United Airlines Holdings Inc (UAL) — Q2 2023 Earnings Call Transcript

Thank you, Silas. Good morning, everyone, and welcome to United's second quarter 2023 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. Unless otherwise noted, we will be discussing our financial metrics on a non-GAAP basis on this call. Please refer to the related definitions and reconciliations in our press release. 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 the line available to assist with the Q&A. And now, I'd like to turn the call over to Scott.

Thank you, Kristina, and thanks to everyone for joining us this morning. Before I discuss our financial performance for the second quarter, I'd like to first address the operational challenges at Newark at the end of last month. I am extremely proud of the people of United for all they did to recover under very challenging circumstances. Our pilots, flight attendants, gate agents, contact center teams and others went above and beyond to inform and assist our customers in an extremely stressful situation. We are now doing more than ever to mitigate the impact of weather, congestion and other infrastructure constraints at Newark, and frankly, to build a schedule at Newark that is more manageable given the frequency of weather events and the very real operational constraints that exist there even on a clear day. Brett will highlight just a few of those changes shortly. But we have already put them in motion, and we’ve already started to improve the working experience for our people and the travel experience for our customers. A bigger picture, this quarter was yet another proof point that our United Next strategy was correct and is working almost exactly as we expected. Over the past couple of years, I've talked a lot about three exogenous constraints facing the industry. But also the fact that those very constraints and challenges are going to set the table for improved financial results for the airline industry. One, pilot shortages; two, supply chain disruptions; and three, infrastructure limitations. At United, we have control over the first two constraints, pilot and supply chain, and we mostly got ahead of the curve and had minimal issues there. But we’re probably the most exposed to the infrastructure constraint since our hubs are in some of the largest and most crowded airports in the country. So now we're taking even more action to give us the ability to operate more reliably despite the infrastructure constraints. That means we've had to lower our capacity plans for the second half and therefore raised our CASM-ex guidance. But the reality is that our CASM-ex will be better than it otherwise would have been because there's nothing as expensive as running an off-schedule operation, and these changes are designed to get our operations, particularly at Newark, working at a level that reflects the fact that it only has one set of parallel runways operating in the most crowded airspace in the world. The flip side of this coin, however, is that these exogenous constraints were also the basis of our United Next strategy and it is off to an incredible and even record-setting start. This was an all-time record quarter for pretax earnings and EPS on an adjusted basis. This performance reflects our success in building a strategy to, one, aggressively hire pilots; two, grow our Mid-Con hubs; three, upgauge our domestic fleet; and four, expand our wide-body fleet and international exposure in response to the trends that we identified at the beginning of COVID. Importantly, we now expect to deliver earnings per share of $11 to $12, even with incremental conservatism in our cost in the back half of the year. The vision and strategic outlook that we first identified nearly three years ago is happening. Cost convergence is occurring, which has changed our business dramatically on the domestic front. Long-term, positive structural changes to the international markets are also apparent in our results. We continue to anticipate that the GDP relationship between airline revenues has been reset higher due to cost conversions and will continue to improve. The outlook for United and our United Next strategy is incredibly bright, as highlighted by our financial results this quarter. This quarter demonstrates that we're ahead of our planned targets and the challenges emphasize that the industry backdrop gives us a clear path to our 14% pretax margin in 2026. As we march towards that goal, we're focused on setting the airline up for success. I'm also pleased that we've reached an agreement on an industry-leading contract with ALPA. The four-year agreement, once ratified, will deliver a meaningful pay raise and quality of life improvements for our pilots. Thanks to the team for getting this across the finish line. We are well on our way to being the best airline in the history of aviation. United Next gave us an unbeatable head start on that goal, and as long as we execute, we will. Thanks again to the United team. And with that, I'll turn it over to Brett.

