United Airlines Holdings Inc (UAL) — Q3 2024 Earnings Call Transcript

Thank you, Krista. Good morning, everyone. And welcome to United's Third Quarter 2024 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. All forward-looking statements are based upon information currently available to the company. A number of these 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 Customer Officer, Linda Jojo; Executive Vice President and Chief Commercial Officer, Andrew Nocella; and 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.

All right. Thanks, Kristina. And good morning, everyone. Before we start, I want to acknowledge the devastation that has occurred in the Southeast due to severe hurricanes that impacted the region. The United team has been working overtime to get our customers and employees safely in and out of the impacted areas. We've also raised hurricane relief funds and transported humanitarian aid to the region. Turning to the quarter. The inflection we spoke about on our last call has happened and we're seeing unprofitable capacity begin to exit the market, leading to the expected domestic yield improvement. We once again delivered a solid quarter, and I want to thank the United team for taking care of our customers and producing these strong results while strengthening the culture that puts the safety of our customers and employees first. Today's results are another proof point of what we've been outlining was going to happen on these calls for several years now, both at United and in the industry more broadly. So how have we gotten here? Over the last several years, United has worked hard to improve the customer experience. That starts with a great culture and great people that are proud to be a part of United and want you, our customers, to feel the same way. Over a multiyear period, we've also made significant product investments that are important to our customers, like new aircraft with seatback screens and power in every seat, expanding clubs and the fastest WiFi in the industry with Starlink. United is also the clear innovation leader in global aviation and our technology is now without question the best of any airline in the world and by a wide margin. One of the most common comments I get from customers now is about how much better the United app is than any other airline. But no investment has been more important than the almost $10 billion investment we've made in our people over the last four years. During this time, we also reached industry-leading contracts with four of our five major work groups. We're currently in federal mediation with the AFA who are committed to reaching the same kind of agreement for our flight attendants. But we knew that doing all of that following COVID would be difficult. We could have just hoped that the world would revert to pre-COVID norms. That's allowed us to be consistently ahead of the curve and often move opposite the consensus, and we've been consistently right. All of these actions and investments combined with our United Next plan have propelled United to a leadership position operationally, financially and for our customer stakeholders. All these actions position United to provide benefits to all of our stakeholders, financially stable, secure careers for our people, improved experience for customers. And now that we've done those two things, we can return value to our shareholders. This success has led to our strong financial results that have facilitated our ability to restore our balance sheet and position us to take the next step in solidifying our leadership position in the industry. Our Board of Directors has approved a $1.5 billion share repurchase program. Mike will go into the details about our capital allocation framework, but this is a critical next step for United as we work to create value for all of our stakeholders. We're proud of our current results and excited about the innovation that we have ahead for customers. We're also glad to see that the industry inflection point, which we've been predicting, has actually happened. We believe that all sets United up to expand margins in the years to come. And with that, I'll hand it to Brett.

Thank you, Scott. And good morning. I'd also like to thank the United team for closing out this summer on a high note. This quarter was the busiest third quarter in company history, setting the company records for the most ever passengers carried on the July 4th and Labor Day holidays, and for the highest number of customers carried in a day at 552,000 in July. Despite record numbers of passengers and challenging weather across our network, we ranked first in on-time departure and second in on-time arrival amongst major US airlines for the third quarter with the best on-time departure in the months of August and September. These results are a testament to the investments we have made in our operations, resources and tools to bolster the durability and resilience of our operation. These investments, along with what we've learned from operating in challenging geographies, have further improved our recovery during weather and irregular operations events. In addition, our safety measures have only become stronger this year with additional investments in our people and technology. This year, we launched training for our pilots focused on safety and professionalism, and more will be rolled out next year. We added additional safety resources across the operation, and we are investing in new technology that will make it easier for employees to engage with our safety programs. Running a safe and reliable operation is the backbone of this airline and one of the many contributors to the success of our business. Investing in the customer experience has also been key to widening our competitive advantage. Our NPS scores continue to reflect the benefit from these investments. Our third quarter NPS was up 5 points versus the same period last year and is up 24 points versus 2019 year-to-date. These results would not have been possible without the vision and leadership of our Executive Vice President and Chief Customer Officer, Linda Jojo. Last month, Linda shared the news that she will retire at the end of this year. In her 10 years, Linda led a team that revolutionized air travel and has enabled so many of our industry-leading customer innovations. These innovations have continued to set United apart and have delivered real value to our brand and our business. But the most lasting element of her legacy is likely to be the impact that she had on our culture and is well known across the company. Her commitment to mentoring the next generation of leaders at United, especially women. Countless people, men and women across the airline, not just on her team, have benefited from Linda's wisdom and her willingness to generously share it. Her leadership will not be easily replaced, but it’s certainly an example we'll aim to follow. Now that I have thoroughly embarrassed her, let me hand it off to Linda to talk about the changes she has seen at United in her 10 years.

