japan is fully open for business. We continue to build our partnership with Virgin Australia. We’ll begin new nonstop service to Brisbane from San Francisco in a few weeks. We’re the only airline that maintained service to Australia from the U.S. during the pandemic, and now United expects to be the largest airline operating to and from Australia this winter for the first time ever. Latin American PRASM was up 20% on 4% more capacity than 2019. Domestic PRASM was up to 20.4% on 10.5% less capacity versus ‘19. Our domestic gauge versus ‘19 also increased 11% as we continue to replace regional jet flying with mainline jets. Gauge increases are being absorbed well without much of a negative impact on PRASM. Cargo volumes were strong even as we faced much more competitive capacity. Yields in the quarter continued to fall, consistent with our expectations relative to pandemic highs and were 90% greater than 2019. The corporate business travel recovery in the quarter was about 80% of volume from ‘19 and stable over the quarter. While larger corporations clearly lagged the recovery rate, we believe new network patterns and hybrid work environments are having positive and offsetting impacts on revenue. It’s also worth noting that business traffic for long-haul segments across the Atlantic has recovered at a faster pace than domestic. It’s our observation that a Zoom meeting is simply less practical in a global setting. We remain optimistic that business traffic will continue to get better from this point forward. Our traditional view on business traffic recovery rates relative to 2019 may now be an obsolete measurement, given the changes in how customers now travel as remote work allows business and leisure trips to often be combined. New revenue segmentation efforts versus ‘19 have been increasingly successful. Premium Plus, our new mid-tier global long-haul product, is now 7% of our long-haul capacity, producing yields that are twice that of the main cabin. Our efforts to better market and sell main cabin seats have also produced strong results with seat revenue per passenger up 21% from 2019. September was a strong revenue month, and we are entering the fourth quarter with a lot of momentum, and October is on track to quickly replace September as our third best TRASM month ever, excluding the low-flying pandemic months. In fact, we currently anticipate a similar TRASM increase in the fourth quarter as we saw in the third of between 24% and 25% on between 9% and 10% less capacity. While I recognize recent headlines would otherwise indicate our revenue performance should be faltering, I hope this strong revenue outlook puts those thoughts to rest. I wanted to briefly address some of the recent changes on RJ operating costs. We expect that these recent cost changes to alter the balance of pilots, choosing a career at United Express versus a ULCC; with competitive pay, United Express versus ULCC for the first time, we’ll be better able to staff our United Express operation, albeit at higher costs. United Express pilots who joined our Aviate program can transition to a United mainline position in four years, making it the best short-term and long-term career option. We do expect that given the overall pilot shortage today at non-legacy carriers, it may take a while and probably until 2026 to fully utilize the 300 to 400 RJs we’d like to operate through our Express partners. Finally, a quick update on our MileagePlus program. I have to say every key indicator we measure is positive. We’ve seen a record number of memberships to date, with more enrollments so far this year than all of 2021. Mileage redemptions this quarter were the highest for any third quarter in our history, and new co-brand accounts were up over 25% year-over-year, and we saw the highest quarter of spend in the history of the program in the third quarter. Momentum is strong, and we expect 2023 to set new records as we continue to grow the program. I wanted to say thanks to the entire United team. And with that, I will hand it over to Gerry.

