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

Good morning, everybody, and thank you very much for logging on and joining our call today or our conference. This is Helane Becker coming at you from, still virtually, sort of unhappy about that. But it's the 14th Annual Cowen Global Transportation & Sustainable Mobility Conference. I'm Helane Becker, Cowen's Senior Airline Analyst. And now we are joined by Andrew Nocella, Executive Vice President and Chief Commercial Officer of United Airlines. So Andrew, thank you very much for being here this morning and for joining the conference. You guys filed an 8-K this morning. So before we go into Q&A, I just want to know if you want to say anything about it or speak to it at all.

Sure. Well, it's great to be here. I clearly would much rather prefer to be in Boston today, and that was the plan. And I also clearly would have preferred a different type of 8-K than the one we issued this morning because that was the outlook only a few weeks ago. Clearly, a lot has changed in a very short period of time. When we had our Q2 earnings call and we talked about our outlook, we felt very certain about that outlook, to be clear. And our July performance, in fact, as we put in the 8-K, came in really on plan, and we're really pleased by that. And I can assure you that the August outlook at that point in time was to, in fact, exceed July and we were really on that pace. But unfortunately, just right after the earnings call, the headlines for the Delta variant and what was happening here in the country and around the world really kind of overtook the situation and quickly kind of changed the outlook, which now, I think, reflect in the 8-K that United put out this morning, and quite frankly, what we're seeing around the industry. So we're all disappointed by that. But that being said, we really saw some really significant glimmers of hope in July and where we were going to be in August. We saw great response from surveys to our business customers that they are ready to get back in the air. But all that's been delayed, and it's been delayed by probably 3 to 4 months, more likely early next year at this point than not. The crystal balls had been a little bit foggy to say the least, as we've gone through this crisis. And we at United had never really wanted to get too far ahead of the reality on the ground and in the air, and we think we've done a reasonably good job at that. And the same is true as we look at Q4 now. We're really carefully evaluating our capacity outlook to make sure given where we see demand that we have it in the right spot. That being said, I will say in terms of hope that the last few days bookings, as we pass the holiday, have been better. So I do feel like the situation is stabilizing. It is not getting any worse. So we feel good about the outlook we just put out as a result of that. And as quickly as things kind of went south maybe is the best way to describe it, we also think things can quickly move right and back in the positive trajection. And so we're anxious for that to happen, but we're going to be really careful and plot our recovery to make sure we don't get too far ahead of actual demand.

Okay. And then what about, maybe it's too early, but what about like November, December. You kind of alluded to it in the 8-K this morning that bookings for the holiday hadn't really been affected. And I don't know, are people waiting longer to book again? Or are they, do you think they're kind of comfortable booking now for then?

I think they are comfortable booking now for then, and we are continuing with our RM strategies and making sure we charge the appropriate price points for that peak demand capacity. That being said, we will offer less capacity for Christmas and Thanksgiving than we would have otherwise had planned earlier this summer given where we are today. So we're going to be really careful on our capacity outlook. But we do think the holiday story is still largely intact from an airline perspective even with the headlines we've seen recently. However, what is more difficult is the trough period. So between Thanksgiving and Christmas and clearly in October and early November, those periods are going to be a little bit more or a lot more difficult than we had originally anticipated with simply supply being well ahead of demand from an industry perspective, at least temporarily.

Right. So does that give you an opportunity to, and I don't want you to speak specifically to pricing because I know you can't, but does it give you an opportunity to really think about raising prices? And that, Andrew, in the context of the fact that I got an e-mail the other day from United telling me, if I book, I could get a $67 fare, $67 fares were coming. And I was going to go online to see where I could go, where I could go for $67 or any of my usual haunts for $67. Then I thought I probably wouldn't want that seat assignment. So how should we think about that?

