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

Hi, and good afternoon, everyone. David Vernon with Bernstein, covering airlines and transports. Welcome to Day 3 of our 37th Annual Strategic Decision Conference. Our last event of the day is with United Airlines. We are joined by Scott Kirby and Kristina Munoz. We are going to start off with the obligatory disclaimer, and Scott is going to give us some early introductory comments, and then we'll jump right into Q&A. If you have a question during the presentation, go ahead and reach out to the right part of your screen there. There is a place where you can log a question. We will try to process that into the queue. With that, Scott and Kristina, I would like to welcome you both to the conference. Thank you both for attending and hand the mic over to you.

Thanks, Dave. 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 and now to Scott and Dave.

Well, thank you, Kristina, and thank you, Dave. I'm looking forward to this being the last investor meeting that I do virtually and doing more and more meetings in-person, which for those of you who haven't started doing it yet, I have, it is -- you don't appreciate how much you missed it until you start doing it again. So good to see you, but look forward to doing it in person. I'll start in brief by saying thank you to the whole United team for just an amazing job in the last 15 months of getting through the pandemic as well as we did. If you remember back in the last weekend in February starting to coming out of the view that this probably was a global pandemic, even though no one was recognizing it yet, and we immediately started buckling down on what it was going to take to get through the crisis and taking actions on the cost structure, on capacity, on financing alternatives. But that really set the table for what I think is going to be the world's leading global airline on the other side of this crisis because it established a tone of leadership, culture of moving fast and taking decisive action and not waiting for the consensus of what everyone thought was going to happen, being willing to lead and forge ahead. And you saw that throughout the crisis, whether it was in safety and health, the first airline to require mask, the first airline to have a partnership, our CleanPlus partnership with Clorox and Cleveland Clinic, the MileagePlus holdings financing, transactions, and the list just kind of went on and on and continued with our sustainability announcement on sequestration, sustainable aviation fuel, our partnership with first of its kind electric aircraft with Archer Aviation. The announcement today of ordering 15 aircraft, next-generation, supersonic aircraft that we're excited to do at United. And all of those things, and you combine it with kind of -- not kind of changing the frontline culture. If you fly United, those of you that have -- we're not perfect, we make mistakes, but -- like everyone, but it feels different. And it is different at United. And I'm sure we're going to talk about the structural cost changes and things like that, that we've done. So I'll spare from that. What I would say to investors is the one underappreciated facet that is different at United, it's going to set United apart in years to come is the culture change that has happened as we've gone through the crisis with both because of the customer and by trying to lead and be innovative. We've seen lots of examples of it, whether it's Boom here today. But even for the high-profile public examples that you've seen, there are literally hundreds of changes that are unique to United that no other airline in the world is doing. That have happened -- that are driving cost efficiencies that are providing a better experience for customers and really is what I think is going to make the difference in having -- in a few years, you're going to look back and say, "Well, of course, United is the leading global airline." You all have all the reasons well, 7 best hubs and this and that and the other thing. But the reality is what's fueling it is the culture change that has happened at United. So we're excited for the future. We're excited to see the light at the end of the tunnel, the road recovery, not exactly sure how long it takes, but confident on the recovery, and I'm sure we'll talk more about that today. But we are glad to be getting through the pandemic and looking forward to being the best airline in the world on the other side.

All right. Let's start with kind of where we are in the recovery. How are business levels trending sort of generally? Where are we in relation to whichever benchmark you want to use? I know we all keep looking back to 2019 as if that was the only benchmark we can think of. How would you think about framing this for us kind of where we are today?