Thanks, Andrew, and a big thank you to the whole United team for achieving another quarter of profitability. As Brett mentioned, our recent operational performance has been record-setting, and we believe the worst of the operational-driven cost pressures we’ve talked about on previous calls are now behind us. Importantly, we’ve completed all remedial work on our 52 Pratt powered 777s and the vast majority are back in service, with the last few expected to be online by next month. On previous calls, we have noted the significant CASM-ex headwind driven by the grounded 777s, but it was more than just the capacity implications. We believe, as we piece together a schedule with a suboptimal mix of aircraft, we also incurred a variety of direct and indirect costs in many of our operating groups as we waited for the return to service of a significant portion of our wide-body fleet. To put in context how impactful it is to have these aircraft flying again, our fleet was able to produce over 20% more ASMs for mainline aircraft per day in the third quarter compared to the first quarter. This provides a meaningful improvement in our utilization, which is one of the primary drivers of improved unit costs. Looking at the numbers for the third quarter, we reported pretax income of $1.1 billion on an adjusted basis and an operating margin of 11.5%, also on an adjusted basis. This was 1 point better than our most recent guidance, driven by a combination of stronger revenue and better costs. Our third quarter CASM-ex was up 14.5% versus the third quarter of 2019. This is 1.5 points better than earlier expectations. The outperformance was driven in large part by our improved operational performance. A reliable operation is an efficient operation and a key to our strong unit cost performance today and for the future. As an example of how our strong operation benefits our costs, in September, we saw a 27% reduction in the premiums and overtime paid compared to an average month in the first half of the year. That equates to a $35 million improvement in September alone. This reduction in premium pay is expected to reduce fourth quarter CASM-ex by more than 1 point compared to the first quarter of this year. As we look into the future, retaining top-tier operational performance will continue to be a key element to our execution on costs. Looking ahead, we expect fourth quarter 2022 CASM-ex to be up between 11% and 12% with capacity down 9% to 10% versus the fourth quarter of 2019. As Andrew mentioned, we expect the revenue environment to remain strong throughout the fourth quarter. As a result, we expect our fourth quarter 2022 adjusted operating margin to be about 10%, exceeding the fourth quarter of 2019; and adjusted diluted earnings per share, a metric we are happy to talk about again, of $2 to $2.25. In the third quarter, we took delivery of 11 Boeing 737 MAX aircraft and 1 Boeing 787 aircraft. In the fourth quarter, we expect to take delivery of 20 MAXs and 4 787s. Assuming these aircraft are delivered, for the full year 2022, we now expect total adjusted capital expenditures to be $4.7 billion. Our most recent capacity guidance for next year assumes 179 aircraft deliveries from now through the end of 2023. There’s certainly downside risk to that assumption, but under almost any circumstance, next year we expect to take delivery of more aircraft in one year than any other airline in history. We continue to work closely with Boeing and Airbus regarding our deliveries, and we plan to provide you with an updated outlook for 2023 in January. Turning to the balance sheet, we ended the third quarter with over $20 billion of liquidity, including our undrawn revolver, which allows us to maintain flexibility as we meet the uncertainties that remain in our industry. We used some of our cash to purchase all of our aircraft delivered to date this year, and we expect to use cash for about half of the remaining deliveries in the fourth quarter. And remember that every aircraft purchased for cash today increases our pool of unencumbered assets, which further protects our future. In addition to aircraft purchases beginning in 2023, we will have the opportunity to prepay a portion of our debt at par. In the current rate environment, it is a tremendous benefit to have the flexibility to prepay debt, continue to pay cash for new aircraft, or access the financing markets opportunistically for new aircraft deliveries. And at all times, we remain committed to restoring our balance sheet and working towards our long-term leverage targets. I again want to thank the whole United team for all we accomplished this quarter. We are executing our plan and making good progress towards our United Next goal. And with that, I will turn it over to Kristina for the Q&A.

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

Yes. Good morning, everyone. I have a quick question for Brett. You mentioned 137,000 saved connections during the quarter, which averages out to about 1,500 a day. Could you provide some insight into what that means in terms of savings from reaccommodation costs? Are we looking at tens of millions of dollars? I'm interested in understanding how this new technology is enhancing your product. Thank you.

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

Yes. For us, it’s much more about NPS and the overall experience.

Great. And then...

Are you there, Mike? We lost you.

Sorry. I was muted. I’m back on. Just a quick one on capacity, maybe preliminarily for next year, Andrew. I know, Gerry, you said that in January we’re going to get an update on kind of how you’re thinking about 2023. But Andrew, the comment that you made that next year, it looks like you’re preparing for all of Asia Pacific to recover or be back in the plan with the exception of China. I think your prior number was that you grow no more than 8%. Has that number now been adjusted down by a couple of hundred basis points? Any sort of initial view on 2023 capacity? Thanks.

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

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

So, if we were to cast our minds back 12 months, I think you and the rest of the industry were sort of struggling with an environment where you were seeing very peaky peaks and very troughy troughs. And I think in your commentary, you sort of indicated that what’s happening right now is the exact opposite where even the shoulder seasons are actually kind of picking up and running it similar to almost peak-like levels. And you also spoke about a permanent structural change in the leisure and corporate traveler. What does all of this mean for the way United is going to like build your network and your fleet over the next 3 to 5 years? Do you need to make any structural changes to adapt to this new normal, or do you think that you can make it work with the current system?