Thanks, Brett. We believe that United has the best hub cities, the best network and the best people. But to create an airline that customers choose to fly, we need to deliver a great customer experience. That's why over the last decade, we've invested over $14 billion in technology to help our employees work more efficiently and deliver outstanding service. We believe these investments give United a unique competitive advantage, further strengthening our brand and fostering a culture of innovation that's hard to match. For example, one of the first decisions we made when I joined United was to issue iPhones to our flight attendants. Once these devices were in our employees' hands, it unlocked a new way of thinking for both our frontline and our digital technology teams. These devices now help our flight attendants deliver more personalized service, from recognizing someone's birthday to offering in-the-moment care, to sharing connecting gate information, building stronger connections with our customers and driving higher NPS scores along the way. We've also moved to a paperless flight deck, issued iPads to our technicians, upgraded our contact center, crew scheduling and airport tools, resulting in more efficient aircraft turns and better crew communication, especially during our regular operations. This culture of innovation, combined with our investments in our technology infrastructure, enabled us to launch dozens of industry-first capabilities for our customers and employees. For example, we launched Connection Saver more than five years ago, saving the day for over 3 million customers since then. This is a customer benefit still not copied by other airlines. Like Scott, I'm very proud of our app. It's used by nearly 90% of our customers on the day of travel where they can save up to 30 minutes at the airport. And when things don't go as planned, we take steps to automatically rebook you and we've introduced new features like allowing customers to list standby for earlier flights and access hotel and meal vouchers. Our self-service success rates in the app have doubled since making these changes, translating to customers getting on their way faster and our employees freed up to assist those customers who need more help. Our patented Agent on Demand technology gives customers the option to text, talk or video call a live agent from the United app and enables our teams to collaborate across airports, aligning our people resources to where they're needed most. During a recent storm in Houston, over 7,000 customers got help from live United airport agents already on duty in other airports who were not impacted by the storm. Our pace of innovation continues. So far this year, we've allowed customers to be automatically moved to a preferred seat, created a flight filter so travelers can confirm that aircraft accommodate their wheelchair, expanded live activities to Apple Watch and signed the industry's largest deal with Starlink for in-flight WiFi. The Starlink announcement was a full circle moment for me. Finding a way to improve in-flight WiFi has been a years-long challenge. And like when we gave iPhones to our flight attendants nearly a decade ago, I think this will completely transform the onboard experience in ways we probably can't imagine today. And that's why I can't wait to see what the team will do next. I'll now hand it over to Andrew to talk about the revenue environment.

