United Airlines Holdings Inc (UAL) — Q3 2023 Earnings Call Transcript

Thank you, Silas. Good morning, everyone, and welcome to United’s third 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 our Chief Executive Officer, Scott Kirby; President, Brett Hart; Executive Vice President and Chief Commercial Officer, Andrew Nocella; and the new Executive Vice President and Chief Financial Officer, Mike Leskinen. 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. I want to start today by saying how heartbroken we are by the horrific attacks on Israel and the escalating conflict in the region that has millions of innocent people in harm’s way. Here at United, when tragedy strikes anywhere around the world, we focus first on safety and second on how we can use our unique capabilities to help. While we suspended our service to Tel Aviv, we were the first U.S. carrier to add extra flights to Athens where customers connect from airlines operating between Tel Aviv and Athens. We also upgauged some regularly scheduled flights to Athens, added a dedicated Tel Aviv support desk and continued flying to Oman and Dubai to maximize flexibility for our customers with tickets to Tel Aviv. We’re closely monitoring the situation on the ground and staying in close touch with State Department officials so that we can resume service as soon as possible. We look forward to cessation of violence in the region, and as we’ve done in past crises around the globe, we expect United to continue to play a meaningful role in the humanitarian response. Turning back to the business, I want to start by welcoming Mike to the leadership team. You all know him well, but I’m excited to have him as a partner who agrees with my no excuses approach, who is 100% committed to making United work for our employees, customers, and shareholders. I also want to congratulate Kristina for her recent announcement as one of the top 40 Under 40 by Crain’s here in Chicago. The third quarter was another solid milestone to demonstrate that United Next is working as we expected, and the growth we are adding is profitable. Though fuel spiked this quarter, we’re very encouraged about our results. It’s clear to see why from the numbers. Our top-line revenue grew 12.5% to $14.5 billion, making it the highest third quarter in our history. Our costs were also on track with our plans as we delivered strong operations in both August and September. United’s diverse revenue streams have also allowed us to handle variations in demand and produce solid, absolute, and even better relative results. It’s evident in the numbers. United and one other airline expect to account for 98% of the total industry revenue growth this quarter, and over 90% of the industry’s total pre-tax profitability. Even in a tough industry environment, United’s diverse model is building strong, absolute, and even more impressive relative margins. So, what is it about revenue diversity that makes us different? First, because of our size and industry-leading global network, our loyalty program is the most attractive program in the world for customers, and therefore generates significantly directly earned EBIT, significant loyalty, but also significant opportunity to do even more with it in the future. Expect to hear a lot more details from us on this front, starting at an investor day in early 2024. Second, we have unmatched geographic diversity with the largest domestic network complemented by the largest long-haul international network, and both are solidly profitable. While this is a great attribute, it does create some short-term risk and volatility as we’re seeing right now with the transitory hit to margins this quarter, as a result of the tragedy in Israel. Third, we feel that both business travelers and leisure customers have shown recent momentum in that segment. We’ve gotten a lot more agile at pivoting capacity in the leisure markets and not surprisingly have found that our core customers can now fly us in both business and leisure markets as we add seats to leisure destinations. Our ability to move domestic capacity in the leisure markets when they’re strong is a consequential driver of our strong relative revenue performance. And fourth, we continue to advance and improve our segmentation efforts. This project has been almost a decade in the making, but all the way from Basic Economy, which just allows us to compete profitably on price on the low end and all the way up to Polaris on long-haul international flights. United is able to give our customers the real choice they want. So, what does that mean going forward? In short, it’s a confirmation that United Next is working as we expected. We thought the industry operating environment would be difficult. We thought that medium-term capacity aspirations would be higher than demand growth. We thought that domestic would be a lot tougher than international in the short to medium-term. But we also thought United would win share, grow our gauge, and grow our connectivity, and that would allow United specifically to improve our results. By the way, we also expected, and now believe it’ll happen even faster, that the domestic market is going to see a shakeout that leads to an improvement in margins over the medium to long-term. It’s impossible to call the timing exactly, but I guess we see meaningful industry changes by the second half of 2024. And for what it’s worth, that’s what has happened every single time we’ve been through one of the cycles in my career. And as that is happening, I’ll continue closely tracking the airline industry revenue to GDP relationship. I’ve talked about this in the past. That ratio declined by approximately 35% in the past few decades. I don’t think we’ll make all that up, but almost everything we do make up goes straight to the bottom line. So, in conclusion, I’m proud of the team at United. We’re creating something special here. Even in a tough industry environment, we’re producing strong absolute results while producing the best relative results in our history. We believe we have a lot of runway ahead of us with United Next in our diverse revenue streams, along with our ability to catch up on gauge and connectivity positioning United well. We expect that the current stress in segments of the industry is also going to lead to structural changes that lay the foundation for an even better future for United, our employees, our customers, and our shareholders. With that, I’ll turn it over to Brett.

