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

With United Airlines next, I'm very happy to welcome back at Laguna, CFO Michael Leskinen. Mike, welcome back.

Thank you, Ravi.

So no 8K from you guys, which is good. That's the standard.

But can you give us an update on kind of what you're seeing out there and trends in 3Q relative to expectation?

Well, it's a standard, I think, not having an 8-K this business, stable business that is on a reasonable trajectory, you shouldn't have a lot of surprises. But we're not quite there yet. This industry, I mean, I've never been more excited about the transformation that the industry is undergoing. And it's undergoing a transformation, that is customer led. Customers are choosing to fly on specific airlines because of the product, because of the clubs, because of the food, because of the loyalty programs. And that's fundamentally different than the past when customers were choosing basically primarily pricing schedule. Pricing schedule matters but now so much more matters. And so you're seeing a divergence in fortunes based on the airlines that have a business model that's based on the customer and giving the customer choice and giving the customer options and those that had primarily focused on cost. And that's so fundamental to our path to double-digit margins. It's so fundamental to our path to an investment-grade credit rating. And so fundamental to proving out the stability through a recession or whatever next cyclical event. If we start going into an economic downturn at 12% margin, and we lose 5 points, we're still mid- to high single-digit margins with an investment-grade balance sheet with tens of billions of dollars of unencumbered asset, we will never dilute shareholders again by issuing equity in a crisis. And that's what's going to lead to, I think, significant, significant multiple expansion for those players with a higher margin. And you've seen it in the past. This is -- but we need to prove it, we need to improve that margin. But never have I felt more confident about that path. I've been dreaming about this transformation for years and years, but never I've been more confident than this year because this year, despite the results that we put up, despite the results that Delta has put up, the rest of the industry is in a recession. We got hit starting right after the inauguration with a significant decline in demand. And that impacted us, no doubt, and Newark has impacted us in an idiosyncratic way. But despite all of that, our margins have proven resilient. I'm really proud of that. And the other players in the industry that are lower margin, are pivoting and they're pivoting in a way where they are trying to invest in segmentation. They're trying to invest in ancillary products that will give the customer choice. But they're 10 years behind those of us that have been investing in it. We talk about investing in clubs. It takes 5, 10 years to build a club. It takes 5, 10 years to think about changing the cabins on an aircraft. It takes 5 to 10 years to put seat-back entertainment into our aircraft. And we're not standing still. Starlink, I'm incredibly excited about. We invested $100 million over the last year in improving food on our airlines -- on our aircraft. I hope all of you have experienced some of that. It makes a big difference. And so we are a commodity industry that is turning into a customer-centric industry where customers follow, with brand loyalty. It's going to create strong, stable double-digit margins and investment-grade balance sheet. And I think there's a tremendous amount of alpha that will be generated for those of you that see that transformation early.

Got it. So maybe we'll come back to the near-term trends in a second. But just to stay on that theme, to your point, the other airlines are trying to reinvent themselves, and they are behind you. But they're also trying very hard to look like you. So do you think that -- what impact do you think that rate of change will have on the industry? Meaning do you think it's good for all of them to look more like you and that is a rising tide of RASM for everybody. Do you think that that's potential competition where they can say, "Hey, I have a new plane and I have a new cabin and so come to me instead of flying United" kind of how do you think that plays out?

I think there's only space for a very small number of differentiated brand loyal airlines at the top of the industry. I think there's only so much space for that. I do think that there is a very important role for cost-focused airlines to play in smaller and midsized cities, leisure destinations like Orlando and Las Vegas. And there will always be a place for those types of airlines. It's just smaller than what it has historically been. As more and more of the population in the United States has a preference for the products and services that we're offering. And make no mistake, this is not something that like United has done or Delta has done. This is something that the customers are choosing. This is about customer choice. It's just transformational.

Got it. So what do you think this industry looks like in 10 years? Like are we going to have 3 mainline carriers, 3 regional carriers and 3 ULCCs? Or do you think it looks fundamentally different?

I think probably in 5 years, I'll go even sooner than 10, I think in 5 years you're going to have a couple, maybe a few, but probably a couple of players at the top that have tremendous brand loyalty. And then you have maybe a player or 2 in the middle where they're serving mid- and small-size cities. And then you're going to have a constant churn of airlines that are low cost that are serving smaller cities in a point-to-point model place for that. I think that's probably where the industry stabilizes. I think it will be a healthy -- a much healthier industry, frankly, for everyone.

