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

Great. Let's kick off the airlines content for today. And next up is United Airlines, and we have with us Mike Leskinen, who is President of United Ventures. Mike, so much for -- thanks so much for joining us.

Yes, Ravi. Thanks for having me. This is my favorite conference of the year. I love the -- I love coming out here. I think this is the tenth time I've been out, maybe fourth time as a corporate, not an investor, Nice to see you.

I love that -- appreciate the endorsement.

So maybe a good place to start would just be kind of what you're seeing out there. Obviously, a lot of focus on demand trends. We got some updates from some of the ULCC peers this morning, which were interesting. So would love to see what you're seeing out there, both domestic and international demand.

Yes. Let me comment -- answer that, but I'm going to say a couple of opening remarks because my frustration having been an investor in this space and now an executive in the -- on the corporate side is we get too short-termist in the sector. And I know it's easy to say as a corporate and a lot harder to effectuate as an investor because you'll get measured by your P&L mark-to-market each day. But if you go back to 2019 and you look at the margin of each of the players in this industry, and the ULCCs and the LCCs with margins that were 2 and 3x the margin of the legacy carriers, and United really in the back of the pack among the legacy carriers. And then you fast forward to today and you see the margins of the legacy carriers, United kind of the top of the pack with Delta and the margins of the ULCCs and you look at the updates we saw today, which makes today is why I want to open with this, so consequential. You look at the margin guidance for the third quarter from the ULCC and LCC models, you've seen a complete inversion of the industry structure. And I think we need to step back and say why is that? And I would argue that a lot of that has to do with what United Next is all about. And that is us focusing on the high ground where we have competitive advantage, whether that's segmenting the cabin, driving business through our direct channels, driving our cost down by adding connectivity in our hubs and upgauging aircraft rather than adding frequency, et cetera. But really have gone from -- and United also within legacies really getting to the top. And so this is just a fundamental change. And back then, the ULCCs would trade at 2x the multiple of the legacy carriers. And frankly, if one believes that margin profile was sustainable, that was right. Not only should they trade at a premium multiple but they should have the right to grow. So what has changed? I think what has changed is we're not spilling traffic. We're not trying to add new points to the map. We're flying where we have customers today, where we know demand exists, where we can provide a superior product because of the way we run our business. Air traffic control is going to be constrained. The OEMs are going to be a constraint. Pilots are going to be a constraint. There are all of these constraints that the whole industry faces. Those have all contributed to this flipping of the industry dynamic around margin. But I think that -- and I will talk about international and domestic. But I think when you set up, when you think about being an investor in the space, you need to think about that dynamic and what that means for the sustainability of these returns and then think about if this multiple is attractive or not. Now international versus domestic. Look, we just updated our guidance last week. Fuel has moved and we were very clear. We're not raising revenue guidance. So the correlation lag, we're not arguing for that right now. You need to adjust your numbers for higher fuel, bring EPS down. But we reiterated our guidance for revenue because we aren't seeing a deterioration in the aggregate. And maybe that was over-optimism from others or maybe there is some divergence, not just international or domestic. I will say domestic is a little tougher than international but we knew that going into the quarter. There's no new news. And so the question is, is there some divergence within domestic that is causing the different outcomes? And I would say that if you are growing into new markets, putting new dots on the map domestically, the revenue degradation you get from that versus the type of growth that United is leading is very different. And so I'm here to say that macro economy is going to ebb and flow. There is more concern about recession today than there was 3 months ago. So this does not mean head in the sand saying everything is roses. But we are going to deliver on the third quarter as we thought we were going to deliver, and it will ebb and flow. We aren't passing through higher prices from fuel immediately. We normally don't get an immediate reaction. But it is clear that for those carriers that are growing dots on the map, that something is happening that is much worse for them.

Got it. So just to emphasize that point, you don't think it is a -- they are the canary in the coal mine, they're seeing it before everybody else. Do you think it is something specific to their business model? Or obviously, I'm not asking you to answer for them, but you think it is not something that's spilling over to you?