It's been an exciting decade at United. Thank you, Linda. At United, we take great pride in our leading RASM results over the last few years. Our segmentation strategies, multiple product choices from basics to Polaris and network capacity deployment decisions have created strong relative margins for United versus others. The elimination of change fees and the swapping out of single-class RJs for mainland jets has been very positive for United and negative for our competitors. Turning to our third quarter revenue results. United's top-line revenue grew 2.5% year-over-year to $14.8 billion on 4.1% more capacity versus the third quarter of '23. Consolidated TRASM was down 1.6% year-over-year aligned with our expectations of a challenging domestic industry capacity dynamic in July. As expected, we reached the domestic inflection point. Domestic PRASM was slightly positive in August and September year-over-year, which was a material improvement from earlier in the quarter where it was down 4%. United's domestic capacity in 2024 was shaped with the expectation that the industry would remove unprofitable capacity in earnest in Q4. As a result, United expanded slower than most during the first three quarters of the year when capacity dynamics were less favorable, but importantly, our timing was right, tilting our growth to the quarter where the industry conditions would be the best. Network and business model changes due to large financial losses by others are resulting in an improving domestic and near Latin America pricing and yield environment. We expect more of the same in 2025. The timing of our growth push in Europe in 2022 and 2023 proved to be spot on with the recovery in demand post-pandemic. This year, we allowed capacity added in 2022 and 2023 to mature creating good RASM results. We entered Q4 with momentum across the Atlantic as RASM growth was strongest as we exited Q3 at plus 4%. We've gotten pretty good at knowing when and where to grow and just as importantly knowing when and where not to grow. While our Asia Pacific network is solidly profitable, Asia RASM was challenged in the quarter as we continue to face China and South Pacific headwinds driven by simply returning to a more normalized revenue environment. United expanded Asia capacity by 27% year-over-year in Q3 and by 50% in the last 12 months. Pivoting capacity across the network remains a focus as we enter Q4. We're in the process of reallocating underperforming narrowbody capacity in our Guam operation to create new revenue pools and connectivity in Tokyo. United's planned Pacific growth will moderate to 7% in Q4 and further again in 2025. We plan to return to a more typical Pacific growth rate once our post-pandemic network is fully restored. With stronger year-over-year performance expected across the Atlantic and Pacific in Q4, United is also seeing a much better global year-over-year RASM outlook versus Q3. We remain bullish about the long-term growth prospects of our global network. The structural shift in profitability is evident in two of the three international entities at United so far in 2024. We're optimistic that performance to Latin America will improve in the coming quarters as the region is seeing significant capacity rationalization by low-margin airlines. United’s network health remains strong. All United hubs and all four entities produced profits in Q3, produced profits year-to-date, and produced profits over the last 12 months. Corporate demand acceleration was nice to see in September across all regions and is expected to continue into Q4. Contracted corporate revenues were up 13% in September at 95% of 2019 revenues, which is 13 points higher than July and August. United is centered in the largest business markets as corporate demand expands, and we expect a material tailwind. Load factor for managed business was down nearly 2.5 points in Q3 still versus 2019, and we look forward to slow but steady gains as we enter 2025. We've seen eight of the top 10 biggest post-pandemic corporate revenue booking days since the start of September, including the biggest day in United's history. RASM in United's premium cabins was up 2% in Q3. Premium cabin RASM performed better than main cabin in all entities during the quarter. On the other end of the spectrum, basic economy remains an important product with volumes up 21% year-over-year. MileagePlus revenue was up 11% and our Connected Media business continues to spool up as we invest in technology and seatback screens to create new high-margin revenue streams. Active membership at MileagePlus was up 13% year-over-year and holders of our credit card have reached a new penetration record with credit card spend reaching new records, up 9% year-over-year, showing flyers increasingly engaged with all United has to offer. I will end with a quick view of the revenue setup for early 2025. Much of the revenue challenges we have seen in Q3 on weak leisure yields for domestic leisure customers who book travel far out. As we look into Q1, we're selling these very same tickets at yields that are much higher. We believe Q1 yield strength will be possible due to the significant schedule changes and business model changes that will continue to be implemented by low-margin airlines. While there's still a bunch of noise in Q4 due to the multiple calendar shifts that make the positive magnitude of the domestic revenue pivot a bit difficult to see for some, the environment is improving rapidly just as we anticipated. In addition to the positive leisure yields we expect in Q1, we're clearly seeing an acceleration of return to office policies, which are driving corporate traffic revenue growth at an accelerated level and creating a great setup for 2025. Further, as I said earlier, Asia unit revenues have clearly pivoted in Q4. Thanks to the entire team for a job well done. With that, I'll turn it over to Mike to discuss our financial results.