Maybe not. One of the things I've been almost singularly focused on over the last 6 months is how do we build our yields back to at least 2019 levels, if not higher, and what are the RM and pricing strategies that United, uniquely given our network and how we're affected by the crisis could do. What I will say is that we think we were doing a really good job of that. And the July numbers, in fact, I think, show that. And we were quite on the right trajectory. However, the supply/demand imbalance in the trough periods, in September and October, are just really difficult to overcome and yield is suffering. The good or bad news is, the lower yields are filling up seats at an industry-wide calculation at this point, but yields definitely have suffered. And I look forward to the point where we can maybe not send you as many e-mails with that particular price point, and we can get back on track. We were on track just a few weeks ago, and we can get back on track, I think, very quickly. But the next few quarters or next quarter or so are going to be more difficult. Supply has just outrun demand and that it's really difficult to catch back up.

Have you, I don't know if you knew this, but have you been able to figure out like the time cases peak and the time bookings come back, so that as you look with the current variant may be peaking, bookings start to come back, I don't know, last week of September, first week of October. Are you able to tell that?

We haven't seen that just yet. And I do think this is heavily influenced by headlines more than natural data, to say the least. And so we'll have to wait and see. But things moved downwards rather quickly. But they can, I think, move upwards just as quickly. And what we want to do at United is just be careful not to get too far in front of this. I think we've been, the entire crisis, trying to never get in front of it and let the facts determine the answer. In Q3, we did close our capacity gap to most of our competitors quite a bit. And I think when Q3 is all said and done, if you look at the guidance numbers that are put out there, that our TRASM number is going to look really, I think, quite healthy relative to others. So we're proud of that achievement, but we have a long way to go. And we just don't want to get too far out in front of our skis is, I guess, the appropriate saying here. And we'll let the actual numbers dictate our strategy in terms of capacity deployment versus what we feel is going to happen.

Okay. That's fair. And then on the last earnings call, Scott had talked a little bit about the outlook for Europe in the summer months, summer of '22 kind of being maybe back or being the strong, I don't know, the strength that we saw in domestic this year we would see in Europe next year. And yet the U.S. government hasn't been able to get its act together enough to, and I'm being critical, this is my opinion, obviously, to get the borders open. And so do we have to rethink the amount of capacity that you're going to have in Europe or elsewhere internationally this summer, next summer, rather?

So we're really hopeful that given vaccination rates in Europe and the rates here in the United States, which are climbing, that the border restrictions will have been hopefully completely eliminated by then. It wouldn't shock me if there's still testing requirements or you can't travel, sorry, without a vaccine. So I think people are getting more and more used to that. And we've, in fact, integrated the automation in the united.com so people know exactly what they need wherever they're going. So we think it will be much easier to fly and people will be used to this new normal of having to fly with vaccines. And a majority of our passengers, we think, are already in that state, not all, but a majority. So we feel really bullish about Europe for next summer. We had a glimpse of that this summer. We started a few new markets. In fact, we loaded those for sale very late. And those new markets are actually some of our top-performing city pairs because Croatia and Greece in particular, made it clear to the world that they were open for business. And in fact, our customers responded to it immediately and our new flights to Greece did incredibly well. So we feel, I think, really bullish that there will be a lot more demand flying across the Atlantic next year. We've opened up Africa in a big way, expect more of that, in fact. We've grown our Indian presence in a big way, expect more of that because these are parts of the world where we think that travel will be possible. I don't know if I can use the term easy, but with appropriate testing and vaccines, people will be able to travel, we hope, by next spring and summer in those parts of the world. Across the Pacific, it does seem to be a little bit of a slower pace of recovery. And we'll have a wait-and-see approach to that. We're not expecting our Asian capacity to get back to normal anytime soon.

Got you. Well, I'll tell you, I flew to Quito this summer, and it was very easy to fly. We only had to show proof of vaccine, and then we had to test coming back. I would say the only negative was there was a 4-hour wait on the BinaxNOW or NAVICA website the day we were coming back, the day we were testing to come back, right? But the concierge of our hotel fixed that problem for us by getting us a doctor within half an hour. And within an hour, we had our results. So it was fine, and it never occurred to me I would test positive. So I just figured, well, I would go. Anyway, Andrew, that's all very helpful, and I am looking forward to more international travel because there are a lot of places that I still want to go, that are on my bucket list and that you hopefully fly to out of both Dulles and Newark. So I don't know if you can talk about this. But can you just talk about the capital allocation. And I know this is not necessarily your purview, but maybe how you're thinking about aircraft acquisition. You guys announced a couple of big theoretical orders this year, right, with Boom, with Archer, with Heart. I don't know if we'll ever actually see them because they're all predicated on those companies getting the aircraft actually, having an aircraft to sell you. But could you just like talk, so those are 2 different questions. So the first question is talking about how you're thinking about those aircraft and fitting into the United network. And then the other part of the question is capital allocation and how you're financing those aircraft.