Thank you, Scott. And thank you to each member of the United team. Your dedication is what continues to propel us to the top. I also want to acknowledge the tragic conflict in Israel. At United, our top priority is the safety of our crews and customers. We are closely monitoring the situation. Following our coordination with the State Department, we have suspended flights to Tel Aviv until the end of October, and we are offering waivers to impacted customers. We will continue to monitor the situation and adjust as needed. Mike will provide more detail on the impact of these capacity adjustments shortly. Last quarter, we announced changes to our operation at Newark to better hedge against disruptions, including taking advantage of FAA granted waivers to reduce our flight schedule along with the necessary airspace relief in the highly congested region. While July was a difficult weather month, the Newark waivers and other proactive measures to improve reliability helped avoid pre-pandemic levels of ATC-related delays. In the third quarter, delayed arrivals were down 16 points compared to the third quarter of 2019. Additionally, in August, we had the fewest cancellations of any August in history while operating the third largest quarterly widebody schedule effort. In September, the FAA granted extensions to the New York airspace waivers, allowing us to maintain a reduced flight schedule at Newark that will help minimize air traffic delays through the rest of the year. The flexibility enabled by waivers is proving to be successful in ensuring operational reliability and resiliency at our largest international hub and has meaningfully improved the travel experience for our customers traveling in and out of Newark and throughout our network. Looking to our system operations, during the quarter, we carried over 482,000 revenue passengers daily, the most in any quarter in United’s history, with top-tier system customer service in August and September. We’re grateful to the FAA for allowing us to make necessary adjustments in Newark and thank our employees who worked hard to get our customers to their destinations safely and on time. While most of our network has recovered to 2019 capacity levels or beyond, our China network has been the last to recover. At the start of the quarter, we were operating four flights a week from San Francisco to Shanghai. This month, we increased that to a daily flight. Next month, we will be the first U.S. airline to return to Beijing with a daily flight from San Francisco. We believe this measured approach to bringing China capacity back online is appropriate as demand slowly recovers. These increased flights are a significant step forward in rebuilding our Asia Pacific network. Late last month, our pilots ratified their industry-leading agreement. This contract enables us to continue providing great career opportunities at United, and I’m excited for the future as we continue to execute our United Next plan. At this point, we ratified agreements for four out of our five major work groups. Flight attendants represented by AFA are in active negotiations, and we look forward to sharing an update when we have one. As a reminder, we began accruing for pilot pay rate increases in the first quarter of this year. Our outlook has and continues to represent our expectation for this agreement. And with that, I will hand it over to Andrew to discuss the revenue environment.

Thanks, Brett. Total revenue for the third quarter increased 12.5%, one point ahead of our guidance midpoint. TRASM was down 2.8%, PRASM was down 1%, and capacity increased 15.7% year-over-year. Capacity came in a bit below our original outlook, mostly due to the changes in our Hawaii flying levels in response to the fires. It’s nice to come in ahead of our revenue outlook as the strong Q3 outcome further validates that our United Next commercial strategies are working well and that we have differentiated United from our competition. Demand for transatlantic and transpacific routes was truly outstanding, and we see that trend continuing into the fourth quarter. Third quarter domestic PRASM results were consistent with our year-over-year performance in the second quarter, down 2.1 points. In other words, we saw no real change in our domestic trends in the quarter-over-quarter review. Our focus on prudent gauge growth centered in our hubs resulted in strong positive marginal revenue on our incremental capacity. We did focus a majority of our third-quarter growth on international flying. International capacity increased 22%. International PRASM was up 1.3% year-over-year. International profit margins remain well ahead of domestic, though domestic margins remain solidly profitable. We also saw strong performance across most of the globe. Clearly, Europe was a standout with capacity being up 12% and with positive PRASM performance. Asia Pacific led international PRASM up 3.8% on 86% more capacity. Turning to our outlook for the fourth quarter. We expect total revenue to be up approximately 10.5% on approximately 15.5% more capacity. This implies TRASM will be down around 4.5% year-over-year. Our guide assumes we begin limited service to Tel Aviv again in November. Tel Aviv accounts for approximately 2% of United’s consolidated capacity. As we think about the sequential trend in unit revenues, I know many of you are wondering if we are seeing a slowdown. The resurgence of the Pacific flying is resulting in many long-haul flights being added, increasing United’s long-haul international scheduling by five points versus Q3. United’s Q4 unit revenue expectations are consistent with Q3 adjusted for stage. United has taken full advantage of the demand surge across the Pacific with capacity being added to key markets, including the long-pending resumption of daily flights to Beijing and Shanghai from San Francisco and the addition of Manila, just to name a few. Having done capacity planning in my entire career, I can confidently say that our team is the best in the business. United has properly allocated our 2023 growth to international markets over domestic and in domestic markets, we wisely invested in gauge, not scope or depth. Less than 1% of United’s domestic capacity this winter is in new markets, not from 2019. Capacity planning for 2024 will be even more important to achieve our financial goals. While we’re not going to provide guidance for 2024 today, we have plans to let the 30% growth we’ve added to the Atlantic since 2019 mature in 2024 and expect to fly at a similar level of capacity in 2024 as in 2023. We also plan on little to no growth for the first half of next year on domestic flying. This preview of our 2024 capacity, I think, will allow United to continue to produce top-tier results as we align with industry conditions. I wanted to touch on a few other important commercial elements today as well. Recently, the question I get asked the most often by our frequent flyers is about potential changes to achieve premier status on United. The good news is we have no material changes planned for the 2025 program year. We’ve carefully managed our premier population in recent years to maintain a robust and valuable set of benefits for each premier member. We very much believe in never causing a situation where everyone has a premier status, which obviously results in no one receiving an adequate level of premier benefits. Our United strategy to offer premier members access to more premium seats than each of our competitors is enhancing the value of our frequent flyer loyalty program. I also wanted to take a moment to talk about revenue segmentation. We’ve worked really hard on perfecting segmentation of our products in recent years. Not only do we have multiple product types appealing to a broad range of customers but we also have new, more effective ways to distribute our products through united.com and NDC technology. United is, of course, very focused on growing all of our premium products, given where our hubs are located. When I look back at where United was in 2017, we simply didn’t offer premium products that many of our best customers were willing to pay for. We put a plan in place with United Next to correct this disconnect in our commercial plans and we’re making quick progress. Premium Plus is one of our best examples of segmentation and has been a huge success. Premium Plus third quarter 2023 capacity is five times that of 2019, with revenue up seven times from 2019 and is now our most profitable cabin. Premium Plus is now offered on all twin-engine international aircraft for United and also will be onboard our new A321XLR jets, which replace our 757 starting in 2025. Another important driver of revenues has been the success of domestic first class. We plan on increasing our first class seats per departure from nine in 2019 to 16 by 2027, an 80% increase. This increase in first-class seats comes as more and more customers are seeking elevated experiences. United’s Basic Economy product represents the other side of the spectrum compared to many of our premium products. Basic has made United more competitive versus ultra-low-cost competitors, giving our customers more choices. Basic Economy is now 12% of our domestic passengers, and we expect to be even more competitive in this segment of the market in the future with the arrival of our large narrow-body jets in 2024 and 2025. These new jets have low marginal CASMs, allowing United to be price competitive with anyone at any time. While it took time to perfect the offer and we are only in the early stages of inducting these jets, Basic has changed the competitive dynamics of our industry. I think it’s also becoming increasingly clear that United’s core business model of multiple product choices and expanding club network experiences, from Basic Economy to Polaris, provide travelers with options, and for United’s growing premium product choices, travelers are willing to pay for. Beyond segmentation, United’s network split evenly between domestic and global capacity.