Thanks, Andrew. And thank you to the United team for another solid quarter. In the third quarter, we delivered a pretax margin of 9.7% and earnings per share of $3.33, above the high end of our guidance range despite challenges from the CrowdStrike outage and suspension of our flights to Tel Aviv and Amman. Revenue trends improved across most geographies as industry capacity rationalized, all while we saw a relief in fuel prices. Customers continue to choose United as we invest in our hard product, our people and a resilient operation. Turning to costs in the quarter, CASM ex was up 6.5% on 4.1% capacity growth versus the third quarter of last year. We expected CASM ex to be pressured in the quarter with lower capacity growth. This was further amplified with an approximately 1 point reduction in capacity from CrowdStrike and suspension of Tel Aviv and Amman. As we look to the fourth quarter, we expect some unit cost improvement as labor headwinds moderate and our capacity growth steps back up. We expect that our costs will remain pressured from previous capacity reductions in both our domestic and Atlantic schedules and delivery delays from Airbus and Boeing. As we look ahead to CASM ex in 2025, we expect to see tailwinds from better utilization and firmer capacity plans, assuming OEM delivery delays moderate. We expect to continue to see pressure from our labor agreements of around 2 to 3 points, which should be an industry headwind as well. For the fourth quarter, we expect earnings per share to be between $2.50 and $3. Turning to the fleet. In the quarter, we took delivery of 17 Boeing MAX aircraft and three A321neo aircraft. In the fourth quarter, we expect to take delivery of 19 narrowbody aircraft and three widebody aircraft; our estimate accounts for our current assessment of the impact of delays at both Airbus and Boeing. With these deliveries, we now expect full-year adjusted capital expenditures to be less than $6.5 billion. On capital allocation, our United Next plan is working, and the airline industry is in the midst of a positive transformation. A decommoditization of customers are choosing United based on the wide selection of products from premium international seats to flexible travel for domestic business travelers and basic economy for our price-sensitive customers. Our investments have solidified a leading position for us in the industry. As our strategy has worked, our relative profitability has improved materially, but our stock hasn't kept up. We believe there's tremendous value in our shares and now have the balance sheet and free cash flow to opportunistically repurchase those shares. Our Board of Directors has approved a $1.5 billion share repurchase program that we intend to execute beginning this quarter and throughout 2025. This program will be funded by free cash flow generation as we expect our profitability to improve. It's imperative that we balance our priorities of investing in the business and consistently returning value to our shareholders while also deleveraging. Our current net leverage is 2.7 times, and we are targeting below 2 times in the next few years. In parallel with this new buyback authorization, I'm happy to share that we've already repurchased approximately $82 million of shares that were issued when a portion of the warrants originally granted to the U.S. Treasury under the CARES Act and Payroll Support Program were exercised during the quarter. The repurchase of just over 2 million shares fully offsets the dilution associated with these exercise warrants. The shares were purchased at an average price of $39.99. We are delivering on our financial commitments and expect to deliver on our EPS guidance for the second year in a row. We are greatly encouraged by our third quarter performance and the progress we've made to positively differentiate our product, increase TRASM, improve our balance sheet and now return cash to shareholders. The future at United Airlines is incredibly bright. With that, I'll pass it over to Kristina to start the Q&A.

We'll now take questions from the analyst community. Please limit yourself to one question and if needed, one follow-up question. Krista, please describe the procedure to ask the question.

A question I get pretty often from investors is just how you plan to capitalize on an evolving industry backdrop in '25. Many of your competitors are making significant changes to the network and product. When you take a step back, where do you see the biggest opportunity in the U.S. domestic market next year?

I'll try to take it. We're focused on United and our outlook and continuing to develop the United Next plan. And so there's a lot of opportunity. I think, first of all, we're going to continue to build connectivity in our Mid-Con hubs. We've had that as one of our north stars for a long time and we'll continue to do that. But we're also going to continue to invest in the customer to make our product one that they choose more and more often, and we continue to see market share gains related to that. And then I think the last point I would say is particularly from a corporate point of view, we see corporate traffic accelerating; that's United’s bread and butter. We've been waiting for that to happen for a while. It's particularly important in Q1, and we think it's going to happen in Q1, and that creates a great setup for us. So we're going to stay focused on building products that customers want to buy. We're going to stay focused on building our high-yield share as we go forward and building connectivity and, of course, building our global network, which has done incredibly well over the last few years.

And then maybe just sticking with or going back to United Next. When you first laid that plan out in 2021, obviously, a lot has changed. You're forecasting double-digit pretax margin by 2026. I was just curious if you could update us on your thought process and how you get to that double-digit margin? You've obviously done a very good job of pivoting and driving margins relative to others. But just any thoughts there would be helpful.