And I'm not going to answer for them, but I will say that the neighborhood we live in matters. And we have a lot of exposure to the domestic market. So there ends up being excess supply in the domestic market. That will impact yields for everyone. But just look at the updates for the third quarter, look at the results for the second quarter. Don't take my word for it and say, how much has each carrier changed their revenue expectation? And I think that, that tells you and we can debate what it is, but I think that tells you that there is a very different magnitude of impact on those carriers that are running point-to-point networks and that are trying to grow the map.

Got it. What are you looking for kind of some of the data points, some of the internal data you have to kind of tell you whether there is incremental deterioration in domestic demand or not?

We follow bookings every day. We have a worm chart. We have worm charts by market that we examine in detail every day. And as a leadership team, we look at once a week. And they're broadly tracking, broadly tracking what we expected. We do try to be very disciplined when we set guidance to set it in a way that we're not always going to have blue sky days. And so we want to make sure we give ourselves a little bit of room, put some contingency in there, and that practice hasn't changed. I like to be able to announce towards the end of the quarter that we're doing a little bit better. We aren't announcing that. We didn't announce that last week. But the results are very solid and we've got nice double-digit margins. And I think we're on our way to higher margins as we execute the United Next strategy through 2026. And the key here is the strategy is working and the resounding evidence of that is the relative margin profile of the industry.

Got it. So as you look ahead to the holiday season and kind of how far your booking curve reliably goes right now, is it consistent with seasonality? Is it better? Is it worse? Kind of what is that booking curve telling you? And also, there's been some speculation about whether the pendulum, which probably swung a little far towards international over the summer, may start to swing back towards domestic. Is there any sign of that?

Seasonal booking curve is following the pattern one would expect. There's no evidence of some acceleration in strength, but I don't want to give any messaging of that but down the fairway. We aren't seeing fuel being passed through as quickly as we have in prior quarters. And so I would be a little cautious about how much I -- if I have a model that I've preached to many of you that when you see fuel move up, you got to move revenue up, I'd be a little cautious about that. But I'm not seeing any deterioration in demand. And I'm sorry, what was the second question?

Whether the pendulum between domestic and international is kind of swinging back towards domestic?

I don't think so. The constraints and structure of the international lanes just feels a bit healthier. In the domestic market -- listen, the domestic market doesn't seem like a demand problem. It seems like if there's anything, there's a supply problem for certain lanes. So international feels really good. Latin America is maybe a little bit tougher than Atlantic. Atlantic was really robust this summer. We took advantage of that. I think that we'll see continued strength into next year. I wouldn't expect another step-up but I think we'll see continued strength. The Pacific is really, really robust. We're starting to see volume into China grow a little bit. I think it's going to grow in a very measured way, and that should accrue to our benefit as we have some disproportionate exposure there. But international feels strong and has stability. Domestic does feel a little bit softer but that's not new news.

Right. When you think of the fuel pass-through, does that happen on a more of a lag than you thought or do you think it just doesn't get to that level or both?

Look, the fuel pass-through, we talk about the correlation between fuel and yield. And it's not causal, it's correlated. And it's correlated because as fuel prices rise, there are certain routes that might not make sense and that capacity has been reduced and then Econ 101, yields start to rise. And that usually lags 1 to 3 months or something like that. Right now, there have been lots of other constraints to capacity, whether that be pilots or aircraft or air traffic control, et cetera, et cetera. And so right now, we aren't seeing as much, as speedy of a fuel pass-through.

Got it. Just last question on this topic. Kind of everything you're saying right now, like did a switch get thrown after Labor Day or is this something that has consistently trended through the summer?

We have not seen any dramatic change in the bookings. So it is -- we're scratching our heads. We are -- we have seen all the reports that came out today. I understand the consequences of coming on stage with what's going on in the industry and I woke up at 4 a.m. reading all the 8-Ks. We are not seeing -- it was this -- the magnitude of what we have seen from peers was as shocking to us as it was to all of you.

Sounds good. Maybe I want to switch to United Next. Obviously, when you gave us United Next going out through 2026 in 2021, everybody was like 5-year view, that's kind of shocking. But you guys...

Isn't that how you'd like to see us run our business?