I’ll just end with diversified revenue streams providing United with a resiliency that other business models will not ever achieve. RASM-accretive gauge growth focused in our hubs, in turn, provides United with the unmatched ability to create cost convergence for years to come with our low-cost providers. Thanks again to the best team in the business. And with that, I will hand it off to Mike.

Thanks, Andrew. Good morning, everyone. Before I get into the results, I want to take a minute to say how honored and excited I am to join the United executive team during such a transformative time. Industry dynamics are constantly changing, and I continue to see the incredible opportunity ahead for United. We believe our no excuses mentality and clear strategy with United Next are laying the foundation for success. I look forward to continuing the conversations I’ve had with the investment community thus far in my new role, and I’m excited to lead the talented finance team here at United. Now let’s turn to the results. For the third quarter, we delivered pretax earnings of $1.6 billion and a pretax margin of 10.8%. Our earnings per share of $3.65 was ahead of expectations as our revenue growth came at a full point ahead of our guidance midpoint. Thanks to the amazing commercial team for their great work. They truly are the best in the business. Fuel remains volatile and worked against us in the quarter. Our average fuel price for the quarter ended $0.30 higher than the midpoint of our July expectation and more than accounts for the entirety of the reduced outlook for the third quarter. Our CASM-ex remained on track at up 2.6% versus the third quarter of 2022. Our operation to Tel Aviv has been impacted by the recent events in the region and is materially impacting our outlook as this market represents approximately 2% of our capacity. For the fourth quarter, we expect CASM-ex to be up approximately 3.5%, with capacity up 15.5%, both versus the fourth quarter of last year. Our guidance incorporates no service to Tel Aviv through the end of October. If flights are further suspended through the end of the year, it would reduce capacity by an additional approximately 1.5 points and add approximately 1.5 points of CASM-ex as it’s very difficult to cut the associated expenses related to this flying so close in. These changes bring capacity for the full year, up around 17.5% year-over-year, just below our guidance. We’re proud of that result given all the headwinds United and our industry faced, and it’s a huge testament to the hard work of our operations team. Lower capacity along with elevated maintenance expense has pressured CASM-ex and pushed us above the high end of our CASM-ex range for the full year. For the fourth quarter, we expect earnings per share of approximately $1.80 with an average fuel price of approximately $3.28. Absent our Tel Aviv flying through the rest of the year, our fourth quarter earnings per share would be reduced by approximately $0.30. Looking ahead to 2024, we feel good about the core fundamentals of our expenses. However, we are facing sizable headwinds with labor in expectation of a new flight attendant agreement and continued higher maintenance expense. We believe our capacity growth, along with improvements in utilization are helpful tailwinds as we manage down expenses. We are working through our 2024 budget and new projections for 2024 capacity, CASM-ex, and our other financials, and we’ll provide customary guidance on our January call. On the fleet, in the third quarter, we took delivery of 18 Boeing 737 MAX aircraft and paid for 14 of those aircraft with cash. We expect to take delivery of 20 737 MAX aircraft in the fourth quarter, and we took delivery of our first Airbus A321neo last week. This is a reduction of 12 aircraft versus our plan in July for the second half of the year. Due to these aircraft shifting into 2024, we now expect our full-year 2023 adjusted capital expenditures to be approximately $8 billion. Earlier this month, we announced our order for 60 A321neos and exercised options for 50 787s for delivery in 2028 and beyond. Managing the delivery skyline for the future of United is critical. This order builds on the successes we are already seeing with United Next and reflects our confidence as we extend our planning into the next decade. With the retirement of our Boeing 757 and 767 fleet later this decade, these aircraft are important additions as we work towards fleet simplification and capitalize on our cost reduction opportunity. Turning briefly to the balance sheet. We ended the quarter with almost $19 billion in liquidity, including our undrawn revolver. Before we end our prepared remarks today, it’s important to recognize that while our financial results remain strong, as an industry, we are facing new and unique challenges. Our growth has helped us deliver strong relative cost performance, and that’s even before we begin the accelerated gauge growth that we expect will come from the 737 MAX 10 and the A321 additions to our fleet. We are committed to continuing to deliver industry-leading cost performance. This will form the foundation for continued cost convergence and improving absolute profitability. And because our growth is focused on our hubs, we’re also growing with industry-leading PRASM. There are and will always be headwinds facing our industry, but as we enter 2024, United has great momentum, and I’m confident of a very bright future. With that, I’ll hand it over to Kristina to start the Q&A.