For the past couple of years, we've been describing an industry evolution that we're confident will lead to higher margins. We anticipated that we'd reach an inflection point that would kick off a multiyear run that looks a lot like the 2012 to 2014 airline earnings and investors. For some history, in 2011, each of Delta, United and Southwest had pretax margins between 3% and 4%. Southwest committed to low growth until they rolled to hit a certain target, and they lived up to that commitment for the next three years. Three years later, their margins expanded by 9 points. So the network carriers had expanded by an average of about 8 points. That all happened even while the ULCCs were growing 15% to 20% per year. Fast forward to today, Southwest and one other airline, one of the large airlines, start with margins that are actually even lower in absolute than they were in 2011 and relative margins that are significantly worse than they were in 2011. In response, Southwest has once again made a long-term capacity commitment at the same time that the ULCC may not even survive, much less grow 15% to 20%. And while we've been predicting this scenario would happen, it's no longer theoretical. It happened in mid-August. The only question now is how much margins expand compared to what happened in the 2012 to 2014 time period. I suppose you can have a reasonable debate about whether it will be the same 8 to 9 points or something less. But regardless, there's likely going to be a meaningful expansion of margins in each of the next three years.

I had a question on sort of the international expansion. This sounds like a differentiated strategy that sort of leans into the idea of wanderlust. Can you just talk a little bit about the rationale here and maybe your process for picking, I don't know, Nuuk, Greenland, to add to the system versus any other city? And what kind of impact seasoning some of these newer routes that are kind of undiscovered country may have on results for next year?

We spend a lot of time debating how and where we'll grow. And this announcement has clearly caught the attention of many people, most importantly, our customers, and I think it's a very exciting announcement. But the backdrop for the announcement is the fact that United Airlines simply has the best global gateways in the business. And those global gateways allow us to fly successfully to a broad range of destinations. We heavily fly into our partner hubs, which is the traditional model in our business, but we're also able to do just as well financially outside of our partner hubs. And so we look across the globe, we look for new destinations, we look for hot destinations and, most importantly, we can make money in. We have a really good track record of this, very little of what we've added over the last few years we have canceled. And so as we look forward, we look for those new destinations. And at the end of the day, Greenland has got a lot of attention, but it is only two 373s per week. So its impact on our system will be small. But its impact on United, our brand and our customer profile and sign-ups for MileagePlus will be great. And there is so much more possible on this front than even I thought it was possible five or six years ago. As the United Next plan builds the connectivity, as our global hubs are just in these great cities with high volumes of cargo, high volumes of leisure traffic and, most importantly, high volumes of business traffic, we just have a lot to unlock out there. We'll do it very carefully. We'll make sure we're growing profitably, but expect more to come on this front.

And then maybe just as a brief follow-up on the widebody situation. Boeing's announced they're going to have another delay on the 777X. How do you think that's going to affect supply-demand as you're looking out the next couple of years, the delays in that production platform for the next generation widebody?

So we've talked about this many times since even in the middle of the pandemic. We thought there is a structural shift in global capacity, a lot of A380s and other widebodies are grounded, and many of those aircraft remain grounded, although airlines are bringing some back. The fact is that the production lines for widebody aircraft probably will not keep up with demand over the next three to five years based on everything we see. And that, in turn, I think, creates a better setup for the global long-haul network. We obviously remain bullish on it based on our announcement last week, and we'll do it prudently, but we think the setup is pretty good, and the 777X appears to be delayed yet again.

We are paying close attention to the delays with the 787, as you would expect. We support Boeing and recognize that they are making some wise choices. We would commend their rumored decision to seek equity in the capital markets to stabilize their business. However, if the delays with the 787s persist, we anticipate that there will be a downward trend in capital expenditures.

Building on the previous question, could Scott or Mike share their thoughts on the broader implications of the Boeing strike for the company? Additionally, Mike, in relation to your last response, do you think it's reasonable to anticipate something towards the lower end of your $7 billion to $9 billion capital expenditure range for next year, considering our current understanding of production issues?

I will address the broader perspective first and then let Mike provide information on CapEx. My focus with Boeing is on the long term. We aim to establish the best airline in aviation history, and I am very much committed to that vision. I feel optimistic about Boeing. As Mike mentioned, the main challenge at Boeing has been a cultural one, where there has been an emphasis on short-term profits and stock price at the cost of what truly defines Boeing—creating exceptional products, engineering, quality, reliability, and safety that can be relied upon. I believe Kelly Ortberg is steering the company back to these foundational values, and I think all Boeing employees will support this direction. One of the most significant developments at Boeing recently is their reported readiness to sell equity, prioritizing long-term decisions even if the market reacts negatively in the short term. As a long-term customer, I commend this approach for its benefits to shareholders in the long haul. I am encouraged by the changes taking place. The current strike is, in many respects, a reflection of the cultural issues that have persisted over the years. It is challenging, but I am confident they will navigate through it. I believe everyone involved—the workers on the picket line and the management team—shares the goal of making Boeing a great company that plays a crucial role globally. They will eventually resolve this situation. While we may have fewer airplanes in the short term than we'd hoped for, our focus remains on the long-term plan. I want to push through this period and establish a company built for sustained success, and I am optimistic about our prospects.