Well, I think this new normal really allows us to become more efficient. For example, Tuesdays and Wednesdays are not as much of a trough as they used to be in a traditional week. For holiday traffic, holiday traffic is now spread out more. So, it doesn’t necessarily peak as much on one or two days. It actually spreads out across a few days. And we see that time and time again. And we also see secondary holidays are incredibly strong, not just the primary holidays. Ultimately, what this could mean is that we operate a less peak schedule, and a less peak schedule, we think, comes with really enormous efficiency gains and that the marginal cost of an ASM in February is very different than that in July. So, a lot more to come on that topic, but I think a really interesting opportunity for United as it transitions from a very peaky schedule to something that’s less peaked.

Great. Just a quick follow-up. A couple of weeks ago, you mentioned that you expect transatlantic travel in 2023 to be 10% higher than in 2022. Can you elaborate on that? Are you seeing data that supports this confidence, or what gives you that reassurance for the next nine months considering the current macroeconomic situation? Thank you.

I don’t believe I provided that number. It might have been mentioned by someone else. Recently, we announced several new routes across the Atlantic. Our partnerships are performing exceptionally well. The current strength of the dollar is very advantageous for transatlantic travel originating from the U.S. This past season was remarkable based on the data we've observed, and we expect the upcoming fall to be equally impressive. So, we are moving forward rapidly across the Atlantic and are very optimistic about the outlook, not just there but throughout our entire global network. Numerous positive indicators are visible across the entire network. Once the economy reopens, traffic tends to recover swiftly, and we anticipate seeing this in Japan in the coming months.

Can I just ask a question about the routes that were added this past summer on the North Atlantic? A lot of them were leisure focused. And I just wondered how they compared versus your expectations and whether all those routes are coming back next summer or if some of them were below expectations, the new routes that you announced last week, are they kind of replacing them?

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

Can you discuss how they compare to the system average? Are they performing better or worse than the system average?

I won’t give you all the details, Helane, because I don’t want all my secrets out. But I will say that one or two of those routes we added were our best routes across the Atlantic.

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

Sure. I’ll give it a try. First of all, our alliances, particularly going across the Atlantic with Lufthansa and Air Canada is, first and foremost, that is gigantic. It’s the number one alliance across the Atlantic. We have the best partners and the best hubs to supply in Europe. And that is and will continue to be our primary focus. So, I just want to be clear on that. And of course, across specific areas with ANA, down to the South Pacific with Air New Zealand, these are all things we focus on every day here and are key to our global network. That being said, the Middle East was, as we use the term, a white spot for United. Our global gateway supports all kinds of markets across the globe. When we looked at the opportunity to do a partnership with Emirates, it did fill in this white spot and allowed us to access a lot of destinations that we could not otherwise access with our existing partnerships. And so, that motivated that. The same is true in Australia, where Virgin Australia has a fantastic franchise. We’re so excited to partner with them. We were already the largest airline to Australia. Now, I hope to be not only the largest airline to Australia but the most profitable airline to Australia. I think that comes with the strong network we have and great partnerships across the board, particularly with Virgin Australia. So, we’ll continue to look for opportunities that don’t interfere with our core strategic alliances. That’s what these two things represent. Quite frankly, at this point, United’s global network is pretty comprehensive. I’m not sure there are many more out there in the world, but we’ll keep looking.

So, Gerry, the sequential drawdown in the air traffic liability was larger than I would have expected. I’m just trying to square that with the strength in bookings. So, how do I reconcile these two metrics?

I don’t think it was anything out of the ordinary. It was simply seasonal as we return to the usual booking trends we observe over time. Therefore, I don’t see anything unusual.

Okay. It was just the sheer dollar magnitude that surprised me. But you’re right; if I look at it as a percentage of trailing revenue, I suppose it’s not that unique. Second question. So, Scott, there’s an airline business model that I would describe as predicated on an abundance of cheap capital and abundance of aircraft and abundance of pilots, and the pilot wage arbitrage and seating density. So, how should we think about that business model in an environment where none of that, say, for density seems to exist any longer?