Got it. Speaking of healthier industry, again, I will give you guys all the credit in the world for first going out and publicly saying that there are people who are losing money flying and that's not sustainable and that's going to end badly. So here we are. But given that the industry has now picked up that baton and they are cutting back on that unprofitable flying, do you think them shrinking is good for the industry overall. Have you seen enough at this point? For all the changes this industry has embraced we've had last year and this year, 2 pockets where there's been too much capacity and the industries had to take a bunch of it out, kind of has it now got to a point where this is sustainable going forward?

I'm not going to take debate on talking about others' plans. What I will say, having come from an investment management background, return on invested capital matters, delivering on your financial targets matters. And I think we're approaching a period where that enforces financial discipline on the industry. And so if you are earning a lot of money in some of your southern hubs and the margins are strong, fantastic. If you're losing money, in hubs consistently year after year after year that's not going to work. And I think shareholders are going to increasingly hold leadership teams accountable as they should to deliver on financial metrics. And so I think that's what's healthy around it. And it's healthy because not everyone has been dealt the same set of cards. If you have spent a decade or more building out a customer-friendly model, you can't fix that overnight. And so that's what I think is going to determine the winners and losers. I think it already has. I think that the investment community is starting to realize that, but I still think we're early innings. I think we're inning 3 of that transformation for this industry. I think it's going to be really healthy. We've seen it in other industries. We've seen it in the hotel industry, the cruise line industry, I think, are good analogs. They're not perfect analogs. That's happening in the airlines now.

Got it. So you mentioned in your earlier remarks the path to double-digit pretax margins. How -- can you just give us the kind of big building blocks to get there, right? How much of that is building on this premium product, how much of it is share gain, how much of it is United Next and the new aircraft, how much of it is potentially cost take out? What are the big chunks there?

Look, I think most of it is customer led. It's customers. The demand profile that we see in the premium cabins, in international cabins, even in the main cabin, it seems to be different than the demand profile that some of the lower-margin airlines are seeing. It's fundamentally different. You can see it in the way we're all behaving. You can see it in what we're seeing at conferences. You can see it in the results. You're going to see it in the 3Q results, you can see it in the 4Q results. So I think that's foundational to it, and we're going to have a revenue -- a unit revenue advantage that only widens because customers are choosing it. But on top of that, I think we've been really disciplined. I'm really proud of the finance team at United right now for what we've done on the cost front this year in what has been a recessionary year. We brought our cost down significantly relative to what I thought back in January. Our procurement team has been restructured. We got a new leader [ Bob Rai ] out of RTX that's been fantastic. He's off to a running start. He's got some key lieutenants that are doing a great job, being smarter about structuring our contracts. We're the largest airline in the world, we should get the best pricing in the world. We increasingly are. And so that's been a big tailwind. We've got opportunities to run a more efficient tech ops organization. The team is doing a great job there. It's synergistic with an improved procurement department. And so there's some real, I think, relatively low-hanging fruit on the cost front that we're going after at United, and I'm really, really proud of that. And that's definitely helped '25 relative to what I thought at the beginning of the year. As we look at the '26 and '27, I think some of that actually gained momentum. So we've got some nice tailwinds on the cost front. But in addition to that, we have a gauge benefit. So as Boeing starts to produce more aircraft, especially MAX 9s and 10s, it's going to help us accelerate our gauge story. And that's going to be idiosyncratic for United for 2 or 3 years at least. I'm so really excited about that giving us a nice relative tailwind. So I think we've got a nice cost tailwind. We've got a structurally transformed industry that's driving strong unit revenues. Andrew Nocella and his team, Patrick Quayle done an absolutely incredible job driving the network in a way where this connectivity just feeds on itself. And so I think that you're going to see it come from both. I'm not going to give an idea of is it 50-50, I don't know. But it's both that drive our margin expansion into that double-digit range.

Got it. So on that platform, let's talk about near-term trends and kind of how the quarter is shaping up. Obviously we've heard already from a number of airlines and July was a tricky month for a number of reasons, but there does appear to have been an improving trend in August, September, going into October. What are you seeing so far relative to that?

