United Airlines Holdings Inc (UAL) — Q4 2022 Earnings Call Transcript

Thank you, Candice. Good morning, everyone, and welcome to United’s fourth quarter and full year 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 the 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. Unless otherwise noted, we will be discussing our financial metrics on a non-GAAP basis on this call. Please refer to related definitions and reconciliations in our press release. For reconciliation of these non-GAAP measures to 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 our Chief Executive Officer, Scott Kirby; Executive Vice President and Chief Operations Officer, Toby Enqvist; 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 the line to assist with Q&A. And now, I’d like to turn the call over to Scott.

Well, thanks, Kristina, and good morning, everyone. Before we do our normal presentation, I want to walk you through a short deck that explains the intellectual rationale of what we’re seeing and where we think the industry is headed over a longer-term horizon. In short, we think there’s ample evidence that there have been structural changes in the airline industry that set the entire industry up for higher margins than we had pre-pandemic. First, while the specifics of the demand environment will be different, we expect it to return at least to pre-pandemic levels, and it could go higher. Second, we believe cost convergence among all airlines, as well as supply challenges, may drive structurally higher industry margins. And finally, United has been pretty accurate about the macro outlooks, the impact of COVID, and what the recovery would look like going all the way back to February 29, 2020. Based on that, United really did take a different and unique approach to the recovery. At the onset of the pandemic, we acted first, and we acted more aggressively than anyone else to protect our airline and the jobs of the people who work at United. At the time, in fact, some said that we were overreacting and that the pandemic wouldn’t be so bad. But by confronting that reality and acting quickly, our leadership team was able to be the first airline to move forward, turning crisis into opportunity, and began making plans for big investments in United’s future while others were still in crisis response mode. This has had a significant impact on both our absolute results, as we’ve achieved our 9% adjusted pre-tax margin ahead of schedule, and in our relative margin results compared to the rest of the industry. On this next slide, you can see what industry revenues look like as a percentage of GDP over time. A few interesting points: The industry still has about 15% domestic revenue growth left to go just to return to 2019 levels here in 2023. Our base case margin targets, 9% and 14%, assume that we just get back to the 0.49% ratio. In the 1990s and 2000s, however, revenue to GDP was even higher. We believe that cost convergence may drive revenues higher than 0.49%. And for what it’s worth, every basis point of domestic increase translates into about 1 point of margin for United. On slides 5 and 6, I’ll address what I think is the most significant structural change to happen to the industry in a long time. For a host of reasons, we believe the industry capacity aspirations for 2023 and beyond are simply unachievable. Just like 2022, when the industry capacity was 7 points lower than initial guidance, we believe that same trend will happen this year for similar reasons. We’ve talked a lot about the pilot shortage, which is just one of multiple constraints. We, along with Delta, American, and Southwest, alone are planning to hire about 8,000 pilots this year, compared to historical supply in the 6,000 to 7,000 range. Pilots are and will remain a significant constraint on capacity. Post-COVID, all companies, including airlines and the FAA, need to staff at higher levels. Lower experience levels combined with sick rates that are elevated because of COVID, and new state legislation that makes it a lot easier to call in sick contribute to this challenge. We believe any airline trying to run at the same staffing levels they had pre-pandemic is bound to fail and likely to experience severe operational challenges whenever there are weather or air traffic control stressors in the system. OEMs are behind on delivering aircraft, engines, and parts. Across the board, there are supply chain constraints that limit the ability of airlines to grow. Finally, the FAA and most airlines, with the exception of the network carriers, have outgrown their technology infrastructure and cannot reliably operate in this more challenging environment. At United, we believe we need to carry at least 5% more pilots per block hour than we did pre-pandemic. Additionally, air traffic control challenges mean our taxi and in-route flight times are elevated and growing. So, the same number of block hours probably produces 4% to 5% fewer ASMs. Put it all together, and we need 10% more pilots and 5% more aircraft to produce the same number of pre-pandemic ASMs. This is the new reality, the new math for all airlines. We may be the only airline that’s actually figured this out and likely the only airline that has included this in our 2023 CASM-ex guidance already. To be clear, all of these issues also impact United. The reality is that the airline industry is probably the most complex operational industry with by far the highest safety and regulatory standards of any industry in the country. COVID hit our industry harder than others. All of us, airlines and the FAA, lost experienced employees