Well, I do. I don't know if everybody else out there does. But I think it's the right approach. But you guys have done phenomenally well for the first half until you get to your 2023 waypoint so far. Now you enter maybe phase 2 of United Next, if you will, which maybe carried some of the capacity growth risks that maybe some people had. I wanted to expand on your opening comments a little bit more about the differences between United Next and what you guys are doing with gauge and your new aircraft relative to what some of your kind of low-cost peers might be doing with putting new points on the map in terms of capacity growth.

You're right that it was a return to 2019 levels and now it is growth above 2019 levels. I'd say the economy is 20% larger so there's a lot of room, number one. But number two, and I think this is lost. And I actually don't think this is going to be a big phenomenon in 2024, but in '25 and '26, it's a tremendous phenomenon is the gauge growth. And the gauge growth really kicks in for us in '25 and '26. And the MAX 10 being an important component of that, the 321s being another important component of that. That is going to be very powerful for United's margins. And so we have that goodness to come. I guess I've been talking in a bunch of one-on-ones. But the domestic growth that we have is not about adding new points on the map. It's about adding connectivity in the cities we already have, to customers we already have. And so we have much more visibility and confidence that as we grow in that way, it's accretive to our margin, not dilutive to our margins. It is one of the great strengths of a hub-and-spoke model versus a point-to-point model.

But are you concerned that with the others adding more -- it's not just the guys are adding more points, right? There are also other lower-cost carriers who are adding -- who are also doing their own gauge growth, who are adding new aircraft on existing routes. Do you feel there is a risk to the 2026 United Next targets if there's too much capacity on the domestic side?

The neighborhood we live in matters, so I'm not going to sit here and put my head in the sand and say the neighborhood doesn't matter. But you have to -- again, I'm going to go back to the [ opening ] remarks. Look at the relative margin in the industry. It's not an industry where everybody is on the same level and saying, "Wow, this is disruptive. We're all destroying economic value." This is an area where our margins are double digits, expanding to mid-teens. And right now, other carriers have margins that are quite negative. And that is because we have cabins that we can segment. We have distribution that is increasingly direct. We have recoverability. We all have weather. Newark, in particular, has a very tough air traffic control. But we built a system that's robust, and so when those events happen, we can recover faster. And we have customers that is super engaged in our loyalty program, increasingly -- increasing revenue stream that is not cyclical like the underlying airline. And we have a cost profile that, geez, it took decades for this to occur, but we have a cost profile that now has converged as an industry. It used to be that if the LCCs were growing so much faster, there's a juniority effect. But if we grow as well, we can match that juniority effect, number one. But number two and maybe even more critically, pilots are now going to have broad wage convergence, the same for flight attendants and most of our labor groups for that matter. And nobody can buy an aircraft more cost effectively than United. And so our cost of aircraft is going to be very effective. Fuel prices are what they are. And so if you add all that up, that incremental capacity we can grow as cheaply as anyone else, and we can drive more revenue and more premium revenue out of that same tube. That's a very strong setup. It is a nice competitive moat, and it is a setup that I think we'll see increasingly sustainable margins and returns out of United Airlines. And I think our other legacy carriers' peers will benefit from some of those same trends. But it's a very nice setup. And our stock certainly isn't valued that way today, and I don't expect that to change overnight. I think you need to see us put up results and we have been for some time now, the pandemic interrupted it. But we need to tell you what our plan is, and we need to deliver quarter after quarter after quarter. And as we do that, the investment world will start to recognize it and we'll create more value.

Got it. I'm going to turn to cost in a second. Before that, I want to spend some time on international because I think you were the first airline to come out of the pandemic saying that you are more bullish international, international margins than domestic, which was, again, pretty radical at the time, but it's going to turn out to be pretty prescient. And at the end of summer last year, you kind of told us that you thought summer '23 would be 10% higher than summer '22, and I think it was even bigger than that. Do you have a sense of what summer '24 looks like trans-Atlantic versus summer '23, i.e., do you expect the momentum to continue? And second, any thoughts on Asia? I think historically, you've been the only airline that's been slightly profitable going to China. Any sign of that reopening next year?