The strong trends we talked about on our Q2 conference call have absolutely continued. I feel great about it. There was like -- it was like a light switch, late July, early August. And we're seeing it across segments, across industries, really strong. I do agree with comments from some of our competitors that corporate recovery is leading really good. Fourth quarter, international, I think, is going to be really strong. Third quarter. I think we're still working through match and supply with demand at the industry level. And so there's some work to do for next year via tailwind, but really strong. In fact, one stat from my team, we were just going through most recent bookings, if you look at the out bookings, 2 months and more out since Labor Day, it's been double-digit improvement year-on-year. So we just feel really emboldened. I mean that's a short trend, but I mean, the bookings are really strong, particularly corporate going into the fourth quarter. I will remind everyone that for second and third quarter, we had an issue with Newark. And so we booked some tickets at lower yields. We'll see that in the third quarter. So what I expected when we set the guidance in August, so everything feels really, really good. But I want to remind everyone about that idiosyncratic difference for the third quarter. Fourth quarter looks fantastic. As we look for the setup into 2026 based on what we're seeing in bookings, really, really emboldened.

Got it. That really I'm going to hear -- I told Delta as well, I'm a little bit surprised to hear the tone from all of you guys on corporate travel, just given that in the general view that corporate America is somewhat in the cusp of recession, now attendance is up 50% here at Laguna Conference. But beyond that, kind of do you have a sense of what's driving that? Is it actual optimism on the corporate side for '26? Is it pent-up travel from what they didn't do in the first half of the year? What's driving that bounce?

I think it's simple, Ravi. Corporate is the segment that hasn't fully recovered since pandemic. I look around this full room, and I look around the conference, I think this is the top attendance it had. Business travel is coming back. And so I think that there's more to come. I mean we're not counting on it, but I think it's more to come and I think it makes sense relative to the levels we saw prepandemic that, that's -- we still have some more catch up there.

Got it. Let's talk about Newark. Obviously, kind of unfortunate disruption there. So you said trending towards the 0.9% drag that you had expected in 3Q so far. But how is the Newark resolution? And there seems to be some ongoing developments there kind of trending versus your expectations?

I'd tell you, we couldn't be more grateful for the administration and Sean Duffy and the team and what they're doing to drive more resiliency and stability into the system, particularly in the Northeast and Newark. So it's been tremendous. 72 operations per hour. I don't know if it stays at 72, it goes a little bit higher, but it's been -- it's foundational to run the airport at a level of capacity that the airport can handle on blue sky days. And I think we finally have found that unlock. And so it will create a much, much more reliable hub, a hub that you can count on for connectivity. I think it's going to improve profitability. We've built lots of like buffers into the system to try and make it more recoverable during irregular operations. But if we can fix the overall throughput to balance supply and demand and with the physical capability of the airport is, you can kind of take some of that out. So I think we'll see -- we talk about the path to double-digit margins. One element to that, that maybe is underappreciated is just how much improvement we can see at Newark. And so we're very excited about the future. In fact, if you look at the operational results at Newark versus LaGuardia versus JFK, really proud of the results at Newark since we brought the operations down to 72 operations. It's really right in the hunt when historically, it hasn't been.

Got it. You said in the past that you've been a big proponent of reducing the flight rate at Newark and kind of capping that capacity and now you have got that. Can you remind us, again, kind of who makes the decision on how many departures there are going to be and kind of what factors they're looking at while they make that decision?

It's government decision, and it's across agencies and in groups to make that decision. We have input, but we don't get to make that decision. But it's really just simple math. It's -- you've got 2 parallel runways. What -- how many can you fly on a blue sky day and you shouldn't schedule more than that. And that's where we are now.

Got it. So just to confirm, any book away, any weak RASM that you saw from incentivizing people to come back to Newark in 3Q, that is behind you in 3Q and from 4Q onwards?

We're almost fully behind us in 4Q. There's probably still a few corporate customers that have still maybe pushing a little bit of their flights out of JFK. From the disclosures you see, you wouldn't be able to see it, but we're still fighting to get a little bit of that back, but really excited about what's happening there.

Got it. Any other noisy items to think of in the third quarter. I think a couple of airlines have flagged July weather being disruptive from AIRO perspective. I think you guys had a tech outage very briefly for like a few hours, at one point in 3Q so anything else to keep in mind?