Thank you, Scott. Thank you to our United team for their hard work this quarter. As Scott mentioned, during the last week of June, we experienced one of the most challenging operational environments in United's history, impacting primarily our largest international departure hub, Newark. Our hub locations make us disproportionately prone to weather, and in the second quarter, weather was particularly challenging, with 25 major irregular operation days accounting for 75% of our second quarter cancellations. Despite this, we are focused on setting United up for success, and being able to recover more quickly in the future. We are implementing a few new initiatives in Newark that will improve our operation. First, we are reducing the total flying in the peak hours to align better with the capabilities of today's constrained operating environment. Second, we expect to have additional gating as we bring the remaining six gates in Terminal A online, two of which are additional wide-body gates, as well as make additional tactical changes at United. Third, we are adjusting our schedules to increase our out-and-back flying to limit the downline system impact of any cancellations or delays. Fourth, we are increasing our resources and crew scheduling and accelerating the timeline of our technology enhancements and automation. Lastly, and importantly, our partnerships with the FAA and Port Authority are essential to the airline's success. Collaboration and communication amongst these groups has never been stronger. To that end, Scott and our government affairs team continue to remain actively engaged in working with the administration and leaders in Congress to pass an FAA reauthorization bill. Legislation that equips the FAA with the resources, tools, and funding they need isn't just essential to the success of our industry; it's among the best investments that we could make for the traveling public and the U.S. economy right now. And we're committed to continuing to advocate for a smart FAA reauthorization bill and to get it passed quickly. These are only a few of the initiatives underway, but combined with lower capacity, these adjustments add approximately 1 to 2 points of incremental year-over-year pressure to our 2023 CASM-ex. Gerry will go into more detail, but running a successful and efficient airline is critical, and United is laser-focused on getting our customers to their destinations safely and on time. As we work to respond to these challenges, we are also investing in our customer experience. Recently, we announced new mobile app features that support our customers during travel disruptions. These first-of-their-kind tools will allow customers to rebook, track their bags, and get meal and hotel vouchers when eligible on their personal devices. It is important for us to provide our customers the resources they need for their flight at their fingertips, especially when things don't go as planned. As Scott mentioned, over the weekend, we reached a tentative agreement with our pilots represented by ALPA. We're thankful for the hard work our pilots put in every day, and this agreement is a representation of that. We are still in active negotiations with our flight attendants represented by the AFA and have new agreements in place for all other work groups. The United team continues to be resilient. We're making real-time changes that directly impact the travel experience for our customers and for our employees, day-to-day. Proud to be a member of this team. I want to thank everyone for their unwavering hard work. And with that, I'll pass it over to Andrew to discuss the revenue graph.

Thanks, Brett. I'd like to start off today by thanking the entire United team for their hard work and dedication in taking care of our customers, particularly during the final week of the quarter. Our financial results provide proof that our United Next plans are working and that the demand environment remains robust. United finished the second quarter with top line record quarterly revenues of $14.2 billion. Total revenues in the quarter were up 17%, ahead of our guidance of 14% to 16%. June was exceptionally strong and was our best revenue month ever. Since the start of June, we've had 13 of our 16 highest flown gross revenue days. TRASM in the quarter was down 0.4%, and PRASM was up 2.2% with capacity up 17.5%. International results were exceptionally strong, with passenger revenues up 44% year-over-year. International PRASM increased 13.3% year-over-year. Year-over-year PRASM results were strongest in the Pacific, followed by the Atlantic, and then Latin America. The resurgence of the United Pacific entity has been the most transformative. Margins for our global long-haul flying continued to outpace domestic margins. Our second quarter capacity deployment plans leaned into international flying with 27% more capacity year-over-year, which proved advantageous. International ASMs represent 45.4% of United's 2Q capacity, up 2 points from 2019. Domestic passenger revenues were up 7.8% on 10.5% more capacity year-over-year, largely in line with our expectations at the start of the quarter. Domestic PRASM was down 2.4%, but that was a fantastic outcome as it compares to an exceptionally strong Q2 of '22. We expect similar or slightly better results for domestic PRASM in the third quarter. Our RM setup for the quarter proved to be the right one. We held back seats early in the booking curve, saving them for higher yields and closing bookings, and we ended the quarter with record top line results. The business recovery remained stable. Revenue from international travelers flying for business grew 40% year-over-year with 10% growth in domestic business travelers. On a ticketed basis, business travel revenue continues to trend roughly flat to 2019. Cargo revenues have normalized post-pandemic. Yields were down 38% versus 2022 but do remain up 29% versus '19. We expect yields in the third quarter to be consistent with Q2. Healthy cargo revenues and yields are helping drive incremental profitability to our global long-haul flying. MileagePlus had another strong quarter with revenue up 11% year-over-year. We broke records this quarter for all key measurements from new card acquisitions to new member enrollment. Ancillary revenue from bags and seats hit a record $1 billion in Q2, up 19% year-over-year. Per passenger ancillary revenue increased 8% to $23.79. Replacement of single-class RJs with mainline aircraft with multiple types of seat upgrade opportunities is a key driver of our revenue growth. Premium leisure demand remains very strong across the board. Our domestic first-class capacity is up 4% from 2019, but RASM growth in that cabin is 12 points stronger than the main cabin, even with corporate traffic not fully recovered. Our global long-haul Polaris product is also offsetting the loss of corporate business revenue with premium leisure demand and validates that the size of our Polaris cabins post-pandemic are correct for United hubs. For Q3, we expect total revenue will be up 10% to 13% year-over-year, with capacity up approximately 16%. The demand environment remains strong, and September and October looks particularly strong relative to both 2019 and July and August. Another sign that seasonality has changed in the summer peak period is more spread out relative to the past. Once again, Q3 capacity deployment focuses on international markets, with capacity expected to be up 23% versus 13% for domestic. We believe international revenue will continue to outperform domestic revenue in the third quarter across the globe, other than Latin America. Overall, our domestic margins are now back to 2019 levels while our international margins are trending well above where they were in '19. Earlier this week, we announced an expansion of our Pacific flying this fall with new nonstop service from Manila to San Francisco. We also announced a second daily flight from San Francisco to Taipei, a new daily nonstop flight from Los Angeles to Hong Kong, and will resume our service between Los Angeles and Narita as planned. These additions to our key Pacific destinations are in addition to our previously announced expansion plan to the South Pacific. While international flying remains our focus, we also have plans to improve domestic margins by rebuilding and enhancing connectivity versus 2019, grow and engage faster than any other carrier and stay focused on our existing set of hubs. Domestic connectivity fell materially in the pandemic because we decided to retire about 300 regional jets. But our connectivity is growing every month as we take United Next deliveries, and that will continue to drive PRASM higher each month. Like the period from 2017 to 2019, when we grew RASM and margins by growing connectivity, we'll do it once again but this time with large mainline jets preferred by our customers. Gauge has also been a key gap and opportunity for United; larger gauge narrow-bodies with 190 or more seats operate with the best single-line aisle margins in North America. The introduction of the A321 and MAX 10 was always a key enabler of our United Next age growth and margin growth. The potential of these larger jets is proven and further upside to United Airlines when we finally enter the fleet. I also want to add to Scott and Brett's comments about Newark and our United Next plans. United Next always contemplated that the only way to grow Newark was upgauging from regional to mainline flying. We expected that to lead to higher growth in seats and ASM at Newark even though the total number of flights would not be growing. Our growth in Newark has always been contingent upon larger aircraft, not more aircraft. While we may need a couple of departures more than planned, we don't believe these changes will impact our long-term capacity from Newark due to the use of larger gauge aircraft. And with that, I will turn it over to Gerry to talk about our financial results.

