United Airlines Holdings, Inc. (UAL) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Wolfe Research Global Transportation & Industrials Conference. This is the United Airlines Holdings fireside chat hosted by Wolfe's senior analyst, Hunter Keay. [Operator Instructions] And now I hand the call over to Hunter.

Thank you, Grace. Everybody, thanks for joining us. I'm Hunter Keay. We have half an hour here with United Airlines. I have Andrew Nocella, who is the Chief Commercial Officer. I have Gerry Laderman, who is the Chief Financial Officer. And I really want to thank you guys for doing this. It's a tough time. You have -- you're very busy. I really appreciate you taking the time to talk to me today. I hope we can make this fun and productive. So I'm just going to get right into the Q&A.

And for the audience, by the way, you will see -- someone just asked the question, good. You'll see the Q&A box sort of on the right. Write it down. If the question is cool, if it's nice, I'll ask it. If it's not, I'm not going to. So use your own judgment, and I'll ask it. I'm going to start. First, Andrew, I've asked every airline this. I'm not locking you into anything. I'm just trying to take an informal poll, okay?

Okay.

This is an industry question. U.S. domestic load factor was 85% in 2019. That's industry number, okay? 2021, 75%. Do you want the over or the under? Industry question.

Hey, Hunter, before Andrew starts, I do have to say one thing for the record.

Yes.

That the remarks made during this webcast may contain forward-looking statements that represents 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 2019 Form 10-K filed, our first quarter 2020 10-Q and other reports filed with the SEC for more thorough description of these factors. And Hunter that does not take away from our 30 minutes.

No. But I'm actually really glad you read that because now, Andrew, you can give me the answer.

I'm really glad you read that as well.

Because I would say literally what that is for. So again, this is not a guide. I'm just kind of curious. Over or under 75% domestic industry loads, 2021?

I think I would take the under. Maybe not by much, but I would take the under.

Okay. Thank you. Appreciate that. That's helpful. Okay. So the first thing I want to talk about is just this concept of business and leisure, right? And in the event that business travel does recover more slowly, it's probably a question for Andrew, how does United structure itself to become -- and there might be a cost question for you, Gerry, but how does United structure itself to compete and make money in a leisure-oriented sort of market for the next 2 to 3 years, assuming it takes that long? How does United become competitive and profitable in that environment?

Assuming it takes that long, first of all. I don't think it will. I don't -- this technology has been interesting, but I don't think it replaces business travel. I think that's one of the lessons we've kind of learned over the last 8 weeks. But we need to be agile. In United, we've changed a lot over the last 3 years. We've redefined what it takes to be successful and kind of put the puzzle back together so we can drive EPS, drive margins, just like we said we would. As we go forward, clearly, depending on how the mix of traffic changes, we'll have to do the same. And if there's less business traffic, I expect that we will use bigger gauge aircraft, we'll use less 50 seaters. We'll do different things with the number of banks we operate. In particular, schedule depth won't be as nearly as important, I think, in that world as it is today. So we would have just a totally, I think, redesigned type of network. All that being said, when business traffic does come back, I think it comes back first in our hubs. Our hubs are -- at least for United, in total. Our hubs are in the biggest business centers. So when it does come back, I think we are going to be in the driver seat, hopefully, to take advantage of that first amongst the U.S. carriers.

So how do you know that the investments that you are making in, say, Polaris, not just the onboard product, but the lounges itself, how do you know that those are still going to be good decisions in the next cycle? And how do you know they weren't just sort of late cycle choices that made sense at the time? When do you decide to go forward with those things or to keep them open? At Polaris, [ still afraid ], I mean, that's still about what, half way done? You have to make a decision on that one way or the other, right? You got to either finish it or get rid of it.