Well, our United business is roughly 1/3 domestic leisure travel, 1/3 domestic business travel, 1/3 long-haul international. It's not exact, but it's close enough for this discussion. And when the pandemic hit, obviously, it was much worse on long-haul international and business demand. And so United actually had a reasonably wide margin, the biggest headwinds of any airline coming into the crisis. And one of the things I'm really proud of, if you kind of -- if you go look at whether it was cash burn, nobody is measuring cash burning, whatever the financial metric you want to look at. We've been #1 or #2 basically every quarter even compared to domestic only carriers that don't fly long-haul international that are primarily leisure. That's a pretty amazing outcome. And today, where we sit is that domestic leisure business, I think, is back at more than 100%, which indicates kind of the desire, the pent-up demand, but also the desire to connect and reunite and get out and see the world. Business demand domestically is still down probably 75%, but it was down 80% a month ago, 85%, 90%, 2 or 3 months ago, it is beginning to gradually recover. My expectation is that it's really not going to recover until people are back in offices, which I think is going to happen post Labor Day. I have -- more and more people I talk to, I have tons of anecdote, that seems the consensus that companies are going to start to be back in the offices post Labor Day. That allows you to start having business travel. So I think we'll see an inflection point. A bigger inflection really coming in 2022 when new budgets are in place. And -- but I don't think it will ramp up 100% immediately. But by the time we're in 2023, I expect business travel will be back at 100% of 2019 levels, even including growth for GDP. And then finally, international borders, it's another 1/3 of our business, are still mostly closed. And as they're starting to open, we see huge demand. Every time another country in Europe opens up, it's Katy bar, the door for bookings, and they go through the roof. Again, indicating huge pent-up desire for travel. And so that's just a matter of timing. And my guess is Europe is going to hopefully open before too long. Asia will be a little longer I think before it opens up. But kind of if you look at those 3 leisures back 100%, business demand is recovering. We could certainly see a reasonably confident path towards that recovery and international demand really just depends on the politics and border openings.

Okay. And what about fare allowance, right? You gave us a good overview of where sort of the flying activity is. How has the fare environment been during this early part of the recovery and is there anything about the recovery in fare levels that's surprised you?

Well, I guess it surprised me with the number of -- the amount of -- the amount of flying in a world where demand is still down a lot. It's recovering, but down a lot, the amount of capacity that's in the system and supply and demand is what it is, Econ 101 that I think mostly across the industry led to lower fares. We do see that improving as you get into the summer. At United, we're back to close to flat on leisure yield, which is good, but we have less capacity in the system than some others. But we're back to close to flat there. Obviously, international is not opened yet. So it's kind of hard to compare there. And then there's a mix of effect of business demand isn't back. All of it, though, is that's sort of short-term noise where the fares are now. I have confidence that as demand is coming back, fares are likely to come back as well. My guess is the pricing environment, I'm pretty sure, the pricing environment for long-haul international is going to be quite a bit stronger than domestic because the supply-demand balance is going to be different there than it is domestically. But I expect okay pricing domestically and strong pricing internationally.

Okay. And what -- how does that set us up from a mix perspective, right? You gave us the 1/3, 1/3, 1/3, domestic leisure, international, et cetra. As you think about the different levels of profitability across these different segments, right? Should we be expecting more operating leverage as international comes back? Or can we also see some leverage given the amount of cost we've taken out of the system before international starts to reopen?

Yes. We said, I think on our last earnings call that we -- business demand in long-haul international got back to 65% of 2019 levels, we thought we could -- that's about what it takes to get to breakeven and getting within shouting distance of that. That includes the cost takeout efforts that we've had. But I expect both of those to be well under recovery. They're already well under recovery and improving, but to be significantly better, certainly by -- well, just even in the months to come. I'm not sure the exact time. We're seeing continuous improvements. They already talked about business demand. I think the next big step-up is probably September. And international, I think, particularly Europe, we'll get more borders open. This summer, there's a lot of pressure to get them open, and that's going to help internationally even sooner.

Okay. All right. And if you were to think about maybe how the profit leverage to those segments has changed through the crisis? Has there been any sort of material shift?

Well, I would have called it domestic and international. I think of it as that level profitability, not individual passenger profitability level. And whether you said this happened during the crisis, I mean, obviously, with international -- long-haul international close, that's less profitable right now. But I think more importantly, is looking a year or 2 years out. For us, United was unique. We have had the largest global network of any U.S. airline pre pandemic. That's by virtue of where our hubs are New York, Newark, Dallas, San Francisco, even our interior hubs, Chicago, Houston, in particular, have more international demand than the other interior hubs. And so we were just much larger internationally. And I expect the international environment. It was already more profitable for us than domestic. I expect it to accelerate and get meaningfully more profitable. My guess is across the board at all airlines, domestic margins are going to be under pressure because demand is going to grow faster than -- our supply is going to grow faster than demand domestically. So my guess is, I think we'll be able to expand -- I hope we think we'll be able to expand, certainly, EBITDA margins, and it will come from a larger expansion internationally, balancing kind of more pressure domestically.

And what about the difference there between international and domestic? Like why are you confident that the supply response will be as strong internationally as it might be domestically?