Sure. Well, I think maybe at the highest of level, when I think about that question and those companies and those aircraft, really, what we at United are trying to do is prompt innovation. And prompt innovation that is great for the world we live in and the environment that we have to live within. And some of these things may not come to fruition but many will. We have to start somewhere. And so when we think about starting somewhere, we've selected these companies as great partners with great teams that want to innovate and change the world. And we are so pleased to be in partnership with them, to help design products that will ultimately be economically viable for United to operate. We don't intend to operate anything that doesn't work for us financially, and we want to operate aircraft that are very good for the environment in the long run given what our goals are. And that's exactly what these orders are. How they come to be and when they come to be is still a little bit of TBD. There's still a pretty long time horizon between when they'll be operated by United. Hopefully, they all will be operated in some way, in some fashion by United or our partner and really, again, change the world, but you have to start somewhere. So I think it's premature to talk about the capital allocation for those particular aircraft given that they are just really, really far out from my perspective. We are really focused on between now and 2026 United Next plan. And we recognize pre-pandemic that the world was changing. But the pandemic has really accelerated here domestically in the United States, I think, the framework that we need to operate in, and we needed to change our plans and accelerate our plans a bit to be competitive in this new competitive framework we're dealing with here domestically. And the United Next plan exactly does that for us by changing our gauge equation and changing our product quality equation dramatically and very quickly.

Okay. So shifting gears a little bit. What can you do with technology in the next few years to really elevate either the product or your customer, like as a customer, my experience with the airline? What can you do that makes sense, Andrew, from an investment perspective?

Sure. I want to start off with the Travel-Ready Center because the Travel-Ready Center, which I talked about a few minutes ago in terms of making sure that as you begin your overseas journey, you know exactly what you need to do to qualify for entry into those countries is a good example of technology that we think is far in advance, better than all of our competitors, by the way, and remove as much of the uncertainty as possibly can be. So that was a big technology effort that we put in place to make sure that the environment, really, as we transition from where we are today to the end of the pandemic, whenever that may be, it's easier to travel. So technology was just really key to kind of making that happen and really being just an amazing tool that our digital group has come up with. And there are plenty of other ideas that are like that out there that I think make the environment better. The other one that is a good example is we are installing seatback videos on our new aircraft. And I think most of us in the world would simply say, well, now I can go and I can watch that episode of a favorite TV show or something like that on that screen. But we intend for that screen to be a lot more than just watching your favorite TV show. We intend for that screen to ultimately be a level of interaction with the passengers and to make that journey easier and smoother. There's a long way between where we are today and making that happen. But when we think about technology, we think there's a lot of exciting things we can do with that screen other than just have it play back videos is a really good example. The other one, we have projects that we're unleashing. We have recently and we'll continue to do so on how to make the mileage that you hold in your MileagePlus account even more useful to use, where you can combine dollar spend and miles to buy a ticket, aisle seats, get an upgrade and do all kinds of other things at United Airlines to increase the utility of our mileage program, loyalty program. So that is in the works as well. But there is so much that we can do with technology that ultimately is going to make it a better experience for our customers that I'm really excited about it. And actually, maybe the last thing is we are currently creating the gate of the future. How do we create a better environment at the airports, one where the signs are easier to read and you as a passenger know what's going on before you get onboard that aircraft. And we actually have a few gates here in Chicago where we have modified the gate area. And we're so excited to bring these innovations to just on all the other gates we have in our system because it's going to de-stress that final part of the journey before you get on the aircraft and make it a much, I think, easier, more comfortable and understandable path to getting on the aircraft than where we have been in the past. So technology is just amazing. Our team that does this is just amazing and there's just so much more to come.