We had a brief tech outage. We're working on getting off mainframes. We've got some systems that are on mainframe still and trying to get that all up in the cloud. And so you'll see less and less of that. I'm proud of the team for recovering quickly. That's not going to impact any of our results. But I want to make sure we provide a better customer experience, so we got to get better at that. But outside of Newark, cost control is really fantastic right now. I'm proud of the team on that front. Revenues, strong and bookings are very, very encouraging.

Got it. Any further color on International? I think another carrier was saying earlier that they're seeing some weakness in International. A couple of things. One is they're seeing some weakness in International, particularly main cabin. And then they're also seeing what they think is a structural change of seasonality where July and August are maybe not as peaky as they were before, but September, October are like picking up? Like would you endorse both those views?

Let me try to put myself in their shoes a little bit. I mean I wouldn't characterize it the way they did. I would -- firstly, I would say there's strength across all channels -- across all segments. But International, in corporate, in particular, as you look at the fourth quarter feels stronger than Main Cabin, but there's strength in both. I do think that there's at an industry level, and we need to do more at United to understand some of the seasonal patterns and how they may be a little bit different than they were pre-pandemic. And so October being a little bit more peaky and how do we level that out a little bit more. And so that's an opportunity for next year. But really, nothing in the booking pattern is concerning. One thing I will highlight, I guess, around you didn't ask, but on the cargo front, the expiration of the de minimis rule, we've been -- I've been kind of hounding my team like what's this mean for our cargo forecast, we've got a lot of tailwinds that I think are going to offset any weakness around the de minimis rule. And so even that -- upon spending a little bit more time digging into the forecast, I'm not overly concerned about.

Understood. Just to your point on the -- you guys need to do more work internally on the seasonality. I asked Delta this as well, kind of is that purely an international thing? Or do you think domestic seasonality has also changed? I think back-to-school now looks very different than pre-pandemic, the way people travel, peak and trough may have changed as well, but is it largely international?

I think for us, it's been a little bit more international than domestic, but that's a good question for my colleague, Andrew Nocella in a separate meeting.

Fair enough. So maybe switching gears a little bit and kind of talking about the, how you guys have got past the Newark disruption? Another way to do that is by opening a new front and you have done that with JetBlue and the Blue Sky partnership kind of with access to [ JFK ]. So can you just talk through what benefits does that partnership bring to you guys? Kind of why do you think it was important to get into...

Well, I'm going to take it back to the transformation of the industry where you've got airlines that are customer-centric and airlines that have been more cost focused. In JetBlue, their DNA has always been about a differentiated customer experience. So the DNA of the 2 airlines just fits together really well in that respect. And I think that team has been dealt a difficult hand, but they're making really, really smart decisions with the hand they've been dealt. I think the Blue Sky deal is just a win-win for customers. That's where it starts. It's going to give customers more choice, the ability to kind of live between the loyalty programs. And I think it's fantastic for both JetBlue and United customers and shareholders. So really excited about that. It's synergistic. They also have, by the way, I think a really good platform to sell hotel and rent-a-car. We had a system that needed some improvement. And so I'm excited about working with JetBlue in that respect as well to drive some additional ancillary sales.

Got it. Remind us again the timing of the maybe JFK access benefit for you guys when that shows on the numbers?

That takes -- that's going to take at least a few months. Let me get back to you on that, Ravi.

Understood. And on Paisley, you guys have, again, led with tech investments, obviously, Starlink you mentioned earlier. Can you talk about kind of -- was that maybe a little bit of a blind spot for you guys kind of the investment in the ancillary revenue opportunities? And how -- is there any way to quantify what that Paisley access will give you guys?

We have some internal ideas, I'm not ready to share externally. I don't think it's a blind spot. I think it's something that we've been working on. I'm excited to see what Paisley can do for us.

Got it. And do you feel like this is a maxed-out relationship. You don't feel like there's a need to get closer, maybe at some point?

The enterprise value, JetBlue is pretty expensive. They've got a lot of debt. I love what the team is doing. I have a lot of respect for them. But Blue Sky is our path to partnership and that's it.

Got it. We've had a lot of conversation about premium products here, and you guys kind of have your own cabin refresh. Polaris Studio Suite is launching later this year. So can you talk about the how much room there is at the top to make that product even more high end and maybe monetize that?