Well, because there's been structural change internationally. Essentially, every ULCC that was flying long-haul international, which they weren't really low-cost carriers. I mean the business model doesn't work to be a ULCC long haul. And -- but they all went out of business. They didn't just go out of business, they stopped flying, one just per region, they all stopped flying. And so that's a structural change. Most of the airlines around the world that flew big 4-engine airplanes, whether 747s or A380, the big airplanes with lots of seats, retired -- permanently retired them. Those airplanes are gone. Lots of airlines around the world, including here in the United States got rid of wide-body fleet types. A year ago at this time, if we were on a call like this, everyone -- the consensus was business demand is permanently impaired by at least 30%, and international is never going to come back. So a lot of people made decisions based on that, got rid of airplanes and it's a structural change. And the other structural change is I think all airlines, including United, are focused on the core part of their network that work. And in a pre-pandemic world, if you're flying something that was losing a lot of money, canceling it was a hard political PR employee issue. And so you kept decline strategic flying. But in a post-pandemic world, all you have to do is not restart it. And it sounds like more and more airlines. It will be good for them, too, are going to do that. But you combine all that stuff, the international environment is just going to be much better than the domestic environment.

And do you need business travel to come back for that? Or do you think the introduction of the premium products, the differentiated segmentation of the cabin is going to help you kind of pull forward some of that international profitability without a big recovery in business travel?

Yes. Well, one, I think people -- there's probably a misconception about international demand. There's much more real premium demand to fly internationally for leisure, more premium leisure than there really is premium leisure domestically because the difference between an economy class seat and the first-class seat on a domestic flight is nowhere close to the difference between an economy class seat and a Polaris seat when you're flying overnight to Europe. And so there's huge premium demand. We already see that in our bookings when we reintroduce service to Iceland, Greece to Haiti, places like that, big premium. The other thing I expect is the geography that's more dependent on business demand is Asia. But I would also tell you that the corporate accounts that we talk to who have business in Asia, the place they are most anxious to go for business travel is to their factories, their partners in Asia. So if anyone's going to be -- business travel of going to a conference in Las Vegas may not come back 100% right away. But I think the moment you can go to your factory in China without a quarantine, there's going to be huge demand to do that because you haven't been able to do it for 1.5 years. That's more essential from the business travel and some of the other travel we're talking about. All of which makes me feel pretty good about premium demand once borders are opened.

Let's talk a little bit about what you're hearing from corporate customers about that recovery in business travel, right? I think the initial sort of lazy bear case on airlines was too many seats, not enough flyers, fares low. It feels like domestically fares have stabilized, maybe better than we -- faster than that bear case would have predicted. How are you feeling about that recovery in business travel? And what are you hearing directly your corporate accounts about whether they're allocating more budget for travel, opening the flood gates, if you will, like how are you -- what are you hearing from your customers on the recovery in business travel?

So first, I'll start with my opinion, which is the business travel is going to ultimately come back to 100%. There will be some changes. Some of that will be new commuting business, but that business travel is going to come back to 100%. I think it's going to take a couple of years, but it's going to come back to 100%. What it's worth, in April of last year when we turn on [ CNBC ] or listen in to earnings calls and everyone thought business travel was best case permanently impaired by 30%. We sat down at about a 2-hour executive team meeting via Teams where we talked about it and reached the -- at that time, not just minority, we were a minority of 1 opinion that business travel was going to come back 100%. And for what it's worth, the rest of the world is migrated today. And if you talk to our corporate account, I think they would still by and large, tell you they think business travel is going to be down 10%. But the same people a year ago would have told us down 30% to 50%. And that's what's happening. My first job out of the air force academy working at Pentagon, working at economic analysis office with some grizzled economists who've been there forever. And one of the things I remember them saying is you should ignore survey data. What people say they're going to do and what they actually do are rarely correlated. And anyway, anyone interested in behavioral economics is like a further proof of that. But as you watch, like I like telling the story, I talked to one CEO, who was trying to help me as we went through this in May of last year, said one of our top 10 corporate accounts, our business travel is going to be down 50% permanently. You got to prepare for that. By the fall, while we realize we got to do 100% of our customer-facing client, but our internal stuff, we don't have to do. So I would have met down about 25%, they're about half now. And in January or February, I talked to the same individual, and they said, like we've hired all these new people, we've lost our cultural connectivity, we're about training these young people that come in and get them into our culture and like -- and they don't know. So at least for a year, we're going to have to travel more than we did. And I just tell that story, that's like how people's thinking of involved and having done it personally. Once you get back on the road and travel, you -- having not done it for a year, you realize how much you missed it, how much you got out of it. I actually am pretty sure that I'm going to -- I'm going to spend less days in the office and the headquarters of Willis Tower, but more days on the road traveling than I did before. I think it's a new appreciation for the value of establishing human connections. So you can put me firmly in the camp of believing strongly that business travel is about relationships. It's not about transactions, and it is going to come back.