Thank you, Mike. 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 questions.

So following up on some of the prepared remarks, probably for Andrew or maybe Scott, I can’t recall a time when there’s been such a disparity in domestic yields between United and those of the low-cost carriers. How would you rank order the drivers of this? How much is reflective of low-end consumer weakness? How much is your own success with Basic Economy, how much is loyalty, maybe the low-cost carriers are just selling out too far in advance? Just trying to assess the permanence of this phenomenon, so if you could rank order the drivers, that would be great.

Hi Jamie. I'll attempt to address that. While ranking them might be somewhat challenging, I believe your question is among the most significant inquiries one could pose today due to the notable changes occurring compared to the past. Firstly, there's a wide variety of business models today that weren't present in previous years, and these models are clearly producing both successes and failures in ways many of us did not foresee during the pandemic. I remember mentioning in the Q1 2022 call that domestic margins in the industry would face challenges after the pandemic. At that time, the general belief was that all airlines would experience similar pressure, particularly the legacy carriers. Many thought that lower margin, higher cost legacy carriers would contract and realign supply and demand, a scenario that has played out repeatedly in the past. It's often stated that the airline with the lowest cost wins the race. This leads us to consider what about the business models has undergone such a significant shift to create the current change we are witnessing. Why are these low-cost airlines facing significant profitability issues? Why is United achieving top-tier results? I want to clarify that United’s domestic network is profitable; it isn't solely our strong global network that contributes to this. The first matter to address, which Mike touched upon, is cost. Every airline is coping with increased inflationary cost pressures, and the cost structures of low-cost carriers in relation to legacy carriers are clearly aligning. The diminishing cost gap represents a fundamental shift for United and the industry as a whole. It's no longer viable to operate an airline as if it were 2019. High utilization was essential for the success of specific models, and that's simply unattainable in our current environment. Additionally, significant labor cost disparities are no longer possible. Low-cost carriers typically operate with larger aircraft, making it more challenging for them to reduce costs significantly compared to larger airlines like United. Since 2019, we've increased our domestic gauge more than any other airline, and we intend to expand that even further in the coming years. Another issue that is often overlooked is that not every Available Seat Mile (ASM) is equivalent. It’s easy to misinterpret data when analyzing large spreadsheets commonly used for evaluating our outlook. United demonstrated this point at the beginning of 2018 and 2019 through our growth and revenue performance, which we reiterated in Q3. Market saturation of the low-cost business model in certain areas is resulting in very low marginal Revenue per Available Seat Mile (RASM) for some competitors, with several experiencing negative marginal revenue percentages. There's a limit to how many seats can be supported in destinations like Florida, Cancun, or Vegas in a short timeframe. Furthermore, low-cost carriers usually need to utilize larger aircraft to maintain low costs while lacking the connectivity benefits provided by the hub-and-spoke model. Expanding the low-cost approach into smaller and medium-sized markets with these larger planes, which lack connectivity, only serves to create low marginal RASM. Market saturation combined with mismatched gauge and connectivity continues to challenge certain business models. We believe that growth opportunities for this type of model are not unlimited, but many of our domestic competitors have responded to these limitations by planning even more growth for 2024. The marginal growth in markets for 2024 will certainly not surpass that of 2023. No airline network team would suggest introducing weak markets in 2023 just to reserve strong ones for 2024. Additionally, the proportion of ASMs in new markets for these airlines adds another layer of complexity. Rapid growth rates often result in a high percentage of new capacity, which tends to be below average, even in optimal conditions. This fourth quarter, United has less than 1% of our ASMs in new markets compared to 2019, which is a significant differentiator. Our capacity growth strategy aims to keep costs low without relying on markets that generate revenue. As a result, an entire business model can falter, and we believe we’re witnessing that currently. United’s domestic capacity growth has consistently focused on correcting a mismatch in gauge brought about by the overuse of high-cost, single-class regional jets. Here at United, we benefit from revenue diversification that ensures long-term stability and earnings that a more simplistic plan cannot achieve. We offer various products, including a range of increasingly popular premium seating options. Our capacity in global markets matches that of our domestic operations. We serve both large and small cities and have a robust hub-and-spoke model. United has demonstrated significant margin-accretive growth consistently. Our business model supports much higher gauge, and as we add this capacity, we divert less traffic to competitors. Our elevated gauge will facilitate greater cost efficiencies between now and 2027. The complexity of United’s product offerings is actually a structural advantage, generating revenues that outweigh the associated costs. Historically, both United and other legacy carriers have emerged from crises smaller, leaving behind excess aircraft and resources for others to utilize. This time, that won’t be the case. It is now United that is not facing low margins. We will not alter our plans. United’s strong focus on global markets has clearly proven effective in Q3, as evident in the results. Our emphasis on domestic gauge is undoubtedly the right strategy. We will divert less revenue to competitors than in previous instances. Our strategy around basic fares will enhance our competitiveness. As I mentioned earlier, United will moderate our domestic growth plan for the first half of 2024 as we concentrate on developing our Asia Pacific line, where we anticipate the best short-term results. However, I must stress that while the timing may be uncertain, there are many other factors to consider. I am genuinely confident that the industry will eventually rebalance, as it has in the past, and that United along with a few others boasting similar diversified revenue streams will emerge successfully. I realize that was a lengthy response.