I think if you look at the first-class seats, the most premium seats and the amount of customers that are flying from the United States to see the world versus the amount of customers that are coming in that this is an area where U.S. carriers have lagged and there's a real opportunity and real demand for us to provide a product there. And we need to do it in a cost-conscious way but there's tremendous opportunity for that -- for a more premium product, and we're doing it thoughtfully, and we're going to roll it out thoughtfully. But segmentation providing -- I think the lesson here is the more choice you provide for the customer, the more differentiated, you can make the experience on United Airlines, the more successful we're going to be. So stay tuned. We're not done. I know we've teased about this rollout. I think you're going to see more and more segmentation as time goes on. I don't know where the natural end is.

Got it. One of peers did almost unbundle the premium fare to a certain extent. Do you see any kind of rationale on doing that?

We need to see how that plays out, but I think there's some good logic behind it. And we're going to give customers what they want.

One. Any questions from the audience?

Can you just talk a little bit about how you see some of these new AI tools changing the -- how to make -- that enhance the customer experience?

And that's where I'm focused on with AI tools, by the way, is how can we -- how can we do a better job using AI to recover from irregular operations. I think that's an area where it's going to be really well suited. How can we use AI to help rebook customers during irregular operations more quickly. How can we use AI in customer service to help give customers the right recombination and to figure that out faster, maybe to put it in the app, so they can do it even without calling our customer service center. I think there'll be some very interesting AI opportunities we're starting to look into. We're doing -- undergoing a finance transformation as a lot of corporates are doing it, how we can be more thoughtful about running scenarios, how can we be more thoughtful about budgeting, forecasting, using some of these tools. So we're starting to scratch that as well. But I think the first place is how do we use AI for irregular operations and customer reaccommodation.

Any other questions?

Mike, could you talk a little bit about United Next and the build-out of your Mid-Con super hubs where you sit with gates, connectivity, the upgauge opportunity

I think it is the unique opportunity. I mean we announced it back in 2018, but it is the unique opportunity that United has because if you look at the other large legacy carriers, hub-and-spoke, they have created these hubs with connectivity that drives a lot of customer options that we haven't. We've been on that path. We've done it some of it with regional jets because we haven't been able to get the aircraft. But now is Boeing starting to ramp production on the MAX aircraft, I think you're going to see a reacceleration of that connectivity growth in O'Hare, I think you're going to see it in Denver, you're seeing it in Houston. You're going to see upgauging. We will be using more mainline aircraft. We have a better selection of seats than on a regional jet, and you're going to see more and more of that at those 3 hubs in particular, and it's going to create tremendous customer value.

Kat?

You are very active in like the investing space with some of these supersonic eVTOL companies. Just curious if there's an update there and kind of what you're seeing and if there's any opportunities you're excited about right now.

Yes. I love it. And this industry is an industry that for 30 years, it's been about how do you drive the cheapest cost. And so there's not been a lot of innovation. And it's an industry where there should be a lot more innovation. And so eVTOL, my conviction that eVTOL is going to change the way we work and live. The timing, I'm not going to prognosticate on too much, but sometimes soon. We're seeing Joby's aircraft, Archer's aircraft. I went out and witnessed the midnight aircraft for a test flight just a few weeks ago. I mean it is so quiet. I mean my wife's hair dryer is louder than this aircraft. I mean we had a Cessna flying like a 2,000, 3,000 feet above the airfield and it rounds out the aircraft, the noise from the midnight. But the aircraft is going to be quiet, no carbon footprint, cost-effective because it's electric engines, it's going to be, I think, really fantastic. It's going to take mostly cars off the road, not compete with aircraft. Supersonic, there's a real demand for supersonic across the North Atlantic for sure. The economics of that are tougher. Blake Scholl at Boom has done some amazing things to drive that forward, and we're excited about it. There's no question. It would be a product our customers if we can deliver to them at the right price would be very, very excited about. But the economics are a little bit tougher there. I'll tell you an area that we're looking at more recently that I'm excited about, and that is how AI intersects with booking trips and how you plan for a trip. And I think there's something really exciting about allowing or many of our 100,000-plus employees to share experiences about their trips, make recommendations about restaurants or recommendations around hotels and to feed that in a thoughtful way based on what we know about a customer from AI. I think there's some unlock there. We're spending some more time to provide some more thoughtful curated distribution options. I think that's an area that we're spending more time on now. But I think overall, having a venture team, we got to be very thoughtful and disciplined around what we invest. And I think you've seen that out of United Airlines. We are making relatively small checks but making sure that it educates the larger parent so that we're at the cutting edge of innovation. I think that, that's something that this industry has been missing, and I'm really proud of United is leading the way there.