Thanks, Andrew, and good morning, everyone. I am pleased to report that for the second quarter, we delivered the highest quarterly pretax earnings in United's history of $2.2 billion. Our earnings per share of $5.03 was also an all-time record. And in addition, we produced a record second quarter pretax margin of 15.3%, 3 points higher than the second quarter of 2019 and ahead of our expectations. This exceptional performance was driven by stronger-than-expected revenue and lower-than-expected fuel prices. The severe weather at the end of June, which drove multiple consecutive days of strained operations, did lead to a 1-point reduction in capacity for the quarter. We also incurred incremental disruption-related costs that weren't anticipated at the time of our guidance. The capacity loss and added costs led to a CASM-ex impact of approximately 1.5 points for the quarter. Excluding this impact, until June 24, we were trending below the midpoint of our CASM-ex range for the quarter, an indication that our core costs remain under control. For the rest of the year, the operational and scheduling changes that Brett discussed have reduced our full year capacity plans from our prior expectations, and we now expect full year capacity to be up approximately 18% versus 2022. Additionally, our CASM-ex guidance now incorporates an expectation of additional incremental costs in order to address the operational challenges. Specifically, for the third quarter, we expect CASM-ex to be up 2% to 3% with capacity up approximately 16%, both versus the third quarter of last year. When combined with our results for the second quarter and our expectations for the fourth quarter, we now anticipate our full-year CASM-ex to be up approximately 1% to 2% versus last year. However, just like the second quarter, outside of the revisions I discussed, our core costs for the rest of the year are trending as expected. Furthermore, our CASM-ex expectation for the year continues to include the impact of our recently announced agreement with our pilots. Turning to earnings, the strong revenue environment and moderate fuel prices continue to provide strength to our bottom line. For the third quarter, we expect earnings per share to be $3.85 to $4.35, with a fuel price of $2.50 to $2.80. More importantly, given our second quarter performance and third quarter outlook, we are raising our full year earnings per share expectation to the top half of our previous guidance range of $10 to $12. On fleet, we took delivery of 20 Boeing 737 MAX aircraft in the second quarter and paid for 10 of those aircraft with cash. We expect to take delivery of 28 737 MAX aircraft in the third quarter and also look forward to our first Airbus A321neo later this fall. We continue to expect our full year adjusted capital expenditures to be approximately $8.5 billion. Turning to the balance sheet, we ended the quarter with $21 billion in liquidity, including our undrawn revolver. We are comfortable with our current level of liquidity, particularly given the uncertain macroeconomic backdrop. In the second quarter, we opportunistically issued $1.3 billion of enhanced equipment trust certificates secured by a pool of recently delivered Boeing MAX aircraft with an interest rate of 5.8%, which was attractive in the current interest rate environment. Additionally, we prepaid $1 billion of floating rate debt, which carried a current coupon of over 9%. Our adjusted net debt is now down almost $3 billion since the end of 2022 and $6 billion since the end of 2021. With the reduction in debt and the improvement in earnings, at the end of the second quarter, our trailing 12-month adjusted net debt-to-EBITDAR ratio improved by a full turn to 2.4x versus the end of the first quarter, putting us back to where we were prior to the pandemic and ahead of pace to achieve our target of less than 3x by the end of 2023. We also continue to expect to generate positive free cash flow for the full year, including the impact of our new pilot agreement. In conclusion, we are encouraged by the trends we are seeing and believe we're adequately mitigated against additional operational risk in the back half of the year. I'm extremely proud of the United team for delivering our strong financial results. Six months ago, when we first announced our full year EPS guidance, we were met with skepticism from some of you listening. Now more than halfway through the year, as we increase our EPS guidance, I hope all of you are as comfortable as we are with the value of the United Next plan, where we continue to march towards meeting our long-term path target in delivering for our customers, employees, and shareholders. And with that, I will turn it over 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 question. Silas, please describe the procedure to ask a question.