Andrew, that’s great. I really do appreciate it. But let me just follow up with a quick philosophical question. If spill carriers can’t make money but full-service airlines can, doesn’t that suggest we’re actually at the optimal amount of domestic capacity rather than the oversupply that investors keep asking me about?

I’ll give it a try. It’s tough to follow up after Andrew's excellent answer. His remarks reflect our sentiment that everyone on this call and the market feels differently. We are very confident about our direction and what it means for margins as we look towards 2026. That confidence remains strong. Without directly addressing overall industry capacity, one of the standout statistics this quarter is that 90% of the revenue growth in the industry is concentrated in two airlines, which also captures 90% of the pretax profitability. Our business model is more effective. We aim to provide a better product and service experience for all customers, not just for leisure travelers or low-fare options. We strive to create higher-quality offerings that extend down to more economical choices. I firmly believe that air travel is not a commodity. Some in the industry view it as one, which leads to low-cost dominance, but I disagree. The results from these two airlines clearly show that air travel can be distinguished from a commodity. Therefore, while I won't comment on total industry growth, it is evident that delivering a differentiated product and service experience is driving nearly all revenue growth, as customers are showing their preference through their spending.

Congratulations, Mike, on your promotion, and Kristina on your recognition. Scott, I’m going to go to the other end, kind of the side of your business that caters to, call it, the higher-end consumer. And I guess, when I think about just the recent top-up order on the 787s, adding to your current order, I mean, it’s significant. I think it’s actually one of the largest widebody orders out there, at least for a U.S. carrier. Is the internal thinking at United just given the shape of the OEMs, whether it’s the manufacturers or the engine makers, that we could be facing a kind of widebody shortage in the back half of this decade? What are your thoughts on that?

Mike, I’ll give it a try. I do think the production lines for widebody jets don’t produce nearly as many aircraft as the narrow-bodies, as you know. So, there are definitely not as many that are going to be produced. But more to the point, the widebodies we just ordered are for 2028 and beyond. And it’s really our confidence in our plan, but it’s particularly our confidence that we are going to increasingly pivot in the latter part of the decade to global growth and not domestic growth. And so, we secured those positions. We’re confident we’ll use them. We have a significant fleet of 777s and 767s that need to retire at some point later this decade, at least for the 767 for sure. And so, with the number of retirements we have, the confidence in our plan and some of the OEM issues that you just brought up, this just made sense. Again, it’s for 2028 and beyond. It’s a long time away. But we are really confident in the plan. We’re confident that global growth, we will have to lean into that, and we will want to lean into that in the latter part of the decade.

Hey Mike, this is Mike. I’ll pile on. With the delays in the supply chain, they’ve become persistent. And so, part of what we’re doing is controlling Skyline for a longer period of time than we have historically. This industry has been one that has in the past been about putting out fire to fire. United Next strategy is putting us on a firmer footing to plan for the longer term. So a, I want to highlight that the contractual delivery dates, they’ve been pushing to the right. And we’ll probably continue to see that. And as you see us playing internally, we’ll have some expectation of continued slipping. But make no mistake, we will make adjustments to the order book and the delivery times in a way that maximizes the returns to our shareholders. And we will focus on return on invested capital in addition to our pretax margin as we take delivery of those aircraft.

Okay, great. And just one quick follow-up. Just any early thoughts on maybe this proposed regulation around credit cards and maybe a cap on merchant fees? I know it’s proposed legislation, so it obviously has to go through a process, but any sort of early take on it or maybe it’s a TBD?

I'm glad to address that. It would be detrimental to consumers in this country. A proposed bill could affect 84% of U.S. consumers who have some type of rewards card, which I believe most people on this call possess. They appreciate these cards significantly, and our customers certainly value them. It will be challenging for Congress to vote on this, knowing that a large percentage of voters would be dissatisfied with the result. Moreover, this proposal would eliminate rewards programs entirely, including those for debit cards. I consider this a poor policy choice and believe it overlooks the reality for small businesses. I understand their frustrations; however, there is a middleman involved between credit card companies, banks, and those small enterprises. The core of the problems is likely found there. Some middlemen charge small businesses as little as 35 basis points, while others impose fees of 300 or 400 basis points. This issue seems to be misunderstood. Additionally, it's impressive how robust the cybersecurity measures are in the credit card process, as significant investments have been made to enhance it. Given the vast number of transactions that happen daily, breaches are quite rare. I've spent significant time in Washington discussing this matter, and initially, many were unaware of the complexities. However, as the conversation progresses, more people are acknowledging the valid points being raised. We should approach this through a systematic process, carefully evaluating the implications. If we do that, the facts will prevail, and I believe nothing drastic will occur.

Just on cost. I’m trying to understand the trends between your core cost performance and just how these supply chain transitory issues that you’ve laid out are kind of impacting. I realize that it’s probably really hard to tell right now, but could you just frame up when you think some of these potential transitory cost pressures may ease next year? That would be helpful. Thank you.