Andrew, I want to emphasize that the aircraft we have ordered from Boeing and Airbus, considering the profitability reflected in our third-quarter results and our future profitability expectations, are essential for us, and we would like to receive them as soon as Boeing can finish and deliver them. However, given the likelihood of delays not being resolved quickly, we anticipate a downward adjustment to our capital expenditures. I expect it to remain within that range, and we will provide more detailed guidance during the January call as is our usual practice. You are correct to expect a downward bias due to production delays.

Domestically, are there any regions that stick out in terms of recovery, specifically as it relates to corporate, are you seeing any signs of recovery in lagging West Coast markets like San Francisco?

It would be the opposite. So the coastal hubs are stronger than the interior hubs. In the corporate bucket, professional services, financial services, and tech are growing fastest, where energy and a few other things are growing slow. But all verticals are growing, and corporate traffic looks good, but the coastal hubs are much stronger than the interior hubs at this point.

And then Mike touched on it and I think it came up in a couple of questions, but just contrasting the setup on the kind of step-up in growth in 2025 or the step-up in CapEx in 2025 versus prior years where it was a little bit of a placeholder given OEM constraints. Does the setup feel different now looking into 2025? I know you recast and derisked some of your deliveries. But is your confidence higher into 2025 growth or about the same than it was this time last year into 2024?

Duane, I think you're asking me about CapEx expectations in '25?

CapEx and growth were more of a placeholder in previous years due to OEM constraints. You have a clearer perspective on how things will develop than we do from the outside. I'm curious if your confidence in your planned growth for 2025 is any higher now compared to prior years.

Let me respond to your question. We've been clear about our CapEx expectations, which are between $7 billion and $9 billion. Given the current strike at Boeing and other delays, we anticipate a downward adjustment within that range for CapEx in 2025. Regarding capacity in 2025, we won't provide guidance at this moment. However, you can trust that we will manage our capacity to maximize profitability for United.

We briefly discussed this, but let's delve deeper into the domestic RASM, which decreased by 0.8% in Q3 compared to a 1.9% drop in Q2. While it may seem minor, Andrew, you highlighted the performance in July and the trends in August, indicating a significant improvement. Could you explain what factors contributed to this? Specifically, how much of it was due to capacity changes, corporate demand, or an increase in market share in the economy segment? Any additional details would be helpful.

I'll try. I mean, it was a lot of things. I will say that September was dramatically better than July. July was clearly the low point for the year in terms of year-over-year RASM. We saw gains really in all the entities, but September, again, was much better. We expect the Pacific market to also improve as we head into Q4. Business traffic was up, I think, about 6% in the whole quarter, but it was up 13% in September to give you an idea of the spool up. So we exited the quarter with some really, I think, much better performance, and we were hopeful that performance translates into good quality earnings in Q4 and beyond.

Could you elaborate on the strong bookings in Q1 despite being only minimally booked? What factors contributed to that strength in Q1, and how does it compare to the performance we saw in September of Q3?

I don't have it by geography. But what we are seeing is that there's just a much better pricing environment for leisure yields that look very early in the booking curve. And we attribute that to changes in capacity, the elimination of unprofitable capacity, better business bookings, although very slim at this point, and changes at business models of the low-margin airlines. All of these factors are leading to what we anticipate will be a much stronger environment in 2025 for United Airlines.

Congratulations on your retirement, Linda, and congratulations to the team on a strong outcome in the third quarter despite the challenges faced. Mike, I appreciate the no-excuses approach; the share repurchase certainly reflects confidence. Could you provide some clarity for investors regarding the capital expenditure dynamics for next year? Additionally, looking further out, the projected spending range of $7 billion to $9 billion seems a bit high compared to others. How essential is this expenditure and the investments outside of the aircraft fleet in reaching the double-digit margin target?