So Scott and Gerry, maybe a bigger picture level question for you. We're kind of coming up to $11 to $12 in earnings this year, can you help point out the two or three things that are unique to your strategy that are going to make it possible to kind of grow from that level? And there's a lot of concern about domestic slowing down. There's a concern about peak earnings. I'm just wondering how do we think about sustaining this level of earnings power or even building on it on a one or two-year view, conceptually? Not trying to get guidance for '24. Just trying to think about conceptually what's going to help us kind of build from these record levels of profitability.

I will begin, and then I’ll let Andrew provide some additional details. About two to three years ago, we introduced United Next and outlined our vision for what we believed would change in the industry. We anticipated that the international market would perform exceptionally well due to expected demand recovery. During the pandemic, we were uniquely positioned as the only large airline globally that chose to retain all our aircraft and even acquired more, positioning ourselves for growth. This expectation has indeed materialized. Domestically, we expected a convergence of costs to occur, driven by inflation, which we anticipated about 18 months ago. We believed inflation would lead to this convergence, but that the expectations for capacity would not be met due to supply chain issues, pilot shortages, and infrastructure challenges. To address these challenges, all three factors must align. Resolving one alone is insufficient; we need improvements in all areas. From a broad perspective, everything is unfolding as we predicted. This is a legitimate inquiry, and we’ve addressed it for several consecutive quarters. The industry's conditions continue to improve, particularly for large airlines like us with international exposure, which puts us at the forefront for pilot recruitment and supply chain solutions. United specifically anticipated this scenario and made significant investments based on this outlook, distinguishing us from others who were downsizing and retiring aircraft. We focused on growth and preparations for United Next. Our expectations are being realized, and I am confident that our profit margins will grow by one to two percentage points annually through at least 2026, signifying a new normal for us.