There are a few of the aircrafts that didn't have the Polaris seats on board, we've actually parked for now. So those come out of the equation. So I don't know the exact percentage that have Polaris seats, but it's much higher today than it was back then. Look, I think we need to reassess and make sure we've got the right mix, whether it's the right mix of the aircraft, whether it's the right mix of seats on the aircraft. In this case, we went and we -- for example, we put 50 seats on our 767s, 46 in business class, primarily fly to London Heathrow. When we did that, we did a lot of calculations as to how many we would need to kind of make money in that world and what the market could really bear. One of our competitors in the marketplace uses 80 seats in business class. So we actually thought our 46 at the time was pretty conservative given who we are in New York City. And so all I'm saying is, we'll look at all those rules. But we have hubs in the right locations, and we have a lot of aircraft. If we need to change the LOPAs, we'll change the LOPAs. We're pretty -- we're amazingly pretty good at that. But we won't pretend that we know exactly what the rules and regulations of the next 3 years will be relative to where we've just been. We may have to change things in our business plan from top to bottom. And if necessary, we'll do that. Scott has already said, there are no sacred cows, and we're here to reiterate that, there are no sacred cows. We're going to do things to get this business back to be cash positive as quickly as possible and be back to generating decent margins. And the rules, how we do that, as you just pointed out, may not match exactly what they were over the last 3 years, and our investments may need to change. And we'll be agile, and we'll do it.

When you talk about LOPAs -- for those of you who don't know, that's how an aircraft is. It's the layout of the passenger accommodations. And it's how an aircraft is configured inside. Is there some sort of scenario that you envision to where you would actually modify the interiors of your aircraft to accommodate social distancing in the event that, say, regulators mandate you leave middle seats unsold? Would it make more sense to actually just rip those middle seats out to reduce your staffing levels to where you could actually have some better ability to maximize -- match cost with revenues in that dynamic. Is that a dramatically extreme step? Have you considered it?

That's so dramatically extreme. Luckily, none of us are engineers. Otherwise, one of us will be saying, that's crazy, I think. We can definitely add a row or take a row out with relative ease. We can move a bulkhead, but change in that level of -- that level of change onboard an aircraft, I think, would be very difficult to accomplish in a short period of time, even in medium period of time because of the engineering and approvals necessary to do that. And it would take years to enact. I'm confident we'll be on the other side of this situation by the time we could do anything even close to that. And that would be, I think, a pretty significant restructuring of the business model that we just don't think there's any reason to believe is necessary at this point.

Hey, Hunter, realistically, you would need a seat that doesn't exist today. And a seat program to go through design certification is a multiyear process just to get it certified so that's really not a viable alternative.

I understand. Just one more on this. I'm just curious on it myself, if you were to sell a wide-body plane in the domestic market and accept a 25% load factor on it, and you could market that and say, "Look, people are far apart. They're spaced apart onboard." Would you be able to sort of under-staff, under-crew the aircraft? Is the number of crew required for a plane is more about the size of the plane, number of seats you sell? Or is it about -- if you were to say, "I'm only accepting a 25% load factor. I'm only selling 25% of the seats. So therefore, I only need one crew on the 787."

It's largely related to the aircraft type and the number of doors on board, particularly, our wide-body aircraft. You need to have a flight attendant, I believe, man, all the -- this. So today, on our intercontinental flight, we overstaffed based on service so we can bring the staffing back a little bit, but we can't bring it back below the minimums related to the regulations for each aircraft type.

Okay. Okay. I appreciate that. There's a question that came in from the audience. I imagine, Gerry, it's for you. It's, what happened on the bond deal? There's -- I've got a few questions on this, so I'd appreciate your perspective on that.

Sure. So at the end of the day, what that transaction was, was essentially terming out one of, in fact, the principal bridge that we did back in March, the $2 billion bridge secured by a nice large pool of aircraft. So timing was off a little bit. It happened to be the week after the news broke that prior weekend about Berkshire selling out of the airlines, which I don't think was new news to most people, but I would say that it had a pretty dramatic effect on the capital structure of all the airlines in not a positive way. But we've started the premarketing and thought it was worth at least finishing conversations with investors. But at the end of the day is there was no compelling reason for us to do that transaction that week. And what was offered to us was not what we had targeted going into the week. We thought pressing pause was the right decision, the smart decision. We continue to have good dialogues about structure. And we've got time to deal with it. And we have some other things to focus on right now.