and most didn’t invest in the future. That means the system simply can’t handle the volume today, much less the anticipated growth. At United, we missed our capacity target for 2022 due to challenges we faced over a year ago during Christmas of ‘21. Omicron hit us all hard. We still pulled down capacity proactively; it was the only responsible choice. We flew significantly less last year than we’d have liked to fly, but we did it intentionally, as it gave us the breathing room to invest even further in our technology and infrastructure and increase our staffing levels. We had a head start compared to most airlines because we started with much better technology and infrastructure. Importantly, we accepted that the structural changes were real and moved quickly to adapt. I fully recognize that most or perhaps all of our competitors will get on their calls next week and say this was a one-time event, no big deal, no change to our capacity plans. If so, I think they are simply wrong. It’s hard to accept, and takes time to work through the denial phase. What happened over the holidays wasn’t a one-time event caused by the weather and it wasn’t just at one airline. One airline received most of the media coverage, but the weather was just the straw that broke the camel’s back for several. This keeps happening over and over again. Despite good weather, ULCCs still haven’t recovered as we entered the New Year. The operational difficulties are evidence of the systemic challenges limiting growth in flights. As you can see on the data on slide 6, United’s hub locations often experience the worst weather. Despite this, we are able to lead the industry because we are doing many things differently than we did historically. We’ve made significant investments in technology and infrastructure. We are operating with 5% to 10% staffing buffers. This means we need more pilots, gate agents, flight attendants, and rampers to fly the same schedule. We are running with about 25% more spare aircraft than we did pre-pandemic and flying at lower aircraft utilization. All of this costs money, but it’s the right thing to do for our customers and is among the most important things we can do to win their loyalty. Importantly, these buffers are much less expensive than the costs associated with avoiding inevitable operational meltdowns. Other airlines may talk about returning to 2019 utilization and efficiency, but that’s fundamentally the wrong approach. This industry has changed profoundly due to the pandemic, and airlines cannot operate as if it’s 2019, or they will fail. However, don’t just take my word for it; watch the data. United will always operate in the most challenging environment. Any airline operating notably worse than United is outgrowing its technology and infrastructure and simply cannot keep pace. Slide 7 discusses the international front, which starkly illustrates United's different approach compared to competitors. During the pandemic, we anticipated that international travel would rebound strongly. Because of this, we were the only airline globally to make two significant strategic decisions: we didn’t retire widebody aircraft, and we negotiated a deal with our pilot union to retain pilots in their positions. This allowed us to rebound swiftly. Other airlines made decisions that will take years to undo. We’ve already seen this reflected in summer’s capacity data. On slide 8, I won't belabor the theme but want to reiterate that United consciously used the pandemic to invest in the future. Our large aircraft orders represent just the latest example of this. New planes are significant investments, which gain a lot of attention, but other critical investments in technology, infrastructure, and personnel haven’t received the same headlines, even though they are essential to our success. Our strategy has always hinged on believing in a full recovery, which has driven our early investments. On slide 9, everything in this presentation should reassure investors on why we are confident in our margin targets. There’s potential for margins to be even higher, which makes slide 9 the defining slide for me. You can have any viewpoint you want on capacity, but what truly matters is cost convergence. It’s already occurring, and I believe it will continue. I foresee a scenario where ULCCs are unable to pay significantly less to their pilots while still hiring and retaining them, and managing their previous staffing and utilization levels—this is simply not feasible. With cost convergence, if I were a betting man, I’d wager that the revenue to GDP ratio will revert to mid-5 ratios. That’s not our official guidance, but it’s entirely possible. To conclude, the pandemic has sparked a structural change in the industry. The dynamic between supply and demand is unlike anything I’ve experienced in my career, and I understand there may be skepticism among investors. Yet every data point confirms this narrative repeatedly. By recognizing these changes earlier than our competitors, we were able to invest and prepare to capitalize on them. I genuinely believe that margins across the airline industry will be higher, but United’s unique preparations for this recovery will allow us to maintain comparatively strong performance, and I expect that lead to expand. Thank you to the entire United team for their incredible work; you're making United the best airline in aviation history. With that, I’ll hand it off to Toby, who will explain some of these critical investments and their importance for operational success through the most challenging holiday season in my career.