I guess I'll add on a few more details. First, I think we're in the really early stages of the United Next plan, and our results this quarter give us a lot of confidence. We're on the right path. But I really look at all the details. And when I look at them all, what I would tell you is, one, the MAX 10 and the A321 are really important to our plan. They're large single-aisle narrow-body jets that everybody knows has superior economics, and we don't have a single one in our fleet today, and that's a gap we will close. We've already increased gauge by 20% since 2019, more than any other U.S. airline and 8 points more than the industry, and yet we lead in unit revenue performance. The United network has been under-gauged, and we've said that over and over again. And our ability to add low unit cost planes at high marginal RASMs is now well proven and will drive earnings. Larger gauge, of course, gives us the ability to manage our overall unit cost down in a way others just don't have the ability to do, in our opinion, and this again is a unique advantage to us. We think our gauge growth in the coming years will be faster than any of our competitors based on the public plans that are out there. Of course, all of our mainline jets will eventually have a signature interior with seat-back screens and Wi-Fi. These jets have higher NPS scores as a result. These jets also come with larger first class cabins, more economy plus seats. They provide our customers with more options to upgrade and choose their ideal onboard experience while generating increasing levels of ancillary revenues. The pandemic clearly created a boom in premium leisure demand that we see today, and these passengers often purchase an upgraded experience. As Scott said, we have a large order book of narrow-body jets. Boeing and Airbus are largely sold out until the end of the decade. We can use these planes for growth or we can use them for retirement depending on conditions. Also, as Scott said, and I think really, really important, the international long-haul environment is just structurally different. This cycle for our business will have higher international margins versus domestic, a reversal from pre-pandemic. United has the largest international network amongst U.S. carriers. And as a result, we're going to benefit the most. No other U.S. airline has coastal gateway hubs like United. Our hubs are where most of the business class premium demand and cargo demand enter and exit the United States, and they have superior geography for connecting traffic. This advantage is largely unique to United. Of course, we have a larger order book for wide-body jets, as Scott said. Our domestic connectivity is not where we want it to be. We know we can close it, and we know what the margin gains are going to be for that. And while we continue to use regional jets, we won't over-rely on them. Cargo is an amazing strong spot for us that really helps fuel our global long-haul growth. The other thing I'd say, and I think this is really important, is all United hubs are producing strong profit margins. And we have the option to grow these hubs with our large narrow-body order book, which creates a different paradigm for United than most. Simply, we start with a strong foundation to support our growth; we neither must shrink a hub to profitability nor seek to grow a hub with sub-par margins, and I think that's a really important setup for us. As Scott said, constraints to growth continue. Cost convergence is now well documented. The other thing I'll add, United is far less reliant today on contracted corporate business, and that business has clearly been slow to return, but that doesn't mean it won't. If it does, the legacy business model will benefit the most. Further, NDC is changing distribution in the space as passengers with more flexibility want more flexibility in when they travel and how they travel and are increasingly preferring to work directly with United on our industry-leading app. More and more often, individual corporate customers pick the airlines they want to fly on versus the purchasing manager at their business recommendation. This change in consumer behavior is locked in during the pandemic and now seems irreversible to me. Of course, we're focused on our high ground and our last advantage, of course, is our great team innovation.

All right, well David, that was a lot, but you can tell we feel confident.

LCCs are currently increasing their capacity and fare sales, which appears to be having a minor impact on your business right now. I'm interested in understanding what has influenced your reluctance to match these fares. Is it a matter of premium offerings, or perhaps specific regional factors? Any insights on this would be appreciated.

Well, that's largely a domestic question. And I think our domestic environment has done well. As you know, in Q2, we really just hit it right on the head in terms of our guidance for the domestic entity. And in Q3, our performance looks to be very, very similar. So we're pretty pleased by how Q3 is setting up. I just think with where we are with our brand, our network, our upgauge, we're carefully from an RM point of view, determined in our policy. And as we started Q2, we decided to hold out and book later in the curve. I think that proves right. And as we go into Q3, I think this guidance would tell you that we don't see a change. So I'm sure there are other things happening in the environment that are both positive and negative. But we don't see a change in the Q3 environment of down a little bit for domestic PRASM is entirely consistent with the Q2. And so we don't see a change, and we see steady and strong demand.

And then just on the international landscape, you obviously are taking a huge advantage there. Just curious on what's next for the Atlantic. Are you comfortable with that network? And then just on the Pacific build-out, there seems to be a lot of upside there. I'm just curious on your expectations for that fall launch.

Sure. That's a great question. I want to emphasize that our international RASM in Q2 and profitability exceeded our high expectations from April. As we move into Q3, the year-over-year comparison differs from Q2. By Q3, most destinations were more accessible for travel, unlike Q2 '22, where travel was still restricted. This will impact our year-over-year comparisons. When looking at 2019, it's clear that Q3 is performing very similarly to Q2, which is promising. So, like domestic operations, we anticipate a strong performance in Q3, but with tougher RASM comparisons year-over-year and relatively stable RASM figures. Profitability is expected to remain very robust, although Latin America may show the weakest performance. Regarding the Atlantic, the outlook is positive, particularly with demand for travel to Southern Europe, which is supported by extended seasonal flights well into Q4 that we typically do not offer. Additionally, as mentioned earlier this week, we are optimistic about growth in the Pacific, especially after announcing four new Trans-direct routes for this fall. This includes our first-ever nonstop service from San Francisco to Manila, an increase to three daily flights to Hong Kong, a second daily flight to Taipei, and the resumption of our L.A. to Narita flight. We also believe that Japan's travel demand will stay strong into 2024, as it didn’t fully reopen until this spring. In summary, we see significant growth potential in Asia and are pleased with our current positioning. For overall international exposure, in Q2, we saw a 2.3 percentage point increase in international ASMs compared to 2019. In Q4, we expect that to rise by 3.1 to 3.4 percentage points, reflecting our commitment to the global long-haul market, which we believe is where the revenue opportunities lie right now.