Brandon, I appreciate the question. It's something we think about a lot in the finance department these days at United. CapEx is elevated. That refreshing of the fleet, the growth of the fleet has been absolutely integral though to the United Next strategy. The gauge increase from the narrowbodies, that's frankly what's driving our ability to provide basic economy, which is creating a competitive dynamic that is just fundamentally reshaping the industry. So they are intertwined. That said, as the strategy progresses and our margins expand, I am focused on free cash flow conversion. And in the near term, in the next two or three years, we're focused on a free cash flow conversion target of 50%. We're not going to manage perfectly in every individual year. But over the next three years, I would use 50% as a target. Later in the decade, I am aiming higher; I think, 70% to 75% longer term than that, I think there's opportunity. But near term, think about 50% and later in the decade think about a target of 75% for free cash conversion. $7 billion to $9 billion remains the target for the next few years, and we'll give you an update to that in the future. But for the next few years, $7 billion to $9 billion remains the target. And let me say for the third time, that has a downward bias next year.

And obviously, keeping with your no-excuses mantra, I thought it was interesting that there was nothing in the release as it related to CrowdStrike. I know, Mike, you called out 1 point of CASM, but at the end of the day, you did cancel, I want to say, it was like either 2,500 or 2,600 flights on United and its partners. What was the revenue impact? Or is it just with your booking tools, your ability to reaccommodate maybe better than others that the revenue hit maybe was not as much as even worth reporting?

Scott and Andrew, if they want to share some details, they can. Healthy businesses will sometimes make excuses regarding situations like CrowdStrike or weather. We incorporate into our guidance the assumption that there will be one significant unforeseen event each quarter that could adversely affect the business. If that negative impact isn't as significant as anticipated, then we might exceed our expectations or come in at the higher end of our guidance. However, if there are multiple significant events in a quarter or one major event, it's unlikely that we'll always meet our guidance. It's simply about setting targets realistically, acknowledging that not every day will be ideal.

I would like to expand on a cultural philosophy that I believe is very important. During my time as a cadet at the United States Air Force Academy, I learned a crucial lesson about having no excuses. It’s easy to blame external factors and believe they are not your fault, but that mindset cannot be the end of the discussion. We have embraced this philosophy at United, and it encourages continuous improvement. It's simple for someone with an MBA to come into an air-conditioned office and analyze the costs of events outside their control, which is not wrong. However, adopting a no excuses mentality means we don't just assess those numbers; instead, we seek innovative and creative solutions to improve and overcome challenges. We have repeatedly stated that we are the leading innovator in the global airline industry, with our competition far behind. The no excuses philosophy significantly contributes to this success. It drives us to take actions we might avoid if we allowed ourselves to dwell on the calendar or negative circumstances. This cultural approach is vital for both revenue generation and cost management, and I’m proud of our team for embracing it. Our Chief Operating Officer, Toby, often expresses this sentiment differently. He notes that while certain factors like weather may not be our fault, they are our responsibility, which captures the attitude we strive for at United.

Andrew, regarding the smaller cities in your network during COVID, it seems that there were about 30 or 40 markets you had exited due to the pilot issue. It appears that this situation has improved somewhat. Considering your competitive advantage in some of those markets, you were essentially the only option available. I understand that Mike has mentioned some RASM or CASM pressures in 2025, possibly connected to increased regional flying. I suspect some of those markets may be reopening. Is there anything you can share about that?

The RJ network has returned to its new run rate in Q4, coming back in line quicker than we expected at the start of the year. While these are smaller aircraft and they do increase CASM, we believe they positively impact RASM and profitability, which is why we made this decision. We are now fully utilizing the RJs at our new fleet run rate. Recently, we announced a deal for 11 CRJ-550s with SkyWest, and these aircraft have performed better than we anticipated for United. This expansion allows us to better serve smaller communities. However, I don't foresee any major changes in how United serves these communities. Our long-term strategy involves slightly reduced schedules with lower frequency flights using larger aircraft that have lower unit costs. This approach has been a part of United Next for several years, and we are committed to it. While the RJ fleet will continue to exist, it will constitute a smaller share of our business. We will serve smaller communities with a combination of RJs and mainline jets while maintaining low costs in those areas.