Andrew, when we flew home from Quito, we stopped in Houston, of course, to connect, right, to get back. We were on a 737 MAX. I have to tell you. It had that new plane smell, and it had the bigger screen in the seatback. And it said, when we sat down, I was in 2A and my husband was in 2B. And it said, welcome, you are in seat 2A. So it told me that I didn't make a mistake because I've been known to go to the wrong row, not intentionally. But it was nice. It was really. So I've been experiencing some of what you're talking about. But that new plane smell, I think that was like the first time I've been on a plane like seriously that new. And it was, the overhead bins were great. Just the whole experience actually was very good and our flight was on time, actually early. And I notice that, I don't know if we can talk about this, but I notice that a lot of times when I'm on a flight, if everybody is on board, the pilots will close up the doors, will tell the gate agents to go ahead and close up the doors and we'll pull away. And I don't know if that's part of the on-time performance that you're going for. But Saturday night, I was flying home, and it was the same thing. There were 2 passengers we were waiting for. And as soon as they got on board, they closed the doors about 7 minutes early, and we landed about actually half an hour early. So when you're coming in 11:00 at night, that was a good thing.

That's great to hear. I'm glad we got you going where you needed to go. I will say that the overhead bins, as you just pointed out, are just such a step change function for us. And it's not just about the fact that you feel relaxed when you get on the plane knowing there's a spot for your bag. It's the fact that we can board the plane so much quicker, and we don't have to deal with bags coming up the aisle and then slowing down the process or causing a potential delay. And so as we get those bigger overhead bins out there, that's going to make our on-time performance, I think, increase quite a bit. So all these things, they're not just individual things, and they all build upon each other to create just, I think, an outstanding product for our customers, one that we're going to be really proud to deliver and one, quite frankly, we didn't deliver reliably in the past. We delivered it sometimes in a very inconsistent manner. Well, the new United is going to deliver it consistently. And it's going to be no matter what aircraft type you get on, you're going to have that great experience. And we're also pleased to make sure that we depart on time as we do all that.

Got you. Andrew, how should we think about inflationary pressure in the business? I've heard a lot of discussion about that on various news organizations reporting on inflation and so on. How should we think about that in your business?

Sure. There are definitely, I think, a lot more headlines across the macro economy related to inflation given everything that's occurred over the last few quarters. There's no doubt about that. When we look at our cost save and structural opportunities, we've cited about $2 billion in savings and a negative CASM in 2023. So we think our savings are going to really offset a lot of that inflation that we see in the environment out there. So we're going to manage our business carefully, particularly from a personnel point of view. For example, the headcount reductions we made during COVID related to M&A headcount are still in place at United. And as we grow back the airline, we're figuring out the things that we don't need to do anymore. We're figuring out the things we can automate with technology to make sure that we can continue from at least an M&A perspective to make sure that we're being as efficient as possible. So we think we've got a really good grasp on this inflationary pressure as we see it today. And I can tell you that there is probably no airline in the country that's going to experience the type of gauge growth that we're going to see over the next 3 to 4 years. And that gauge growth, quite frankly, is the easiest way to manage CASM if that's what you were solely trying to do. We're doing a lot more than that. We're trying to manage margin to be really clear, not CASM, but margin. But from a CASM point of view, these larger aircraft are just, from a CASM-ex point of view, the high degree of certainty of what they're going to be relative to the 50-seater jet that retires and the process. So we feel really good about where we stand from a cost point of view and the cost initiatives we're putting in place, the ability to offset inflation with a high degree of certainty.

One of the big areas that was the standout for United in the last year has been cargo. And I'm just kind of wondering how you're thinking about that. Because, especially in the environment where maybe you thought some of those restrictions on international travel would have lifted and people would travel again and maybe there, it's going to take longer. So is cargo something you're going to focus on again or how should we think about that? Because you were really a leader in that area.