Okay. Now that some time has passed after the $1 billion or so equity raise, when you think about that now in retrospect, particularly given what you just mentioned about the bond deal, you wish you'd done more? You wish you'd not done that at all? Or do you think it was the right size?

Hunter, there's always a balance there. And to be honest, there never is a right size for any of this. But given kind of what we were targeting, balancing equity versus debt, knowing that we had a target for liquidity and wanting to maintain a good balance, that was the right size at the time. It was a well-executed transaction.

Yes. Okay. In the event that you guys decide to -- or if you're forced to, I should say, implement mass involuntary furloughs, one of the furlough protections that the pilots have in their CBA is a mandate that United remove seats from its regional aircraft. Is that -- I mean, physically remove them. Is that something that you think you're going to have to do? Do you view that as sort of just the cost of those types of furloughs? Or is that sort of an area where that's probably the most you'd be willing to go before pragmatically things just became too hairy?

I'll take that. We are -- we'd rather not remove them for all the obvious reasons, primarily the expense to do so, although it's minimal. But that being said, we have the engineering work being worked on right now, and we will have them removed by October 1.

But you are doing it?

We are working on the engineering part of it. We haven't actually started to execute the project, but we are beginning to -- we are preparing the project, doing the engineering work so we can execute it and be done by October 1.

Okay. Thanks for the answer. I appreciate that. That's pretty clear. Let's see. Here's a bunch more coming in here. Sorry. Oh, I just lost it. Okay. Here's a basic one. Gerry, what's the -- we know your minimum cash balance is $2 billion for your covenants, but what's the minimum amount in this environment today that you feel comfortable having on the balance sheet from a cash perspective?

Minimum and -- well, I guess what I feel comfortable with is more than I used to feel comfortable with.

Right.

We targeted, based on running stress scenarios off of sort of a 9/11 situation plus, like take 9/11 in a recession with high fuel prices, what did we think we needed, That was how we came up with $5 billion, which has been our targeted minimum liquidity for quite a while. Obviously, we -- and I don't think anybody use this type of scenario as the stress. But going forward, I can tell you the minimum we're going to be comfortable with is substantially more than $5 billion, which is why when we look at what are our next steps in the process of rebuilding, it's going to be a focus on liquidity and balance sheet. We will rebuild the balance sheet, which means that as we turn into a free cash flow positive situation and generating cash flow, before we look at going back to making investments for growth or discretionary investments, we're going to be very laser-focused on that balance sheet.

If you were in charge of the Compensation Committee here at United, and I don't want you to overstep your bounds and realize the Board is your boss. But what -- what metric would you suggest that the Board emphasizes more than any other for executive compensation over the next 2 to 3 years starting in calendar year '21? You may have just said it. Is it deleverage -- is it a leverage metric? Is it a -- is it still a margin metric? Is it relative? Is it an absolute number? I mean, is there some sort of target, we say, "Gee, I want to get this company back down to under 2x debt-to-EBITDA," or something like -- what do you view as the most important metric that's sort of like a North Star for management over the next couple of years?

Well, I think over the next couple of years, our focus, as I said, is going to be rebuilding the balance sheet. That's my focus. If that's the way I'm going to be measured, so be it. But look, I think generally, from my own personal view, having gone through now, I don't know how many cycles this might fit forward. This is an industry where there are times like this where compensation for management is not going to be as good as it was over the last few years. That's the nature of the industry. So I still think that it's best to align executive comp with our shareholders, with the rest of our employees and kind of keep that balanced appropriately. It's a little bit of a moot point for the next few years because, keep in mind, we do have the limitation under the CARES Act that caps executive comp based on 2019. And we will be in compliance with that. If we take the CARES Act loan, that's going to go on for a number of years.

Yes. I'm sorry, I'm not as familiar with the -- I didn't read the 8-K that you filed this morning in too much detail. I've been moderating panels literally all day long. Can you -- but it looks like, from what I could tell, that you said things were a little bit less worse than the time you provided the guidance originally, if you want to call it guidance, or commentary, let's say. Andrew, can you give us a little bit more color on maybe what the 8-K did not say that -- I can pick up the 8-K and read it when we're done here, but give me some more color to help me contextualize the comments in there today, please?