Conor, this is Mike. Let me address that. I recognize the headwinds we faced in CASM during the fourth quarter compared to our earlier expectations this year. We now anticipate flying in the fourth quarter about three points lower than we predicted just three months ago. Two of those points are related to captain upgrade issues that Scott mentioned in our last earnings call. This issue has affected the entire industry. While we've managed it well at United, it did impact us at the end of the year. Our new contract with ALPA will resolve this, and we fully expect that constraint to be lifted soon. However, for the fourth quarter, that accounts for two of the three points. The other point is due to the violence in Tel Aviv and the resulting loss of flights. We can reallocate those flights over time and plan to service Tel Aviv once the situation improves. These three points will be addressed relatively quickly; however, we cannot eliminate the costs associated with them. This was the primary factor contributing to the increase in CASM for the fourth quarter. The industry is dealing with various challenges, but this is what transpired at United. We aim to mitigate these issues in 2024 and beyond. Additionally, I'm uncertain about the persistence of maintenance costs. These costs have been higher than anticipated over the years, primarily due to an increased need for spare parts, especially for engine repairs, as the work required has been greater than expected. Some of this is tied to supply chain challenges, and it's hard to predict when that will resolve. So those were the two main factors: primarily capacity issues and some extra maintenance challenges in the fourth quarter. We are not providing guidance for 2024 at this moment. The industry is encountering various cost pressures, including inflation, labor, and maintenance expenses. I can assure you that United will lead the industry in managing our costs. Cost convergence is an ongoing trend that is impacting lower-cost carriers and is fundamental to United Next. I cannot predict where all of this will land, but we will provide guidance as usual in our January conference call, and I commit to maintaining industry-leading CASM moving forward.

Okay. That’s very helpful. I would like to discuss your costs for next year, as many seem related to capacity or delivery. Could you clarify if you have any excess capacity that might help alleviate some of the growth challenges you anticipate next year due to potential delivery delays?

Conor, you’re on the right track. Given the various constraints we are facing, we are working towards ensuring incremental flights from United remain quite profitable, thanks to the excellent performance from our commercial team. We will aim to fly as much as possible to maximize profitability, but we do encounter some of these constraints. The challenge with growth pressure is that you need to hire personnel before you can increase available seat miles. This is a hurdle for United as we continue to implement the United Next strategy. We will strive to optimize this, but it won’t completely resolve until we return to a slower growth rate.

I noticed in the release you called out that Basic Economy was up 50% year-over-year. Andrew, can you just dig into what drove that? Is that 12% of domestic passengers? Is that up significantly? Is there also a pricing element?

That's a great question. Last year, due to the surge in demand, we sold out too quickly and didn't have enough capacity for Basic Economy passengers, as our gauge was smaller. This year, as we move towards implementing our United Next plan, we are being much more cautious about selling out too soon. Our bookings closer to the departure date are quite strong. Interestingly, while I have observed commentary from the rest of the industry suggesting the opposite, it makes me wonder if there's a connection. However, we believe we didn't sell out too soon this time because we have ample room and a typical booking curve, allowing us to accommodate those passengers this quarter, unlike last year. With new gauge aircraft on the way, we will be able to maintain this capacity moving forward. This explains the change in our Basic Economy passenger numbers. It's a product we've discussed frequently, providing options for our customers at lower prices, and we also have many high-end options. This diversity enables us to compete effectively with all our competitors, especially the ultra-low-cost airlines.

That’s great. I have a follow-up for Mike regarding the ongoing delivery delays. With the recent announcement from Pratt, which may impact engine availability and neo deliveries, I believe the MAX 10 has not been certified yet, but please correct me if I’m wrong. What is our outlook on those deliveries for next year? Are there alternatives to the MAX 10 that we might consider? I understand you have the contractual deliveries lined up versus what is expected, but should we anticipate that gap potentially widening when we receive the Q later today?

We can manage our expected deliveries against contracted deliveries and appropriately size the business. Hiring more workforce for aircraft that are delayed leads to greater challenges for us. One of my main tasks in this new role is to accurately assess the gap between expected and contracted deliveries. Additionally, we have older aircraft that we plan to utilize longer amid anticipated delivery delays. I favor this approach as it enhances our return on invested capital. Ultimately, we aim to simplify the fleet, with MAX 10s offering lower structural costs, which we're excited about. The A321s are also excellent aircraft. Both types are well-suited for a network like United, where size gives us a significant advantage. I expect these deliveries to start reducing our cost per available seat mile in 2025, not in 2024, so we should keep the timing in mind. We have several strategies to manage supply chain delays, and we can improve our optimization based on these increasingly predictable delays.

I just wanted to follow up on the commentary earlier about you need to cater to all customers, which I totally get kind of given the broad base of the market. But obviously, we’re seeing some of your peers try to push into premium or pushing into the low end. And just kind of the face of it feels like specializing may be an easier thing to go after than trying to cater to everyone with the network and the product you have. So just wanted to dig a little deeper into kind of why that strategy of kind of being everything to everyone rather than being just maybe a full-service premium network airline.

I’ll start by saying that I assume others may want to contribute as well. However, it’s crucial to clarify an important distinction in your question. We’re not attempting to serve every single market in the United States or globally. Our network does not cover every market in the United States. If we aimed to service every origin and destination pair in the U.S. as the largest airline in the world, that would be extremely difficult, and it's not our goal. Instead, we focus on our hubs and the additional routes we serve, ensuring a diverse range of products that appeal to all customers flying with United Airlines. Some of these customers may travel with us for business, while others might choose United for leisure or other purposes. Thus, they have the option to select from various fare classes, from Basic Economy to Polaris. Additionally, if they join MileagePlus, they increase their chances of being upgraded to our spacious premium economy sections or first-class cabins, which are expanding. This diverse array of revenue streams might seem complicated, but it is our unique advantage. It aligns with what the market and our customers want. We’re not trying to be everything for everyone; rather, we aim to ensure that those who fly United have a variety of product choices tailored to their travel needs.

I would say it is more complicated. It’s simpler if you’re only trying to appeal to one niche, but those niches are small. The number of markets where you can only be a low-fare, low-cost player is limited, and the market for just being a premium airline is even smaller. They are tiny niches, and we are a large airline.