Thanks, Scott, and hello to everyone tuning in today. I first want to thank our employees for their exceptional performance over the holidays. We faced a really challenging operating environment that included some of the busiest days of the year and historical cold weather across most of our hubs and line stations. While you wouldn’t know it from the holiday travel headlines, United was the most impacted airline from a weather perspective, with 36% of all our flights affected between the 21st and 26th, more than any other airline in the country. Despite these headwinds, our team connected 90% of our customers within four hours of their planned arrival and served over 8 million people, 1 million more than last year. Our operation performed exceptionally well under tough conditions. United had among the fewest cancellations during the holiday period and was number one in completion in Denver, San Francisco, Houston, Washington, and Dallas. We also practically eliminated all crew-related challenges and cancellations compared to the 2021 holiday period. So how did we achieve this? The answer lies in the planning and investments we made during the depths of the pandemic. Instead of operating our airline as we did in 2019, we prepared for a more complex operating environment and a sudden surge in travel demand during the 2022 holiday period. We built some slack into our schedule and reduced flight frequency during peak times. We ramped up our hiring and added staffing buffers in critical locations. We implemented processes to prevent individual weather events from affecting our broader network. Finally, we enhanced training across every department, including clearing out the pilot training backlog to ensure we were ready for peak travel demand. As Scott mentioned, our preparations go back even further. Over the last three years, United invested in systems, training, tools, and technology to empower our employees and benefit our customers. We implemented a modernized crew scheduling system, which provides 800% improvement in capacity and performance compared to 2019. We established a smart schedule and operational coordination to ensure reliability in our schedules, increased spare aircraft in our fleet, and updated our technology infrastructure supporting our operations. Together with our customer-facing technologies like ConnectionSaver and Agent on Demand, these investments play an essential role in our operational excellence. I also want to highlight the biggest differentiator for United this holiday season: our frontline teams. They worked collaboratively, volunteered for extra trips and overtime during record-low temperatures. The combination of their dedication and our proactive investments in technology and infrastructure led to our success this holiday season. With that, I’ll hand it over to Andrew to discuss our numbers.