It's a nice way to ask for '24 guidance before I'm ready to give it. Look, I'll engage in a little bit. As you've seen the world reopen post pandemic, you've seen these spurts of growth to get back to a level of demand commensurate with the GDP between those regions, right? And so we've seen it domestic opened first and LatAm, near LatAm opened second, and Atlantic opened, Pacific opened, now China is opening, right? So if you got that right, you timed that right, you had these moments in time opportunity where you could make some disproportionate gains as an airline. I think United has done that. Our network team has been exceptional in making those calls and making them -- it's not about -- it's just like trading the stock. I mean, it's not about -- if you're early, you're wrong, getting that timing right and we've got that timing right. I think that the step function increase in Atlantic demand has happened. And I think you revert now to trend line growth, which is some skinny multiplier over GDP growth between the regions. So I think you revert to that level. I think the Pacific has a little bit more opportunity. But by and large, the Pacific also has had that step function improvement with the exception of China. And I think the China bilateral agreement will open at a moderate pace, and I think that's what is the right pace for both of our economies.

Do you think it's going to be profitable when you guys -- I know you've already ramped up your flight [ specs ].

We have an incredible franchise business in China and we are excited about a gradual reopening.

I'll take that as a maybe. Moving to the cost side. Obviously, we had the pilot agreements and kind of like you said, there seems to be gradual conversions there. Do you feel like you have a real handle or real visibility on CASM-ex as you look forward in '24?

We are in budget processes now, early stage. There are a lot of inflationary headwinds that we face, labor being a big one. We have a good handle, I think, on the magnitude of the labor headwind. We are quantifying some of the other headwinds. We certainly are going to work very, very hard to get our CASM flat. The key is our relative CASM to the rest of the industry, but I won't share that with you today. I will share that with you when we traditionally would, most likely on our first quarter call.

Got it. So if macro doesn't materially change from here, right, I think a lot of -- you're saying you're targeting CASM-ex flat for next year. Let's say macro doesn't materially change or demand doesn't materially change. Ultimately, it comes down to what RASM, TRASM does next year which, again, like you said, is a function of the neighborhood you live in, right? So is that ultimately what you're looking at to see if your peers kind of are more rational on capacity to determine what EPS looks like for '24?

He keeps trying to back me into a corner on 2024 guidance.

I'm not asking numbers. I'm asking for trend line.

Look, the RASM or TRASM result we put out is not simply a function of industry capacity. We have proven that. We have outperformed on our TRASM for, I don't know, 8 or 10 quarters in a row now. And we're doing that because we are growing from areas of strength. We're growing in a segmented way. We're growing our premium offering. We are increasingly an airline that people choose to fly. If a carrier is charging $200 but has $100 in ancillaries, people -- consumers are starting to understand that. And so I think there is a clear preference. And we didn't realize that when we were spilling traffic to some of those other competitors. So I think that to say that the industry doesn't matter at all would be wrong. The industry does matter, the neighborhood matters, and we have a domestic exposure. And if that market is tough, it will impact us. I think we will continue to outperform. I think we'll outperform the industry on both revenue, unit revenue. I think we will outperform the industry on unit cost, and you'll continue to see our margins that are at the industry-leading level. And I think that, that is the strongest evidence that our strategy is working, and you should spend some time looking at our shares at 4x earnings.

I agree. I'm buying the stock. Any questions from the audience? It's a big crowd but it's quiet. Maybe kind of moving on a little bit to other topics. You're not just IR, you're also President of United Ventures. I know it's probably -- is it hard to focus on some of the kind of longer-term initiatives, whether it's eVTOL or SaaS in this environment? Again, it's easier than it was during the pandemic, but can you give us an update on kind of what United is doing on some of those other initiatives even as other things happen in the ...