I’ll just pile on. We fly 200 million passengers annually. And those passengers fly for different reasons, and they shift from leisure to business throughout their life. It is important that we serve all of them and we serve all of them with a product that suits their needs.

That’s very helpful color. Thank you for that. And maybe as a quick follow-up, and apologies if I missed this earlier. There is some speculation about us potentially being at peak international right now, specifically peak transatlantic. What would you say to that kind of going into 2024, do you see enough runway? I think you said in the coming out of the summer of 2022 that 2023 would be a lot bigger and kind of had that visibility. Are you confident that that strength can continue in 2024 as well?

I’d say right now, particularly today, for example, we continue to see strength across the Atlantic. We particularly see it to Southern Europe, I can tell the industry does by all of our changes, and that’s great to see. So we think that the trends are going to continue. That being said, I did say earlier in my comments that we are going to give the Atlantic a rest. We’ve run a lot since 2019 for sure. And this year, it will be a year of basically no capacity growth across the Atlantic. I said I wasn’t going to give capacity guidance, but clearly, that’s a big hint for a big part of the airline. So, sorry, Mike. And the other thing I’ve said is, like, the last part of the world to recover is Asia. And Asia is still, however you want to look at it, very strong; we’re growing a lot of capacity on the front. We’re going to focus our efforts where we see that growth, where we see the profitability opportunity. If you look at our schedules going into next year, you can see a significant percent change in our capacity is, in fact, Asia. So, we put the capacity where we think we need to put it. We’re really bullish on international. We’ve come a long way. It’s very profitable. And there’s a lot more to come. As I said, in the latter part of this decade, I think we’ll lean into it even further. We have the right hubs, right gateways where we have the leading business demand, the leading leisure demand, and the leading cargo demand. That recipe is just unique to United, and we’re going to take full advantage of it.

I spoke to an earlier question regarding the constraints to industry capacity. There’s nowhere that it’s more true than for widebody aircraft. In addition to that, as Andrew alluded to, but I’ll just emphasize, we have the best international gateways leaving the United States of any carrier. And so, this is where, as Andrew says, we were born on third base, and we’re going to capitalize on that.

So Scott, yesterday, you said adjustments are inevitable and you expect them by the second half of ‘24. I guess, I’m wondering, are you just talking about there are going to be capacity cuts by the second half next year? Are you talking about something bigger than that?

I’m not going to predict the exact changes that will occur, but I want to emphasize that the industry is undergoing a structural shift, which I mentioned earlier in today's call. I don’t view air travel as a commodity, even though some in the industry do. I believe that product service experience is essential. Everything we've done over the last three years has been aimed at enhancing that for our customers, from premium services down to Basic Economy, particularly regarding low-cost carriers. We have changed the competitive dynamics in three significant ways. Firstly, as we expand our operations with larger aircraft, we benefit from low marginal costs on those planes. Previously, we attempted to compete using regional jets but couldn't due to higher costs and limited capacity. Now, we have ample seats available at low marginal costs on our growing fleet. Secondly, Basic Economy allows us to remain price competitive while providing a superior product compared to low-cost carriers. Thirdly, we've shifted focus to leisure markets, where we've successfully increased capacity. By combining these strategies, we have developed a product that customers prefer. We aim to offer a cost-competitive option that delivers greater value, encouraging customers to choose to fly with United. This strategy positions us well, especially as two airlines dominate 98% of revenue growth, making it challenging for other competitors. While I won’t speculate on their next moves, if I were part of those airlines, I would be concerned about the lack of a competitive offering compared to United Airlines.

It strikes me, I don’t think I’ve heard you talk so much and then so positively about Basic Economy in a while. It feels like a change in tone or strategy. Can you just talk about that, and why it’s happening now? Is it reflective of the competitive dynamic, the demand environment? Just feels like a shift.

Look, I think it took us a while to work it out. It also helped that some of our competitors went the other direction. I mean charging people $99 at the gate and paying your employees a commission to take their purses away crossed the line. While they’ve gone in one direction, we’ve gone the other with an improved product. The other thing that’s really changed during the last year is we finally started to get the gauge right. We couldn’t make this work when we were flying 650 regional jets around the country. That’s why I love this; it’s all coming together. I know it’s not reflected in our stock price yet. The market is skeptical of it. But this is a plan that is working exactly like we thought it would. That is the big change for Basic Economy. It’s a better product for us. We’ve figured out how to make it work, but we now have the gauge to be able to sell the product.

Mike, I was going to congratulate you on the promotion, but given I’m so far back in the queue... No, I’m just kidding. Congrats on the step up here. I don’t want to pile on, on Basic Economy, but I did think the disclosure was interesting. You called out 50% growth; is that simply a function of kind of inventory availability? So this time last year, things were really tight and they’re a bit looser this year, so we can drive that growth. Depending upon the environment, that 12% of customers was also an interesting stat. So, you can turn the dials and maybe you have half of Spirit Airlines within United inventory to maybe kind of multiple Spirit Airlines within United inventory. I’m guessing you probably pushed back on that metaphor, but maybe you could just speak to inventory availability as a driver there.

Well, we’ll probably save that for a more smaller conversation, to be honest. What I would say is the comps last year, we just couldn’t execute the way we wanted to execute. It’s off a small base; it creates a big percentage, but it is a meaningful change. As I said earlier, we’re going to lean into it. We have these big aircraft coming, and we’re going to be more competitive in the future, not less.