Thanks, Toby. TRASM for the fourth quarter finished up 25.8%, and PRASM was up 24.6% compared to the same period in 2019, even with a 9.5% decrease in capacity, which mirrored United’s strong performance in the third quarter. TRASM growth for non-passenger revenue continued to outpace PRASM in Q4, although that trend will reverse in 2023 due to cargo revenue declining to new post-pandemic levels, while co-brand credit card revenue growth is slower relative to ASM growth this year. PRASM in Q4 was robust across all segments versus 2019, with domestic results up 23%, Latin up 30%, Europe up 11%, and Pacific up 42%. International capacity in the quarter decreased by 12%, while domestic capacity dropped by 8%. Reflecting on our revenue performance for 2022 as a whole, our overall TRASM performance compared to 2019 was up 19.5%, exceeding our expectations against industry trends and outperforming our network competitors during that period. To meet our overall outlook for 2023, we anticipate TRASM will be flat for the year compared to 2022. The impact from cargo and other revenues is projected to result in a negative 2 to 3 points year-over-year in TRASM, implying PRASM will increase about 2 to 3 points in our outlook. As we evaluate revenue for 2023, we are optimistic about global long-haul. We expect overall industry capacity to remain flat both across the Atlantic and Pacific. United has the largest share of this capacity, which provides a favorable setup for positive RASM year-over-year. International demand remains robust, and we are looking at the potential for record profits and margins across our global network this year. Although Asia has historically been a margin challenge for our global operations, we have diligently worked to rebuild our network to close that gap; 2023 will validate these efforts. Importantly, Asia is nearly fully reopened, allowing us to reestablish the bulk of our flying outside of China. We should also note that restrictions on using Russian airspace will limit our operations to China and India; we do not normally provide monthly revenue details during a quarter, but it is crucial to share our outlook for January and February. Our unit revenue outlook for February and March aligns closely with the strong performance seen in previous quarters, roughly 25% higher than 2019 levels. January may be seen as a negative outlier in Q1 with revenue compared to 2019 softer than the following months. We believe this is primarily due to holiday timing and decreased demand for incremental weekend trips shortly after the year-end holiday season. However, we expect the latter part of February and March to revert to trending expectations, with bookings already 30% to 40% above the same period in 2019. Overall, we project Q1 TRASM to increase around 25% year-over-year. Another positive driver for 2022 revenues is the gradual recovery of traditional corporate travel. While November and December lagged compared to October, January showed notable improvement, about 5 points over the Q4 average. Typically, budgets get exhausted quickly, which explains the disappointments in corporate travel in late last year. We have a great setup for global long-haul travel as well as our domestic operations, where industry constraints are abundant, creating a favorable supply-demand environment. United is also swiftly implementing our United Next plans focused on premium seating, revenue segmentation, refurbishing interiors, and enhancing connectivity, which suffered during the pandemic. We’re opening 17 new mainline gates in Newark and 20 in Denver in 2023, improving customer experience and reliability. In Denver, the new gates will enhance operational efficiency, while in Newark, the additional gates will allow us to transition more flights from Express to mainline, smoothing the United Next transition. Additionally, we recently expanded United Club space, enhancing our Newark club by 69% and our Denver club by 180% compared to 2019. We have also increased club space in Chicago and Dallas significantly. Many of these clubs and projects are set to come online soon. Looking beyond 2023, we are implementing our long-term growth strategies and making adjustments to our future gauge plans. By 2026, we aim for a 25% increase in North American gauge compared to 2022 and a 40% increase compared to 2019. United remains undersized in gauge and is awaiting the arrival of a large number of narrowbody aircraft not currently reflected in our schedule, resulting in a margin gap compared to our potential and those with significant fleet sizes in this category. Activity decreased in 2022 due to regional jet capabilities and Boeing-related delays. However, pilot staffing at our regional carriers has now stabilized since the pay changes took effect, essentially matching a competitor’s model paired with our AVA program. Regional jet utilization is improving, but we still have a long way to go, and it may take until 2025 or beyond to fully normalize. We have signed a new agreement with Mesa to expand our regional jet operations in 2023 and retained small community services, while our collaboration with Air Wisconsin will come to a natural end. Consequently, the number of regional partnerships will decrease from six to five, phasing out approximately 40 single-class 50-seat RJs that are not part of our long-term plans, while adding dual-class 70-seat CRJs—a net benefit for United, small communities, and our customers. Rebuilding connectivity will be a key focus in 2023 and 2024 and will contribute significantly to RASM similar to what we experienced in 2018 and 2019. Thank you to the entire United team. With that, I’ll turn it over to Gerry to discuss our financial results.