And is there additional sort of color you can give in terms of like how travel might change, like whether it's the heavy users, consultancies, the bankers, like, is it a change in frequency of trip or duration of trip? Or like what else are you hearing from your customers on the corporate side around what this...

What you hear from people is we're going to do less -- the way that they now say that you'll hear people that they're going to do less is we're going to do fewer at the internal meetings. But really, a year ago was we're not going to do internal meetings anymore. Now we're going to do fewer, but we're going to have fewer people out there. That will also change. You also hear the -- I would go to see a client for a 2-hour meeting and I would fly overnight to London and back for a 2-hour meeting. I'm not going to do that anymore. Well, that sounds good until you're an investment banker and your competing bank gets a deal because you tried to do the sales call on Zoom, and they showed up and went to dinner with someone in London. And that's the last time you decided to skip and took the flight because just losing 1 deal it's not worth it. That's at least what I think. But those are the things that you hear. The one thing that I think will be new in the form of travel much newer than it was before, is we've sort of half joking people that live in San Francisco or New York or somewhere that trade their daily 2-hour commute by car or rail for a once-a-month 2-hour commute by air. So if you work in Silicon Valley, we used to have a grueling 2-hour commute by vehicle on the land. And now you've moved to Boise, Idaho or Denver, Colorado, but you still got to be back in the office for a week out of the month in person and so you fly in and stay at a hotel. I think that there's a fair bit of incremental travel associated with that.

That's interesting. And what about consumer behavior post pandemic? How do you think the leisure travel might change a little bit, whether it's advanced booking days, willingness to pay up for a premium product? Like how do you think about how the consumer appetite for air travel is maybe changing a little bit through this experience?

Well, at least in the near term, there's big -- huge pent-up demand for travel after being on lockdown, pent-up demand for experiences and also money in their pockets to do it. Savings rates are way up, durables for consumer spending have been up dramatically throughout the pandemic, whether it's home repair, equipment or buying cars or buying washing machines. But if you bought a washing machine in the pandemic because you couldn't spend money on restaurants or going out or going on vacation, I mean you already got a washing machine, you don't need a new one next year. So I think people have a lot of money to spend on experiences and the -- and a lot of money in the bank, all the Fed policies have led to lots of money in people's pocket. And so I expect leisure demand to be really, really strong. And that's not permanent. But I think that's for probably a couple of years. If anything, I would postulate and I can't prove this, that demand for travel, 2 years from now will be higher than you would have thought from GDP because having not done it for 1.5 years, makes it all that much sweeter to get back and doing it again. And many people get tired of it. But I'm guessing the answer is no. That once you're able to get back and doing it, having not been able to do it for a long time, it's going to be harder to take it for granted going forward. And so if I was guessing, and that's just a guess, I would guess that if anything, it will be higher just because the desire for experience is more tangible.

And I guess, is during this period of time, do you think there's going to be an opportunity to differentiate yourself based off of service as opposed to just the availability of the seat? And is it going to be -- there's always this discussion around low price wins or maybe there is a premium that you can extract. Like where is your thinking on that debate right now?

Well, absolutely. I think more -- we already see it. More and more customers are choosing United Airlines. I'd love to spend more time, if you want me to, I will, talking about why and how, but over a 30-point improvement in NPS last year, the biggest improvement, J.D. Power of any airline, on both metrics that J.D. Power measured. It really -- it feels different. It is different when you fly United Airlines, getting rid of change fees of the ConnectionSaver program. What we're doing to eliminate delay codes for employees. We are convincing our front-line employees that when we tell them, we want them to do the right thing for the customer that would really mean it. And the experience is different as a result. If you're a gate agent at any airline, and you spent your whole career being forced to slam the door on a connecting customer. And then somebody from management comes and says, "Hey, we want to do the right thing for the customer. And you just have 3 people scream at you. The airplane is right there still connected to the gate. I can't see it. It was your fault that my connecting flight was late, please let me on the airplane." And you couldn't do it. You don't believe it when people tell you to do the right thing for the customer. And those kinds of changes really are making the experience different at United, and we're doubling down on it. And we're not just focused on price, we have competitive pricing, but getting more and more customers to choose United. I said it even in my opening, I didn't dwell on it, but in my opening, I think that's going to make a really big difference. And we're uniquely positioned, I think, to take advantage of that given where our hubs are.