Sure. The 8-K indicated that in the July schedule, we're planning to be down 75%. And so that's a pretty substantial improvement versus where we are today, which is down, I think, about 88%. So we're seeing, for the first time since April, where we -- we're running 12% load factors and cancellations were through the roof, no-shows were through the roof, we're now seeing a lot of this start to stabilize. So our no-show factor is still higher than last year, but it's returned to the ZIP code of reasonableness, I would try of think. Cancellations are coming down. And we start to see North American demand start to inflect and start to look a little bit positive. Now it has a lot -- long way to go before it's a decent number, but it is starting to look positive. As well as certain parts of Latin America and so we're bullish by that. International, in general, still does not look great, has not recovered to any extent that's meaningful at this point. Most of our international flying, by the way, is being driven by cargo more than passenger loads at this point. So we're running 20-something percent load factors on our global flights. And it's a very limited schedule at this point, but it's based on carrying cargo more than passengers, at least today. But when we looked at the data, we looked at commentary from our corporate clients about when they intend to start flying again. And we see these positive slopes on many lines and better inflation factors. We thought July was the time period to ratchet up the capacity just a bit, so we'll be down 75%. So that's the data we're seeing. That's the reaction to the data we're seeing. That's only for the month of July. We'll assess over the next 2 or 3 weeks, what we want August to be like. It may be higher than July or lower than July, then you know where demand is.

And the yields that you're booking right now, you're running through the P&L as the flight is carried out. These are still predominantly yields that you sold and locked in months ago, I would imagine. How -- of the modest uptick in bookings that you're selling right now, late summer into the fall, is there anything you can share with us around the sort of yields that are attached to that volume at this point in time?

I -- I won't give you the exact number, but I would tend to think our pricing philosophy really hasn't changed all that much. And we've been very careful with our RM systems not to -- particularly when we look out into Q4 and Q1 of next year, not to be wide open to sell only low-yield tickets that start filling out airplanes. Where we are [ alternating ] seats that there is demand in the fourth quarter and first quarter. But we're -- in the short run, I would say there's modest pressure on yields, but not -- hopefully, not all that significant based on the way we're pricing and managing our product right now.

That is interesting. That's interesting. And what are you seeing out there just in terms of the publicly available fares that have been filed through ATPCO? I mean like are you seeing a lot of relaxation in traditional rules and fare rules and things like that? I mean is it kind of a free-for-fall out there in the market? Or is there just so much capacity that's been pulled out that this has been able to still maintain some sort of rigidity to the pricing structure. But how fragile is that?

I'm not sure I know the answer to that. But I think things, from a pricing mechanism point of view, seem pretty normal to me.

Okay. Gerry, what's the lowest feasible amount of gross CapEx for United in '21 and '22? You're muted.

Oh. Carry on.

All right. This is why face to face is better.

Exactly.

Anyway, the other half of the 8-K we filed this morning kind of gave some guidance on CapEx in '21 and '22. So when you think about 2021, we talked about, on the earnings call, the aircraft that we expected to take delivery of through the end of next year. Essentially, it's the aircraft that production has already started. And with those aircraft, and regardless of whether we end up leasing them or owning them, they're included in our adjusted CapEx. But we believe next year, we'll get close to $2 billion in adjusted gross CapEx. The vast majority of that is aircraft. So non-aircraft CapEx is only going to be several hundred million dollars. And then in 2022, we don't expect to be required to take delivery of any new aircraft. Now if you think about that, I'm talking largely MAXs. That's essentially what we had in 2022. But I don't expect to have to take any of those. And looking at non-aircraft in 2022, right now, we expect it to be below $500 million. So in a normal year, non-aircraft CapEx was running $1 billion to $1.5 billion. And we're taking it down to really just what we have to do to maintain the operation. There's always going to be some IT CapEx we need to do. There's going to be some facility CapEx. But nothing in there for growth or discretionary CapEx. And as I said earlier, the focus for us using our excess free cash, as we start generating it, is to go to the balance sheet, not to fund growth projects or whatever.