Everyone here is concerned about what I’m going to say. I will be more cautious during this call. While we are extremely optimistic about United's future, we understand that the market isn't quite aligned with that optimism, so I will hold back a bit. However, there is a significant change that hasn’t yet been acknowledged. I might be blunt and call that business model a Ponzi scheme because it relies on continuous growth of 15% to 20% per year. Keeping costs low depends on that level of growth, and that is no longer sustainable. Others will likely state in their upcoming calls that this is just a temporary situation. However, a genuine pilot shortage exists, and it will take years to address it. This is not the only challenge; Boeing and Airbus may take two to three years to return to their previous production rates for aircraft. The FAA does an admirable job managing the air traffic control system, but we currently have fewer air traffic controllers than we did three decades ago. Although operations have tripled, the current system functions adequately in September but fails in July. This is not a reflection of the FAA's capabilities; they do excellent work trying to maintain day-to-day operations, but they are stretched thin by competing demands, such as drone and space launches, and addressing certification and aircraft issues without an increase in their budget. Until Congress allocates more funds for additional controllers, all airlines, including us, will face significant operational constraints during the summer. As a result, no airline will be able to sustain growth rates of 15% to 20% a year moving forward. I believe this presents a distinct advantage for United and poses a real challenge for those other business models. Their entire model relies on three factors: one, achieving annual growth of 15% to 20%; two, packing passengers in like sardines; and three, charging extra fees that customers only discover at the airport. I think that business model is fundamentally flawed.

I’m wondering what the better Q3, Q4 CASM means for next year. At this point, do you see more upside or downside risk to the plus 5% guidance on CASM for next year?

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

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

Well, I think so far, and you can see by our results over the last 90 days and our outlook for the next 90 days, we think it’s a pretty good trend. So obviously, I would say that it’s positive for margin. There’s still a lot more to come. I have to say that business traffic will continue to get better from this point. I’m optimistic that all of those headwinds that United Airlines faced in the pandemic are still in the transition period to tailwinds, and particularly the coastal gateway impact. I think we still have a long way to go, particularly on domestic traffic from our coastal gateway. So, I think there’s a lot more upside.

Why don’t we start right there? On corporate recovery, can you offer some thoughts on recovery by market or hub in the U.S.? How would you mark to market or speak to the momentum of the recovery in, say, a New York versus Chicago versus San Francisco? And Andrew or Scott, I’d just be really curious, as you look into the future, I would really appreciate your thoughts on kind of the Bay Area and how travel patterns may have changed there and kind of the upside you see into next year.

I will provide some insights here, and Scott may want to add to this. We monitor recovery by hub and by industry sector. The sectors contributing the most to United Airlines are currently lagging, with technology and professional services trailing behind. However, I believe our performance is leading the industry, and we have quickly adapted to these changes. I remain optimistic that these sectors will recover, particularly global long-haul travel, which I expect to bounce back quicker than short-haul domestic flights. Recently, there has been a positive trend in the recovery rate, which has been encouraging to observe. I should also note that business travel in key coastal areas, like New York and San Francisco, is still below that of our inland hubs. As the recovery gains momentum, which we anticipate, I believe it will uniquely benefit United, especially given our current position and strategies in this evolving landscape.

I appreciate those thoughts. And maybe a follow-up for Gerry on the 179 aircraft you plan to take between now and the end of 2023. How much of that financing is in place? How much do you still have to do? And how has your expectation for cost of capital changed? I mean, Gerry, you’ve seen a lot of these cycles. So, we haven’t seen rate momentum like this. How are you thinking about sort of supporting that aircraft book over the balance of the next couple of years? Thanks for taking the questions.

So, a good question, Duane. So, it’s too early to tell you our entire plan for the mix of financing or paying for next year’s aircraft. So, more to come on that. We’ll remain, as I said, opportunistic. Yes, there’s no question we’re in a higher interest rate environment. But keep in mind, the financing portion of ownership cost for a new aircraft is such a small fraction of the overall cost of that aircraft, and the benefit so overwhelms that, even in the current interest rate environment, it really doesn’t have a dramatic impact on us. Sure, I love doing EETCs at 3%, but EETC at 6% or a little bit higher, that’s what we used to do 7, 8 years ago. There’s nothing new here.

Regarding the recovery of business travel, what is your assumption for business travel in the fourth quarter that supports your revenue guidance? Additionally, could you provide insight into the international volume aspect? That sounds promising, but it seems there is still progress needed on the yield side. This looks like it could be a solid advantage heading into 2023, so any overarching thoughts would be appreciated.

Yes. When we did the forecast, it’s pretty much flat. So, we’re not expecting a significant recovery on the traditional way we measured it. I’m not sure that’s the right way to measure it anymore, to be clear. So, we’ll be agile on that as we go forward from this at this point.

Okay. And then just piggybacking...

Yes, I didn’t finish your question. On cabin, I think your perspective is somewhat correct there. We’ve seen incredible strength in the new Premium Plus cabin and in the coach cabin. We’ve also seen really good strength in the Polaris cabin but not as good, I have to say, as the back of the airplane. As that business continues to come back, we will hopefully likely see, I think, further strength in the front section of the aircraft. Again, the numbers are pretty downright strong from a load factor point of view. But the more leisure-oriented nature of some of the Polaris traffic today does fly at a lower yield than has traditionally been in that cabin. So, as that returns to normal, however fast or slow that occurs, that will continue to provide, I think, more of a tailwind going forward.