Can you help us understand the overall effect of operational challenges from the end of the second quarter into the third quarter, along with the changes you're implementing to strengthen operations moving forward? What does this mean for the third-quarter and full-year EPS outlook? It seems like the one to two-point headwind to CASM is closely related to this, but please correct me if I'm mistaken. I'm also curious about any potential revenue impact. I'm asking because the adjustment to the full-year midpoint EPS is somewhat less than the beat in the second quarter, so I would appreciate any insights you can provide.

Hi Catie, let me address that. First, regarding costs, what you saw from us in the second and third quarters, as well as the full year, is that the adjusted CASM is entirely linked to the operational disruptions. I want to highlight that aside from those disruptions, our core costs are aligning with our expectations. The variance compared to our previous guidance is fully due to this issue. To break it down, about one-third of that CASM variance is due to the actual costs incurred from the disruptions, while two-thirds are connected to the capacity adjustment. I would estimate that we lost about one point of margin in the second quarter due to these events, compared to our prior forecast before June 24. We have factored in our expectations for lower capacity in our EPS guidance for both the third quarter and the full year. It's reasonable to say that without those adjustments, our guidance for the full year would have been a bit higher, reflecting the upper half of the range. That's how to understand the situation.

That's really helpful. And then maybe one for Andrew. Can you just walk us through some of the assumptions you're making underlying the view that domestic RASM performance is steady or better 3Q versus 2Q? What's the corporate assumption? And really just asking because that's different from what some of your peers are expecting. So just wondering what's unique to United that that's going to hold in a little bit better than some others are seeing?

I won’t reiterate everything that's unique to United, but regarding the Q3 numbers, there has clearly been a shift from Q3 into Q4. October is looking to be stronger than it was in 2019, and June has become the strongest month of the year. This is impacting seasonality and margins for United and the industry. Overall, we have a very good setup. Our international operations are performing exceptionally well with no areas of the network underperforming. We’ve really focused on this strategy, and it is reflected in our results. On the domestic side, we have the right aircraft in the right locations, with New York City performing significantly better for us than in the past. We are pleased with the performance of all our hubs, which are profitable. We believe this reflects excellent capacity planning and a strong market environment.

So just to kind of follow up on the July 4 disruptions. I don't know if it's a fair question, but are you able to quantify kind of what percentage of the disruption was sort of in your hands or factors within your control versus like what was fostered upon you, if you will, or externally imposed? And also kind of in the near term, it does make sense to draw down capacity, but kind of what is the long-term plan to make sure that Newark serves as an effective hub for you?

Well, first, the most important thing is to get Newark working effectively. And we've done some tactical things at United already. We've got some more changes that are coming that are in the schedule that are kind of embedded in the cost that Gerry talked about. The biggest thing that has happened in Newark just this month is a level of communication and coordination with the FAA that is the highest it's ever been. That was planned. Our thunderstorms are tough. If there's thunderstorms, they close departure routes in an airport, you're going to be canceling all flights. But if you can plan in advance, not have airplanes in the air, you wind up not having to divert airplanes. That’s where we get in trouble as we have to do that. The best stat to me is that this past weekend, our team would tell you that the weather in Newark was worse than it was during the last week of June. But because we closely coordinated with the FAA and had advanced planning, we had to cancel a lot of flights while the weather was over Newark, but we were able to immediately start the recovery as soon as the weather passed. In total, we canceled 77% fewer flights. Newark is going to always be a difficult airport. It's got two parallel runways, 40 departures on one runway, 40 arrivals per hour on another. That's a flight every 1.5 minutes; it's about the most we can do. And it's in the most crowded airspace in the world. But I feel really good about where we are and where the FAA is with us on getting the most out of Newark when those events do happen.

Understood. And then maybe as a follow-up, I think it was mentioned earlier, and I agree that your comment on 3Q PRASM domestic being flat to up slightly is a pretty differentiated message from your peers. Do you have enough visibility into what 4Q might look like relative to 2Q?