It's interesting that you said you don't have to take delivery of those planes. You don't have to take delivery of any planes, Gerry. So what do you mean by that? Yes, that's -- what do you mean by that?

Well, it means that we're not done with our discussions yet, but this is where I expect to come out that our delivery schedule will not have 2022 aircraft. Now one caveat, so we get to the world 9 months from now, 12 months from now, where the world is looking much, much better. And are there a handful of aircraft that can offer for the right -- in the right transaction, could we be enticed to take them? That's not today's issue. That's an issue for 9 months, 12 months from now. But I don't expect us to be required to take delivery of any aircraft.

Is there expectation or requirement to start making PDPs again on the MAX after the recertification flight occurs? When do those start-up again?

So our CapEx number always include PDPs that we owe in that period. So depending on where we come out with our ultimate delivery schedule and some other factors will dictate what our PDP schedule will be. But our numbers for CapEx this year, next year include any expected PDPs.

Okay. So when -- but do you know when the MAX PDPs start up again? Is it after the plane -- is it when Boeing resumes production? Is it after the test flight? Is it after certification? Has that been or has it not? Is that -- is all still being negotiated?

I think every airline is probably a little bit different. Depends on what's already been put up. It depends on what may have been agreed to in prior settlements. So I think that just depends on the airline.

Okay. Before we let you go, Andrew, I'd like to get your opinion on this co-branded credit card. You're the credit card guy at United. And I'm curious how you're going to go with your bank partners, how you're going to go over with Chase to ensure that this very small percentage of high-value spenders that makes up probably a disproportionate percentage of the co-brand revenue, how you keep them engaged during a period of prolonged depressed business travel? And what sort of actual changes you and Chase together can make to the perks of the program that might evolve with how consumer spend and how business travel potentially evolves?

Sure. It's a really good question. We -- our back book, our holders of the credit card have been with us a really long time. And clearly, going forward, there may be less new acquisitions for a period of time related to the economy as we see it. But our back book has been a really strong, loyal following of customers for literally decades, and so we have a high degree of confidence that there continue to be invested in United and invested in the program. And they've survived many cycles. They've been through many recessions, in fact. And that's what gives us the history of this. The recession-proof nature of it is what gives us a high degree of confidence. That being said, the marketing department, along with Chase, are working on, in fact, how do you continue to engage people even more through different programs, different spend incentives, what you get bonuses on, what you don't get bonuses on. And so there's a lot of creative work being done in that space. And we would expect to see more of that out in the marketplace over the coming months. So we feel -- I think, we feel pretty good about that. I do feel like we should -- could see fewer new acquisitions for a bit of time as we kind of go through this rough patch over the next 6 to 12 months. But these are loyal followers and flyers of the United Airlines that have been with us for decades.

I'm wondering if there's a way to do something like a co-co-brand credit card, where if you're a business traveler and you value lounge access or whatever it might be, but you're just not traveling as much. Could you have an Amazon logo and the United logo on a shared credit card to sort of countercyclical, that type of thing to where you're still relevant even in an evolving landscape of spend?

I think that's complicated and really hard to do in the short run. And by the time we figure that out, I think we'll be on the other side of this issue. So -- but it's definitely something that they maybe think about for a long -- the long run in terms of a club type product, club being multiple businesses in the same scheme. We've thought about that in the past, quite frankly. It is hard to come up with economic formulas that make every member of the club feel equally compensated or fairly compensated. So we would have to work on that. I don't know if that could be accomplished or not, quite frankly. It's awfully complicated. But the United Airlines MileagePlus is one of our best assets. It's a really amazing program. And the tenure of our customers, the tenure of our credit card holders is unbelievable. And their loyalty is driven by, not just the last few months, but over many, many cycles. And that's why we have a high degree of confidence in the credit card and the program itself to continue to drive value for, not only United, but for our frequent flyers.

Okay. Well, Gerry and Andrew, thank you, guys, both, really very much. I really appreciate you making the time. And good luck out there, and look forward to seeing you guys soon.

In person.

Thanks, Hunter.

Thank you so much. In person, exactly. Bye.