I was kind of wondering to ask you about your comments on the FAA and ATC staffing. You mentioned talking to Secretary Buttigieg earlier this week. Like, how are those conversations going? Because publicly, he still tends to say most of the problems come from the airlines? And like, are things more constructive behind the scenes?

I had a productive call with the Secretary on Monday, as you mentioned, because addressing this issue is crucial. This isn't solely the FAA's responsibility. It's important to highlight that this agency has accomplished a tremendous amount over the past couple of decades and has been asked to take on even more. The demands placed on the agency and the number of personnel dedicated to growth, space launches, and aircraft certification are significantly higher than they were in the past. They have had to manage funding for these initiatives by reducing headcount from their operational budget. It's difficult to overlook the fact that there are now fewer controllers than there were 30 years ago, which raises questions for many. However, this isn't their fault; it’s a problem we need to assist them in addressing during FAA reauthorization. That's what these discussions are focused on—finding ways to support them. In the past 24 hours alone, I’ve spoken with someone from the administration and held three conversations with congressional staff on this topic. Our goal in the airline industry is to help resolve this issue because it fundamentally comes down to supply. Unless we address this core challenge, we'll continue to face difficulties. Operations may run smoothly in months like September, but we will consistently struggle in July without adequate staff reflecting the current volume of airline operations. I believe there is a shared understanding between us and the FAA regarding the necessity to collaborate in a bipartisan manner on the FAA reauthorization bill to enhance their staffing levels. It's important to note that while we've made substantial investments in infrastructure, we also need the human infrastructure to support it. For instance, this Sunday in Denver, where we handle 114 operations per hour in a well-equipped airport with four parallel runways, operations were reduced from 114 to 68 due to a few sick calls on a clear day. We cannot fully utilize our infrastructure without the necessary human resources, and it's essential to align our personnel capabilities with the infrastructure we're developing.

I just wanted to clarify, you said 15,000 new employees this year and 15,000 next year. That’s way ahead of, I think, what the goal was by 2026 with United Next. How much of that is to replace people retiring and maybe some attrition? And then also, if you have any update on the pilot negotiations? Do you expect to raise the pay compared with the original TA that was sent out? Thanks.

Yes. Hi. This is Brett Hart. So, our hiring is actually right on schedule in terms of what we expect across the next four to five years with respect to United Next. Sure, some of that is to replace people who are no longer with the company, but the vast majority of that is geared towards meeting our overall plan. We’re having no trouble finding terrific talent throughout the system. We are convinced at this point that we are definitely an employer of choice. We have no issues meeting our needs. We expect to continue to hire, as we said earlier. With regard to the pilots, our discussions with our pilots are obviously ongoing as they are with our other unions. So, we don’t typically comment much beyond that, but we’re continuing to make what we hope will be progress in that area.

I’d like to ask a question that has probably been touched on already, but it’s about the holiday travel season from a passenger’s viewpoint. What are your expectations regarding demand for holiday travel? How does it differ from previous years? I believe you've mentioned it might be more spread out. Additionally, with the rising prices, not just for airlines but across the board, how do you anticipate demand will hold up, especially considering concerns over inflation and a potential recession?

Sure. I’ll give it a try. We are definitely seeing significant strength for the holidays, especially as we approach Thanksgiving, and our bookings are incredibly strong. As I mentioned earlier, the bookings this year are different in that they are more spread out across multiple days rather than concentrated on a single day close to the holiday like in the past. This reflects a new travel pattern for us, and we are observing something similar for the Christmas period as well. There is certainly inflationary pressure in the country, and it is apparent to everyone when they are booking a hotel room or even going to the grocery store. We are managing our prices to ensure we achieve the necessary results while also providing great value and benefits to our customers. We are reinvesting a lot of that revenue back into our customers through investments in new aircraft, which will significantly enhance the travel experience, whether through in-flight entertainment or onboard Wi-Fi. I believe this investment will greatly improve the onboard experience. United Airlines is committed to ensuring our customers reach their Thanksgiving or Christmas destinations on time with their luggage, just as they expect.

I will now turn the call back over to Kristina Munoz for closing remarks. Thanks 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 on the next quarter.