We're not going to give guidance for Q4 today. Look, what I'll tell you is that, and I already hinted, October, I think, is seasonally strong relative to 2019. We spent a lot of time refining our third quarter forecast. We're obviously already at the top half of the range, and we look forward to refining our Q4 forecast, but we're not going to do that today.

Thorough conference call thus far, just a couple of quick ones for Gerry. The comment on free cash flow for the year being inclusive of the AIP. Just to be clear, you're including retro pay, not merely wages and work rules?

We're including all cash going out the door, Jamie.

And second, your profit-sharing formula isn't harmonized across working groups, at least not yet. If we think about the third quarter earnings guideposts or goalposts, excuse me, can you give us the approximate blended rate that you are using?

No, Jamie, we can't right now because it really depends on the forecast. We can help you and anyone else offline with your spreadsheets on how to think about how profit sharing might best be sort of incorporated if you want.

Sorry about my voice. Hopefully, you can hear me okay. Just to clarify that last question, I know you're not giving a number, but is it correct that there's a significant increase in profit share from Q2 to Q3?

Scott, all we can tell you is that all profit sharing that we expect are incorporated in our full year numbers. That's the best way to look at it.

I'll follow up with you offline, Scott…

Sure. It's very early in the planning process. So this is all very preliminary. But we do know about some of the headwinds and tailwinds that we're going to see as we start putting together the plan on the cost side. Headwinds would include the full year impact of the labor contracts and contractual increases. Inflation, which, by the way, what we're seeing now is a moderation in inflation. We've got constraints on growth due to infrastructure. One of the big ones, and you'll actually see when we file the Q our expectation for aircraft deliveries next year. Back in December, you may recall when we announced the wide-body order, we gave some multiyear expectations on deliveries and CapEx. On the narrow-body side, now that we're that much further in, we have what I describe as a clear expectation on aircraft deliveries. I think for the total, including eight 787s, about 110 aircraft next year. That's down from what we showed you in December. But by the way, if you recall that CapEx number of $11 billion for next year we had in December, just counting aircraft, that's going to be closer to $9 billion and $11 billion of CapEx, a good guide, particularly when we are looking at free cash flow for next year. But bottom line, I would say that with a variety of tailwinds we have as well, which would include improved utilization, improved productivity as our junior workforce begins to gain some experience. Putting it all together, right now, six months ahead of next year, I would say we're targeting high single-digit capacity growth, and in that context, targeting flat CASM-ex for next year. But much more to come as we get into the planning process.

So I agree with your differentiated bet on international recovery; you're winning the jump ball this summer, winning customers in summer 2023. A question would be, how do you think about keeping those customers as international carriers restore their capacity over time? What investments are you making to keep those customers beyond just metal, especially when we think about periods of operational disruption.

I’ll begin, and Scott can add his thoughts. We believe there has been a fundamental shift in international capacity relative to GDP compared to 2019, and it will take years of fleet growth within the industry, including ours, to adjust to this change. We don’t foresee a return to the pre-pandemic structure anytime soon, if at all. This presents a strong reset for us. We are making significant investments in our product. As we previously discussed, we have completely phased out the old business class seats at United. Currently, all of our wide-body jets are equipped with the new Polaris seat globally, which marks substantial progress. We continue to prioritize our customers, enhancing offerings like high-speed WiFi. I believe our brand is increasingly well-positioned to compete not only in the United States but globally, with award-winning partners around the world. Notably, we have recently partnered with Virgin Australia in the South Pacific, which is advantageous for our growth there, and Emirates in the Middle East for that region. We have established a strong foundation, and we are confident that the international landscape presents our best long-term opportunities. While we have much to address domestically in the short and medium term, the international sector is looking very promising.

And just a quick one for Gerry. Can you speak to how much sale-leaseback activity you'd expect to utilize this year? And can you just help us bridge, just remind us what's the difference between net CapEx and an all-in gross CapEx?

Yes, I'm just trying to add together the sale-leasebacks we're doing. It's probably 20 to 30 aircraft. Keep in mind, we use sale-leasebacks just as another form of financing, where even if it's a sale-leaseback, we're going to maintain control over that aircraft for its remaining useful life. And net CapEx, meaning CapEx net of financing or what you're asking there?

Just the guidance is a net CapEx guidance. So how would that CapEx guidance compare to just the value of the fleet that you're bringing on?

No, it’s $8.5 billion total CapEx. Yes, it's gross.

Recently, there have been numerous articles discussing pilots who are hesitant to transition from the right seat to the left seat, leading to a shortage of captains. This issue has been prevalent in regional airlines, but I was surprised to find that it is also happening with major airlines. I'm curious if the new contract addresses this situation and how you plan to ensure there are enough captains to operate your intended flights.