Mike, is there a world where you guys might partner with some of the bigger LLM platforms just to make sure that, a, you have the data and b, like -- I think anyone under the age of 30 now just goes to a Chatbot and says like, book me a -- plan me a vacation [indiscernible] right? So how do you be a part of that?

There's a number of investments we've already made within United Ventures that are scratching that itch precisely. So I don't know exactly where it lands. Part of Ventures is some of the investments are going to work, some are going to fail. So we've got a half dozen that are going after LLMs in what we can use. One area where we are exploring, and I won't name the company, but we are exploring using voice recognition for -- but for very very loud environments in tech ops with a very specific language and keywords. You can't just use something off the shelf to help technicians diagnose the problems and be more efficient around how we repair aircraft and engines. And I think that's going to create some efficiencies in how we run our tech ops.

Got it. Maybe shifting gears a little bit. You guys have also been sort of leaders in the space and talking about the value that is in the loyalty program and the co-brand card, obviously, monetize that during the pandemic. You have sort of feels that you have more levers that you can pull there. So can you just talk about what the potential optionalities are and what the catalysts will be to get you to pull those levers.

Well, let me say, we've been leaders in trying to drive shareholder value creation, okay? And given my background, I've been very focused on that from the very beginning is how do we create shareholder value in an industry that historically hasn't, in an industry where we're still trading at single-digit multiples. And within that business of United Airlines, we've got a very large segment that forget about the transformation I've just described to all of you, has had stable and relatively rapidly growing margin and profitability to the last decade, and that's going to continue, I think, only accelerate into the next and we haven't talked about it enough. And so absent the transformation is like what can you do to help that help accelerate the value that we can bring to shareholders. Now as the industry transforms though, and we get to double-digit margins as we get to investment-grade multiple as we prove the resiliency of the model, I think we get to a mid-teens multiple anyways. And if we do that, the urgency to do any transaction with the loyalty program goes away, any transaction. But what doesn't go away is transparency. I think anyone in the room that wants to do a sum of the parts model and to understand the stability that I'm preaching about and to understand that it's growing at a double-digit rate and that the margins are tremendous and that the free cash characteristics are tremendous, we owe that transparency to investors. And so I'm working very hard. My team is working very hard to provide some segment disclosure. I hope to get that out next year. I'm not going to promise that, but I've been talking about that for some time. We're marching to try to get segment disclosure out next year. I think it will matter to some investors. It won't matter to others, but I think it will be an added -- it will be an added element that drives our multiple higher as we earn it. And I'm not going to sit here and preach about the multiple. You guys get to decide what the multiple happens, I think. But as we deliver on the financial results, I think that, that will naturally occur.

Understood. Just want to close this out by just talking about the balance sheet and kind of the optionality there.

Our balance sheet has never been in a better spot. We're doing a balance of secured borrowing, and we're doing some sale leaseback, all at very attractive rates. I'm really pleased. That's the present. How do we optimize our cost of borrowing as the business improves. As we roll into '26, I think that our margin expands and the margin expansion is the primary driver of an upgrade to investment grade. Maybe that's late in the year, maybe that's in '27. The timing, I'm not going to prognosticate too much. As we do that, I'd much rather borrow it in an unsecured manner, unencumber all of the assets that we have at United Airlines. I think that's the right model for the leader in the industry. And that will bolster our resiliency if an asteroid ever hits again, where we'll have a lot of options. I think Delta did a really admirable job going into the pandemic and building that stronger balance sheet. I think we're going to do that. We're well on that path. And so I think we just -- we need another 12 months or so to prove it out, and that will also contribute to the value creation for our equity shareholders.

Got it. Mike, the quality of the story is very clear. We just need the environment to cooperate a little bit. So we shall wait and watch. Thank you so much for being here.

Thank you.