Thanks, Andrew, and thank you to the whole United team for ending the year on a strong note. With adjusted pretax income of $1.1 billion, we exceeded our fourth-quarter expectations and not only returned to pre-pandemic profitability levels, but we surpassed the fourth quarter of 2019 on both an operating and pretax margin basis. More encouragingly, in the second half of 2022, we achieved an adjusted pretax margin of 9%, matching our margin target for 2023 and positioning us well for continued success this year. Turning to costs, our CASM-ex performance improved significantly in the second half of 2022 compared to the start of the year. As I mentioned last quarter, a driving factor for this success is the return of grounded 777s to service, further enhancing our operational reliability. As we know, a well-run operation is inherently more cost-efficient. Looking ahead, we expect Q1 2023 CASM-ex to decrease by 3% to 4% with capacity up 20% compared to Q1 2022. For the full year, we anticipate 2023 CASM-ex to be approximately flat with high-teens capacity growth compared to 2022. This overall cost outlook incorporates system investments that support operational reliability, our current expectations for labor increases (amounting to about 4.5 points of CASM-ex, excluding any potential signing bonuses), and a higher inflation forecast across all business aspects. One lesson learned during pandemic recovery is that maintaining a cushion in our aircraft utilization is both economical and profit-maximizing. Rather than pushing utilization to its theoretical limits, we prioritize protecting our reliable operations. This minimizes delays and cancellations, which could otherwise lead to higher costs, such as overtime or accommodating customers. In terms of profitability, demand remains robust. As Andrew mentioned, leveraging the January 10 forward curve for fuel prices, we project our Q1 2023 adjusted pretax margin around 3%, with adjusted diluted earnings per share in the range of $0.50 to $1. Additionally, bolstered by a successful second half of 2022, and factoring in industry dynamics that Scott described earlier, we feel more confident in achieving our 2023 United Next adjusted pretax margin target of 9% with projected adjusted diluted earnings per share of approximately $10 to $12 for the full year. Regarding our aircraft, we anticipate taking delivery of 92 Boeing 737 MAXs, 2 Boeing 787s, and 4 Airbus A321neo aircraft in 2023. Assuming all deliveries occur, we now foresee total adjusted capital expenditures amounting to around $8.5 billion for the full year. Despite this elevated CapEx level, we expect adjusted free cash flow to remain positive throughout the year, depending on the capacity, revenue, and cost guidance outlined. Looking beyond 2023, we announced an aircraft order with Boeing last month that includes 100 firm 787 aircraft, addressing a substantial portion of our widebody replacement needs through 2032. We also gained options for up to an additional 100 787s that can support growth opportunities if margin-accretive circumstances arise. Furthermore, this order involves 100 extra 737 aircraft to meet our United Next objectives and initiate preparations for narrowbody replacements in 2027 and beyond. Our aircraft order book represents a vital asset, providing us both cost-saving replacement aircraft and flexibility to leverage profit-enhancing growth opportunities. With this flexibility built into our order book, we can adjust the delivery timelines to align with macroeconomic conditions. Regarding our balance sheet, we ended the year with liquidity of $18 billion while reducing our adjusted net debt by $3.3 billion compared to year-end 2021. We aim to balance liquidity levels with deleveraging activities and financing opportunities, anticipating we will meet our 2023 target of adjusted net debt to EBITDAR of less than 3 times. As we enter 2023, we have a strong foundation, and I want to acknowledge all the hard work that has gone into running this great airline. We look forward to delivering value to our customers, employees, and investors in 2023. Now I’ll turn it over to Kristina for the Q&A.

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

There’s been some pushback just on the 2023 jet fuel guide and just trying to get comfortable with the link between cost and revenue. So, RASM is the highest it’s basically ever been. And even with the capacity constraints out there, industry capacity is now being added. So, what gives you the confidence that you might pass along additional cost headwinds on to customers in the current environment?

Hey, Conor, let me provide a little color on that, and maybe Andrew will as well. First, we provide our fuel guidance based on the forward curve from about a week ahead of the release. These numbers can change daily, and if we had run it more recently, we would have projected potentially $0.10 to $0.15 higher for fuel. All else being equal, that increase would represent about 1 point of margin. We are confident in the correlation between revenue and fuel that we've historically observed. Near-term, we don’t have the same flexibility that we’d have later in the year. However, even for the first quarter, we still have February and March where fuel prices will change daily. For the full year, we remain assured about this correlation. As an example, during the second half of 2022, where we achieved a 9% margin, the fuel price averaged $3.68, providing a significant cushion.

No, I think you covered it well, Gerry. We definitely believe and have consistently observed over time that fuel becomes a pass-through in both directions. Also, as we analyze our advanced bookings, particularly from mid-February onward and further into Q2, we see a strong supply-demand balance enabling our revenue management systems to operate effectively. Therefore, I feel confident about our outlook.

Okay. And then just regarding the United Next plan. When you guys initially discussed it, it was all about leading on costs, and I realize the environment has changed a lot since then. So, as you begin to assess the cost structure, which includes labor, do you expect that United will evolve back into a cost story in a post-2023 world?