Kristina, congratulations. Given I was quoted in the article, I knew it was coming. And Mike, same to you. So here’s my question. As I think about the fact that we have all these infrastructure issues, especially in the New York area that are going to persist for several years, how should we think about two things? You increased gauge, obviously, to capture the demand. But then there’s a point where you want to capture higher ticket prices. So, what’s the sweet spot where you can do both, where you can benefit from capacity limitations with higher aircraft and raise ticket prices so that you improve margins?

Helane, we view the situation differently. Our priority is delivering a positive experience for our customers, and New York and New Jersey have not provided that for a long time. The main issue is that there are more flights scheduled than the airports can accommodate. We believe it's beneficial for everyone, especially customers, to have a realistic number of flights that the airport capacity and our traffic control can manage. We appreciate the FAA for their support in this matter. We aim to serve as many customers as possible, and to do that, we are increasing the number of seats while reducing the number of flights. Our strategy involves using larger airplanes, which not only lowers the cost per seat but also improves operational efficiency, ultimately benefiting our customers.

So, is the conclusion that I should have that the revenue is what it would have been, had the infrastructure issue not existed and you flew more flights, but you would have had higher costs? Right? This way, you have lower costs and the same amount of revenue. Is that right?

I don’t know that I’d get into that level of detail you have in your spreadsheet. What I think is we’re going to have a much better experience for customers. I think, we will have lower costs because we’ll have fewer irregular operations and we’ll have bigger airplanes. I think that will probably keep prices certainly in line with growing inflation, be better for our customers, and we’ll be more profitable because we don’t have all the expenses associated with disruption, and we don’t have a lot of the frustration that comes from that. I think this is one of those few situations where it’s a win-win-win for everyone.

The worst thing from a cost perspective is irregular operations. That’s what surprises us. We built lots of buffers into the system to control for that. With better air traffic control and airports that are appropriately rated, we can do a lot more optimization.

I know it’s been a long call, but I want to ask one more question. Andrew, you mentioned domestic capacity in your prepared remarks and suggested it would remain fairly flat in the first half of the year. Can you clarify what is driving that? I know under your Next strategy, there is an intention to increase domestic capacity. Is this aligned with OEM delivery expectations, pilots, and commercial factors? What insights do you have regarding what is influencing this?

We’re still developing our plan, so it’s not final yet. However, I did mention in my prepared remarks that we expect slow growth domestically. Currently, our commercial efforts are focused overseas, especially in the South Pacific, where I believe we will perform well. As Mike pointed out, there are a few constraints we’re facing, including OEM issues, which contribute to this situation. We believe this is the right approach for our capacity next year and will provide more details in early 2024.

I was wondering if you could provide some context on the number of requests for status matches you’ve received since Delta made those changes last month. Additionally, can you discuss the current state of your supply chain related to the push for premium, how far behind you are on upgrading those cabins, and when you expect to get back on track?

Sure. Look, I’ll give a little bit of commentary. Our status matches are up dramatically. Yes. Is dramatically a big number? No. So, that’s all I’ll say on that front. And in terms of the signature interiors, we are definitely facing some constraints, but I’ll pass that over to Toby, who runs that program for us.

Thank you, Andrew. I think we’re about a year behind. But the good news is that we’re still taking in new deliveries. So we’re just right now flying about 120 airplanes that have the new interior design, which we have been getting regularly, which is really good for us operationally. It has space for one bag for each passenger, so no bag has come out. So that’s probably the biggest thing. So I think right now, we’re targeting 2026 for 100% to be complete.

Well, I’d just add that this is another one of the things that United got right. We believed back in 2020 that there was going to be a full recovery in demand and thought that the pandemic, as tough as it was, represented a once-in-history opportunity to get prepared and invest for the future. So two of the things we did was get ahead of the curve and we built more club space. So we now have 49% more club space than we did before the pandemic. And we just opened two of our largest clubs in our entire system that are great for customers. Feedback is awesome, one in Denver, one in Newark. We plan ahead for that. And while the signature interiors are behind, we today have nearly double the number of premium seats that we had pre-pandemic. So this is a team that started back in the summer of 2020 to prepare for the recovery in premium demand. And that’s the reason Andrew said in his remarks, we don’t need to change our programs and do anything because we’re prepared for this.

Okay. On the other end of the spectrum with Basic Economy, are customers choosing that option because they are more price sensitive now? Also, I am curious about what percentage of your revenue comes from Basic Economy given the 50% increase.

Leslie, I would say, it’s likely a lot more share shift than in the previous quarters and years. We didn’t have the large gauge aircraft to accommodate the range of passenger types and product types adequately. We are now just beginning, but we have a lot more flexibility, and we’re able to accommodate those passengers, and it happened. I think I would describe it as probably a fair amount of share shift.

I wanted to ask you about the situation in Israel. And whether you are assessing the potential for that to spread to other areas and perhaps even to some areas of Europe, where you may have to cancel more flights because people might be pulling away over worries. Are you seeing any of that already where that’s shifted to other countries or other cities that you serve?

We’re not seeing that at all.

I wanted to revisit Scott’s point about the changing industry landscape. Could you elaborate on what it means if every American decides to fly Delta and United? What implications does that have for the rest of the industry? Do other airlines become smaller and more specialized, or are there simply too many airlines in the market? I would like to hear your thoughts on what this could indicate in the long term.

I don’t think it suggests that. But I think what we are proving is that customers care about quality product and service. Because of that, the airlines that succeed are going to invest in a quality product and service. If you don’t do that, you’re going to fail.

And Justin, I’m going to jump in on this as well. What has changed is cost convergence, right? At this point, we’re able to provide incremental seats to our customers at a price point that is competitive with the ULCCs, and we provide a better product. Customers are choosing to fly a better product at a similar price, and we are just getting started.

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