Linda, best wishes to you on your retirement. I wanted to ask, very good trajectory in terms of reduced leverage. Could you give us some high-level view on how this could dovetail with your credit strategy, maybe investment-grade rating on the horizon?

As our margin increases and our leverage decreases, we anticipate achieving investment grade metrics. We will put in significant effort to earn the trust of the credit rating agencies to attain investment grade ratings that align with those metrics. Having less than 2 times net debt and double-digit margins within a more resilient industry, with United as the leading company, positions us as an investment-grade entity.

And just one other quick question. You guys have some great partnerships with names like Copa and some of your Star Alliance fellows. Do you anticipate a fair bit of long-term growth coming from these partnerships, or are we really going to think about organic drivers for the growth?

Our partnerships are incredibly important to us, and we do have the marquee names across the globe with great hubs that we plan to. However, our approach to growth is balanced. As I said earlier, we have the ability to grow profitably in our partner hubs, but we also have the ability to grow just as profitably outside of our partner hubs. We do incredibly well to London Heathrow, for example, which is not a partner hub for us. And so I would expect a balanced approach to this, again, with the idea of expanded margins. But we will look to expand into new regions of the world that I think are uniquely supportable by habit hubs that are in New York and Washington D.C. and San Francisco, in particular. Those hubs just simply unlock the ability to fly to places like Marrakesh or Greenland or other places that we've recently added to the map. So international is an important part of United. We're clearly the largest of the big three flying overseas. We expect that to continue. But most importantly, we have really good margins, at least across two of those big entities today, and we look to expand those margins going forward.

I wanted to ask about the election. I know one of your competitors mentioned a decline around a week before and a week after. Can you share what you’re observing? Additionally, this quarter, we've seen exceptionally low fares to Europe across various airlines and destinations. Can you discuss the demand trends you're noticing? Is this possibly due to increased capacity, or have people already traveled? What factors are influencing this situation?

In terms of the election, I think what we would say is a presidential election normally has an impact on RASM. Fewer people travel that week for the obvious reasons. And here we are, it's four years later, and we are seeing the same thing. So I don't think there's anything to be surprised by. In terms of Europe, Europe has a very good outlook. We've had a very good nine months so far in Europe. We expect it to be good one for the rest of the year. If you see a great fare out there, I urge you and all your friends to buy it and take a trip to Europe. It's great in the winter, particularly Southern Europe; Rome is excellent in the winter.

I wanted to see if you could go back a little bit on some of your comments about the outlook for Asia and China, and how that might be changing and whether United plans to add back any additional China, U.S. routes anytime soon?

I believe China has changed significantly for United compared to before the pandemic. We used to operate about 10 flights daily to China, but those days seem to be over. The demand landscape is completely different now. We recently restarted our Los Angeles to Shanghai route and are increasing that to daily service, which brings us to a total of three daily flights. Based on current demand, I don’t expect to see many more flights than that in the near future. The situation with RASM, which I mentioned earlier, shows that as we return to a full schedule in China, we are seeing what I would call normal RASMs again. These RASMs have dropped considerably from the pandemic period when we operated just a few flights each week. This has negatively impacted our year-over-year RASM results across the Pacific for several quarters. However, we expect this to change in Q4 and Q1 when we fully compare with that previous period. Thus, the negative RASM effects from China will lessen, and we anticipate a positive shift starting in Q4 that will hopefully extend into next year.

And can you give us an idea of the load factor on your China flights?

I don't have that in front of me, but not high enough.

I have a question about Boeing's price. When does it start affecting your United schedule? And secondly, Emirates President Tim Clark, recently said that Chapter 11 is looming on the horizon for Boeing. Do you share that view and have you done any contingency planning around that possibility?

It's hard to hear all of that, but we're not anticipating the outcome you described. When do you expect this strike to start impacting your schedule? It really does; it’s that's immediate when the aircraft have stopped delivering. But as I said in my earlier comments, we are encouraged that Boeing is focused on the long term. We want them focused on the long term. I talked to Kelly as recently as yesterday and appreciate his focus on the long term, and that's what we care about. It has a short-term impact, but I think Boeing is positioning themselves for a strong turnaround in the long term.

Thanks, Krista. And thanks to everyone joining the call today. Please contact Investor Media Relations if you have any further questions, and we look forward to talking to you next quarter. Happy Halloween.