Well, since you offered, why don't we dig into it a little bit? What are the 2 or 3 things that I as a relatively frequent traveler, and we're going to experience differently in the United experience post pandemic from before?

Well, I think more than anything, it's going to be how you feel you're treated by United employees as opposed to we are doing a lot. We got more exciting announcements coming on the product and investing in the product, and we're going to save $2 billion from structural expense. Not a single penny of that is going to come from customer product-facing initiatives. And in fact, we're going to spend more on those things. But the bigger thing is how our -- how you will interact with the people of United Airlines. And that is about convincing them that we really mean it when we say that we want them to do the right thing for the customer. That's getting rid of change fees is great for customers and customers love them. It's even more important to how employee of United Airlines feels about being empowered to take care of customers. The ConnectionSaver where they're allowed to hold an airplane for connecting customers. That proves to the front line employees that we mean it as United Airlines when we say let's do the right thing for the customers. And they want to, like they don't want somebody standing in the gate screaming at them about something. They want to do the right thing. Everything that we're doing, if you ever fly United Airlines and fly other airlines during an off-schedule operation when there's weather or something like that happening, then you will definitely notice the difference because we're so much more proactive about communicating and telling you what's going on. Even when it's bad news, telling you what's going on and giving you options and having all of that automated to give you options and tell you what's going on. The experience is night and day. And when everything goes well, most airlines, it's very similar. But the way people will treat you and the way you'll feel, particularly when things go wrong, I think, are going to be differentiators at United for how customers feel.

And when would you -- the council on investor and when do you expect to see that in a revenue premium?

I mean, I think -- well, I'd argue you're seeing it right now. My guess is we're going to have the best RASM performance of any airline in the country in this quarter. And that will accelerate as particularly as business travel comes back and frequent road warriors get back on the road and start flying, that will accelerate. But my guess is if you kind of go look at TRASM in the last year, we've been leading throughout. And that's despite the headwinds of international and business demand. We should have been trailing. I think people are already starting to choose this.

Okay. And maybe just out of curiosity, how have load factors been trending on a system basis in over the last sort of couple of months here?

They're going up. And [indiscernible] a chart at the Team meeting and it went all the way back to the pandemic, it was really low, and it went up, a little dip and then kind of some thumbs up, but...

How -- maybe we could talk a little bit about the loyalty program for a bit. How are things like card acquisitions, card spend, attrition, those things that you would talk to an investor about around the loyalty program itself, how have those been behaving in the last few months here [indiscernible] they're covered?

Well, frustratingly, we don't talk about those things as much as we should, partly because of our contracts. We're working to talk about them more. It helped -- and by the way, Chase is a great partner and all the disclosures we did around the financing initiatives. But what I'd say is the pandemic proved the resilience of the loyalty program. And despite going through all this, the loyalty program has done really well. Any metric that you look at. I think one of your competitors published is the data. So I'll just quote the data. But for the last several weeks, spend on airline credit cards, and they're aggregated, but for my wide margin, the largest part of that are now up. Also, passenger revenues, still down 50% or more, 50% for the quarter. And credit card spend is back to over 2019 levels. So a really resilient part of the portfolio and we are focused on ways. And the goal of giving the team is to double the EBITDA of that business. And I think that's something that at United, we uniquely are going to achieve.

Any time frame for that doubling?

I've said a few years. So I guess the -- I have given 4 years.

All right. So I'd love to get your perspective on how you think this crisis is going to impact the industry structure overall, domestically, internationally? I think you talked a little bit before about some of the lower cost, long-haul guys getting knocked out of the market. So we've kind of covered that part. But normally, in a time of crisis like this, you hear about -- and we've seen a couple of start-ups come in, guys, you know very well that are deciding that now is a great time to start an airline. How do you think about that being one of the bigger kids on the playground and there just hasn't been any balls to play with, new guys showing up and trying to start a business?