Yes, it's not hard at all. It's exciting. This industry since deregulation has not innovated. And what Ventures is about is driving innovation into this industry. That gets our employees excited it gets our consumers, our customers excited. It gets, I hope many of you, excited. The eVTOL industry is going to revolutionize where we live, how we commute, how we get to and from the airport. It's a question of when, not if. We are betting on 2 players right now, Archer and Eve. But I do expect this is like the early auto industry, and there's going to be multiple winners. And so we want to make sure that leading -- that United is at the leading edge of that and making sure our customers have the option as we can make that a reality. We expect that to be later this decade. On electrification of flight, electrification of flight doesn't work for long haul. It doesn't work for large gauge but it does work for short-haul small gauge regional aircraft, and we have a number of investments pursuing electrification. Electrification has a double benefit. When we get it right, it's going to lower the maintenance cost of these aircraft, and therefore, hopefully make profitable to fly some more small catchment area flying around their hubs. And so we're excited about that. Heart Aerospace is a pretty incredible company out of Sweden. It's building a 30-seat ES-30 aircraft and there's a couple of other very interesting plays in that area. Our biggest recent initiative, though, is our sustainable flight fund. And I want to talk about this. This is not about a competitive tool to try to beat up on our other airlines. This is about the new industry dilemma and that is decarbonizing what is probably the hardest industry to decarbonize in our economy. And it's the hardest industry to decarbonize because you need a fuel that is incredibly energy-dense to fly long-haul aircraft. And kerosene is. Batteries are not. Hydrogen is not. Hydrogen is interesting but even liquid hydrogen takes up 3x the volumetric space of kerosene per unit of energy. And what's more interesting about hydrogen is to compress it and liquefy it is going to cause a lot of issues on airframes. And so we believe sustainable aviation fuel is the future. But it's expensive right now. It's expensive because virtually all of the fuel out there, all the sustainable aviation fuel out there is produced in a HEPA-based process from fats, oils and greases and the French fry grease that we collect from all the McDonald's and air travel is not correlated with French fry consumption. So there's a lot more demand for air travel than French fries. And if we collected all the feedstock, we might be able to satiate 5% of demand for sustainable aviation fuel. And so we've launched a fund it now, it's $200 million. We have other airlines that have joined us. JetBlue is an investor in the fund. Hawaiian is an investor in the fund. I think you're going to see Air Canada is a proud investor in the fund. Boeing is a partner of ours because it's an industry problem, and we're going out and finding start-ups that are trying to expand the feedstock to produce sustainable aviation fuel, think algae, think microbes that can munch on CO2 out of a company out of Houston called [indiscernible] Factory. Think about green hydrogen as a feedstock to produce sustainable aviation fuel. And the goal here is not that we're going to turn volumes on instantly, and all of a sudden, 50% of our fuel is going to be produced in this way. But the goal is to improve the technology so that in 2040, 2045 and 2050, we do have that. And so how can you create hydrogen in a way that allows you to use intermittent power? How do you create electrolyzers that are cheap enough that don't use so much precious metals, that you can utilize them when the wind is blowing and you can turn them off when the wind isn't blowing. Because I'm using baseload power to produce hydrogen and then transforming that hydrogen to sustainable aviation fuel, it's going to cost me $10 a gallon. But if I can use power when it costs me $0.02 per kilowatt-hour, I can get it to $4 a gallon. And then with minor government policy support, which fossil fuel has had for 100 years, you can get competitive with Jet A, and then you -- we can travel the way we do. And it's so critical to this world that we continue to have travel the way we do, and we do it while reducing our carbon footprint which is really important. So I think we'll have more and more airlines around the world that join us on this mission, and I think we're going about it the right way. We do have a question from the audience.

I think we have [indiscernible] mic. Can you wait for a mic?

If you could just elaborate a bit on the upgauging opportunity you touched on in '25 and '26. I'm curious, some of the relative unit economics you're seeing today, we've seen between, say, the 321s versus 320s or the -10 versus -8 and how that mix shift of those fleets, what is it today? End of '26, what will look like?

Yes. So that's about a 10-minute answer but I'd be happy off-line to take you through some of the fleet. But I will give you an anecdote. And that is if you think about the incremental seats on a MAX 10 versus a 737-800, 2 pilots, it's going to have about the same fuel burn, a little bit more efficient fuel burn and all those incremental seats come at a very low CASM. And so as we move from adding an incremental flight to incremental seats on the same flight, your marginal CASM is going to be 50% or less on an upgauge approach like that. And when you -- when you're growing the frequency, your incremental CASM is a lot closer to 1 or maybe it's 80% because you have some juniority effect. And so that impact, as you move into '25 and '26 is going to be a major relative CASM tailwind for United Airlines.

And with that, we are out of time. Mike, never a dull moment in this space. Thanks for sharing your time. for sharing your time

It's [ a tiny ] sector. Nice to see everybody. Appreciate it. Thank you.