Yes. Our cargo team has just had a grand slam. There's no other way to describe it. And if you look at relative cargo results, it's just 100% clear, there can be no debate about that. The longer that the full fleet of international wide-bodies around the globe are not flying passengers, the more cargo opportunity there is. It's simple as that. And we've taken full advantage of that. We have a large wide-body fleet. And in fact, in the last conference call, I pointed out we weren't going to have any more cargo-only flights because we were transitioning those aircraft back to passenger markets. So I just released 5 777-300s to our cargo division for later this year to put those aircraft back into all-cargo markets based on the dynamics we're seeing in the marketplace today. So those aircraft won't be idle. They're not carrying passengers, but they're carrying cargo at a good yield. We've built up relationships, specialty products. And we have the largest, I think technically, there's one airline in the world that has a larger wide-body fleet than us. So really, what we're trying to do is create a level of stickiness with the revenue trends we've seen during the pandemic for a post-pandemic cargo environment. And the key thing, I think, is really the United Airlines cargo team. They're cargo experts. We put people in those roles and their roles are really very, very specific to the granular knowledge of cargo and to the relationships across the cargo business. And quite frankly, again, they've hit a home run. And so we are working to figure out how we keep as much of that revenue on board United Airlines as we possibly can as we come out of the pandemic. That being said, well, it's a couple of billion dollars in revenue, I think, as everybody knows. We tend to have to point the aircraft to where the passenger business needs them to be because that's the bigger part of our business. So cargo post-pandemic simply can't be as big as it was during the pandemic because when we fly to Croatia, well, that's a great destination and our passengers love going there, there's simply not cargo demand for Croatia like we have when we can focus on things like Chicago to Hong Kong, which we don't fly passengers on, but we fly cargo, and we fly Chicago to Hong Kong. So that's a good example. It's a long answer but really home run. And we intend to continue hitting some really solid hits in the cargo front over the next few quarters.

Got you. And then the other market is, I think, China, where there's probably still a lot of demand. Are you flying, I think you're flying less than daily now, whereas at one point, that was a big market for you.

Yes. Pre-pandemic, I think we had 10 or 11 flights a day to China in total. Today, we fly 4 flights per week. And unfortunately, we're forced to stop the aircraft in, I believe, Korea for a crew change because we cannot leave the aircraft or the crew on the ground in China at this point in time. So it's a really difficult operating environment to say the least. We do look forward to the China rebound. Although right now, given the restrictions on travel, that's just not in the cards. And I would also say that of all the regions in the world, the whole Asian entity, I think, is going to be, at this point, slower to recover based on what we see today than the rest of the world. And our plans firmly account for that on how we allocate aircraft. We would love for China and the rest of Asia to come back quickly, and we'll figure out a way to do it if it does. But we're not counting on that and we are counting on putting the aircraft in other locations until Asian demand warrants all of our aircraft again.

I think we're just about out of time. But real quickly, the 777s that are on the ground, what's the prognosis for getting those back in the air?

Sure. We have 52 Pratt & Whitney aircraft on the ground. And those aircraft represented approximately 10% of our business pre-pandemic to give you an idea from an ASM point of view how big they were. We've gone through an extensive set of analysis and testing of the engines in conjunction with our partners at Pratt & Whitney, Boeing and the FAA and are in the process of returning those aircraft to service. Obviously, given the ups and downs in demand, there are months during this crisis where we would have loved to have those aircraft. And there are months during this crisis, such as where we are right now, where we don't necessarily miss those aircraft. They could otherwise fly for cargo, but we don't really miss those 52 777s today, for example. We'd like to see those aircraft back up in the air sometime late this year, early next year and be ready for full flying by the spring of next year when we believe that Europe is going to be fully open for business. And so we're working with our partners to make sure we can do that. We continue to maintain these aircraft. They're going through their heavy checks. We continue to paint these aircraft. And we continue to have employees to fly these aircraft even though we're not flying them. So it is a burden on our CASM-ex, as you can imagine, to have the infrastructure for 52 wide-bodies that you're not flying. And so when you think about our CASM performance and our relative performance, I think the outlook for Q3, I think, looks pretty solid from a CASM relative to our competitors. But if we were able to fly our full fleet as many of our competitors are doing, I think you'd actually see a much better CASM outlook for United.

Got you. Well, thank you, Andrew. I'd love to talk more, but unfortunately, we're out of time. So I have to say thank you and appreciate your time and your support, of course, of our conference, and we'll be seeing you soon.

Great. Hopefully, next time in Boston.

Yes. I hope so, for sure.

Thanks. Good seeing you.