The new contract does address that. It's interesting because it's the first time I've seen this happen in the airline industry. This is a result of United's significant growth. In the past, pilots often waited 10 to 12 years for their first opportunity to become a captain, and if they didn't take it, it could be another five or six years before another chance arose. However, our pilots are now confident enough in their future that they can afford to wait and allow their seniority to increase, which improves their quality of life. We have not had as many captains upgrading as we expected, and while it hasn’t yet impacted our capacity, it will in the fourth quarter. This is already reflected in our numbers. The good news is that the contract should help resolve this situation, although it’s uncertain how long it will take to reach full capacity again. I anticipate it will be in the second half of next year, though union leadership believes it might happen much sooner. At some point in that timeframe, we should have a full complement of captains. This is a temporary issue that's already accounted for in our projections, and we are on the right track. A recent indicator is that our latest captain selection process closed last night and produced significantly better results, even though they haven't yet seen the new contract. They are aware of the changes, and it has already had a positive impact. This is a specific issue that we expect to resolve by next year.

That's very helpful. My other question is somewhat unrelated. Regarding the app that allows you to provide meal or hotel vouchers to customers, how does that affect your costs? How do you assess the impact of that technology? Specifically, how do you evaluate the effect of delivering vouchers to customers instead of requiring them to go to a gate agent for one?

Hi, Helane. This is Linda Jojo. I think the way to think about these vouchers is it's a more customer-friendly way and a more efficient way for our operations to deliver to them what they would already get. This is more about letting our agents be able to serve other aspects of the disruption versus this piece and making it much easier for our customers to actually receive them.

Helane, just as a reminder, that kind of cost, which improves customer experience, is also in our guidance.

I wanted to inquire about the margins mentioned in the opening remarks. The performance is impressive. Domestic margins in Q2 have returned to 2019 levels, while international margins are above those levels. Can you provide an idea of the difference between the two currently and your long-term perspective on it? Will they reach equilibrium, and is there potential for international growth from this point?

I'm not going to give you the exact number. I'm going to say they are well above domestic margins, and we expect for this cycle for them to remain well above domestic margins. Look, our domestic margins are very solid, too, so I don't want to say anything too negative about that. I think international is just performing really well because of the structural change that happened during the pandemic.

Scott, could you say anything about what crossed you to take that private flight during the operational problems at Newark, like what was so urgent? And then if you've had any kind of conversations or feedback or consequences from the Board since then?

It was a mistake. The best thing I learned at the Air Force Academy was to say no excuses, sir or no excuses, ma'am in this case, and move forward, and that's we'll do here.

Can you guys put a full dollar value on the cost of the Newark disruptions like a dollar value of lost revenue or the cost? And are you also providing figures at this point in terms of how you're adjusting the flight if you're cutting flights by 5% or you're cutting 30 flights a day or whatever. Can you provide more specifics on that?

Let me just talk about the financial impact first. So as I mentioned earlier, that disruption effectively cost us 1 point of margin in the second quarter.

In regards to the flights, our summer schedule usually consists of about 435 flights per day. In August, we expect our schedule to be significantly lower than 400, likely around 390.

Can you just repeat a bit on Newark, you were going from 435 planes per day to 390? I just go over like the two in the firm and the cut and does it go into September? And then broadly, just considering all the weather that we've had in Newark, are you considering pulling back from that hub this year, next year, and then maybe over the coming five years, how do you see Newark in your strategy?

Sure. Let me five it a try. The normal schedule in Newark in summer, which has been the same schedule for many, many years pre-pandemic, is about 435 flights per day. This summer, we are scheduling about 410. This August, we're going to bring that down to 390. We are in constant conversation with the FAA about Newark and its overall ability to handle capacity, and we're going to work collaboratively with them to try and figure out the overall level of flight activity. I expect that level of flight activity will be down from our traditional 430 flights per day in the summer until we can come up with a creative solution to the constraints that we're all facing. Hopefully, we will return to that bigger schedule in the future. But for next summer, I do think that we will have a smaller schedule, and we will operate a reliable schedule, and we're going to do that in cooperation with our partners at the port and the FAA and the Department of Transportation to make sure that we get it right for all customers that fly in and out of Newark and New York City.

I will now turn the call back over to Kristina Munoz for closing remarks. Thanks for joining the call today, everyone. Please contact Investor and Media Relations if you have any further questions, and we look forward to talking to you next quarter.