Well, Conor, there’s undoubtedly been an industry cost reset, and I think Scott articulated that well, discussing cost convergence ahead. For us, just looking at our guidance we put out about six months ago for 2023, there has been movement—probably around 9 points. Three points of this relates to capacity aims shifting from what we thought six months ago compared to today. Another three points relate to labor adjustments, while others are tied to inflation and operational buffers. Of note, the relative cost story for United Next has remained intact, which is crucial. Whether it’s the mainline gauge benefit we will see from additional aircraft or reduced reliance on single-class 50-seat aircraft that are leaving our operation, we remain confident in the United Next story.

Maybe just approaching the revenue question a bit differently—perhaps for Scott or anyone else who wishes to answer. How do you envision airline revenue as a percentage of GDP returning? This conceptually aligns well, but do you believe the industry can reach those pricing levels if volume versus GDP is lower amidst the capacity constraints we've discussed?

If you reflect on history, while load factors have improved somewhat, I don’t anticipate significant changes in load factors. A few years back, pricing in real terms was higher, and I believe it remains a value buy today. For instance, air travel prices are approximately 50% lower than they were 30 years ago in real terms, and often, you may find yourself paying more for an Uber to the airport than for your airline ticket to Florida. Hence, the era of $4 flights from Los Angeles to Cabo and $7 flights from New York to Florida, or even $9 from Houston to Central America, are likely behind us. How other airlines decide to price their product is their choice, but it’s conditional upon their cost structure shifting, which we see happening currently—last year’s changes provide evidence, and I expect this trend to continue. Revenue management systems are doing exemplary work, as the yield curve for February is higher than January’s, and so forth.

Thanks for that insight; being in New York certainly resonates with the Uber versus airfare analogy. With everything that has transpired since the original United Next plan, particularly concerning capacity bottlenecks, how should we assess capacity growth over the next couple of years? Are you still targeting a 40% increase by 2026 with a CAGR of 4% to 6%, or should we adjust our expectations?

I don’t believe we're resetting any targets at this moment. The landscape is undeniably dynamic, defined by unprecedented OEM delivery delays on engines and aircraft. Thus, we will refrain from providing updated projections for 2026 today, aside from affirming that we are navigating through significantly challenging skies concerning aircraft availability. We’ll continually monitor the situation and will update guidance when it's appropriate.

The critical point is we have genuine confidence in achieving our 14% margin across feasible scenarios despite the challenges related to aircraft deliveries.

Gerry, a question about labor cost assumptions tied to pilots and the 4.5-point headwind. Do you anticipate that pilot economics will be backdated to January 1st, or is there another date we should consider? Additionally, regarding EPS guidance, do you find Delta’s profit-sharing formula to be industry standard?

Jamie, while I appreciate your questions, we aren’t able to divulge the specifics of potential negotiations during the call.

Understood. I have a follow-up for Scott. You mentioned that the capability for cost convergence is diminishing, and I didn’t fully grasp your previous comments. With recent developments in the Spirit and JetBlue agreements, their wage structures remain comparable, particularly with Delta. Are you suggesting that the wage disparity is anticipated to narrow even further, or did I misinterpret your statements?

I’m stating quite explicitly that I don’t foresee a scenario in which airlines can maintain significantly lower wages while simultaneously hiring effectively, retaining pilots, and adequately managing their schedules. Recently, one of the ULCC airlines has struggled mightily, with their completion rates raising internal doubts about potential pilot shortages given that our system has been performing well. About a week ago, they even issued a $50,000 signing bonus for pilots. I can provide more current data if you're interested. What I’m observing is that several airlines are unable to run their schedules as planned, which is impacting customers who end up dealing with flight cancellations. While the reasons behind these challenges may vary—be it staffing, technology, or infrastructure—the critical point is that airlines like Delta and JetBlue are operating distinctively higher than others due to a set of comprehensive investments that they have put in place.

Scott, thanks for that detailed introduction to this call; the facts you shared were extraordinary. What implications do these developments have for the industry in the long term? It seems unusual, as you pointed out, to see the airline industry trying to grow amidst these constraints. How might this scenario unfold? Do you foresee possible regulatory scrutiny on airlines trying to expand while their service is being impacted?

This situation is likely to ultimately result in reduced capacity. It is simply not mathematically feasible for all airlines to reach their proclaimed aspirations. For context, during a snowstorm that began yesterday in Denver, we achieved a 100% completion factor with no cancellations, whereas two other carriers cancelled 12% and 27% of their flights respectively. Initially, today, we cancelled less than 1%, while both competitors were at 33%. This isn’t a novel issue; we predicted it. Look at what happened last year when the industry capacity came in lower than anticipated, and now I feel even more confident about this. In our industry, several difficulties occur weekly, including weather disruptions, technology failures at the FAA, fuel supply interruptions, and vendor staffing issues at airports. We are at capacity limits regarding the number of flights in the system. While our operational performance is proving effective, it may require competitors, especially underperforming ones in these metrics, to rethink their strategies if they cannot operate within their schedules. The long-term structural issues we’re facing are not short-lived; they demand years of attention and adjustment. Although this certainly challenges us, we are better equipped to adapt thanks to the proactive investments we've made. But again, don’t just accept my word; analyze the ongoing operational data to decide whether these projections hold true.

Thank you, Scott. Your insights suggest you might excel in a sell-side analyst role should you ever venture into that field.

I can’t do sell-side; you guys are way too negative. I’m too optimistic for that.

To follow up, I found your comments about corporates exhausting their budgets early quite intriguing. Do you possess any data on how 2023 corporate budgets are shaping up to ensure this situation doesn’t repeat?

While I don’t have specific data to share, I can state that our outlook appears robust as we head into January. Notably, October was a strong month for corporate travel, and January is showing similar strength, if not better. We'll continue to track this metric closely, aware that it represents a major tailwind for airlines that depend heavily on corporate travel.

Focusing on the relation between fleet capabilities and CASM, let's revisit the moment in time when you unveiled a substantial fleet order in June 2021 with United Next. Your target CASM for this year was set to drop 4% from 2019 levels. However, factors like capacity reductions and inflation loop you have updated this to a 15% increase against 2019 levels. From a perspective of investment rationale, given the constraints you articulated so well, why does this investment approach still make sense? If you can’t grow at the anticipated rate, why invest heavily in it?

To clarify, I believe we can grow at United. However, I don't believe the industry at large can grow for the reasons we've discussed. We are confident in our hiring capabilities; pre-pandemic, our hiring averaged about 900 pilots annually, yet last year we successfully hired around 2,500. Our training team has greatly improved future operations. We took the initiative to build 14 new simulators when others were downsizing. Our operations are improving significantly; removing 300 regional jets aids us substantially in terms of capacity management. However, to be clear, our investments are designed with growth in mind. The great event of the pandemic presents an opportunity for a unique challenge, and if we adjust capacity downward, for whatever reason, we can restructure as needed without the same obstacles some of our competitors face. We have the flexibility to shift aircraft as circumstances change, so we can reassess our approach if we’re not meeting our targets. As it stands, our investments draw positive results, reflected in notable performance metrics. Our operational results indicate that the decisions we're making are paying off, as evidenced by our operational statistics and financial outcomes. This is the new normal; the time has passed for firms to expect pre-pandemic operational efficiency.

Andrew, could you elaborate on the elements embedded in the TRASM guidance for a flat projection? I know you indicated cargo was down and the card program's growth was softer, but how do we expect the revenue from these components to compare from 2022 to 2023?

While we anticipate strong results overall, they will not keep pace with ASM growth rates, which result in the discrepancies we’ve observed. Our card partnership is performing very well, significantly enhancing MileagePlus participation in 2022 above 2019 by nearly 50%. These excellent metrics contribute positively but are outstripped by the ASM growth in 2023, resulting in the TRASM downshift vs. PRASM.

That said, the airline industry's cost structure is, indeed, evolving, and there are no guarantees that we can always recover fully when conditions change. Yet, we do feel we have a solid capacity-cost correlation, which the data supports.

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