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

Welcome to day 2 of Barclays' 43rd Annual Industrial Select Conference. I'm Brandon Oglenski, airline and transport analyst. Next up, we have United Airlines. Very excited to have them here. And I think Kristina wants to read a quick message.

Yes. Thank you, Brandon. So our presentation today might contain forward-looking statements with information currently available to the company. Unless otherwise noted, the financial measures we will discuss are non-GAAP. Please refer to our latest earnings release for definitions and reconciliations to the most directly comparable GAAP measures.

Thank you, Kristina. Well, good morning, Mike. Joining us for United is Mike Leskin, Chief Financial Officer. Glad to have you guys down here.

Really quick, before we get into the conversation, I just want to do the ARS questions. So for those that were here yesterday, the keypad in front of you, we're going to do a couple of questions here real quick. So question number 1, please. Do you currently own United? Yes, overweight; 2, market weight; 3, underweight; or 4, no. Mike every year I say I need to get you quicker, but we don't. Question number 2, please. What is your general bias towards United right now?

You don't let us see the results.

Positive, negative or neutral. Got be fast. There were some owners in the room for sure. I think I see a couple. Skewed very favorably.

Smart group.

All right. And question number 3, in your opinion, through cycle EPS growth for United will be above peers, in line with peers or...

This is an IQ test, guys.

I think Burley might have been hitting the button a few times there. Well...

100% unanimous in the room, above peers. That's great. Look, I'm going to say 1 minute things -- this is a transformational time for this industry. Last year it was an airline recession for a number of reasons. And at United, we bucked the trend. We grew EPS despite that, albeit by a very small amount, but it was an earnings recession for the airline industry, no doubt about it. This year is setting up very differently. And despite Winter Storm Fern, we have the #1 A0, the #1 D0 and the #1 A14 that we have ever had in United's history year-to-date. We also have NPS scores that are continuing to rise. And I know there are some concerns around -- little skirmishes around the country. We actually have mid-single-digit RASM in the first 2 weeks of February in O'Hare. We're tremendously excited about this year. Q1 is shaping up near the high end of our EPS guidance range so far despite the noise that we've seen in the industry. So it's a great time to be part of the U.S. airline industry. It's a really great time to be invested in United Airlines.

Mike, that was a pretty strong opening there. I guess, can we talk a little bit on the 1Q color? And I know you guys are only guiding to an EPS range, but what's driving the upside as you see it today through February?

There's tremendous demand strength. I think it's -- we're seeing continuing evolution of the American consumer to have brand loyalty and to like the segmentation, like the product, like the experience of flying on United Airlines. So I do think that there is an overall strength in the industry, but I think we're seeing continued preference of our customers to book directly on United Airlines.

Well, someone call this the golden age of brand-loyal airlines. Do you guys think you're just getting started on this, though?

I think that this is a secular trend. I think that we have a 5-year lead, if not more, on the competition, and it's going to be a very special decade.

Okay. Speaking about 2026, can we just unpack the volatility that we saw last year, though, because I think a lot of airline investors would say, hey, look, the stocks are cheap. I'd love to own them. But with earnings volatility like we saw last year, it's just hard to get really excited even when maybe the quarter is good, but you could potentially face headwinds very quickly.

Yes. I think it's incumbent on us. Lots of executives complain about their valuation. I'm not going to do that. We need to earn our valuation. We've seen some expansion, and I think we've earned a lot of that. But the earnings volatility with some players in the space that act irrationally has been too much. One of the things we're doing at United in addition to the foundation, which is driving brand-loyal customers, which takes the volatility out of earnings, by the way. It creates a much more resilient path. It's -- frankly, it's why we performed the way we did in 2025 at United. But the other thing we can do is we can continue to fix the balance sheet. So all of you have heard me pound away at our path to investment grade, take out some of the financial leverage at the same time that we're taking out the operating leverage by driving brand loyal customers. And so I think you're going to -- you have already seen a muted volatility in our earnings profile. And I think you'll see that continue to be -- you're going to see continued stability in our earnings as they grow towards double digit.

Okay. I definitely want to talk about the longer-term prospects here. But in the near term, is it corporate demand that's incrementally better, leisure? Where are you seeing it in your bookings?

Our strongest demand, our strongest profitability remains in the premium cabins and international. But I will say that the main cabin and domestic is also seeing an uplift, but we're still seeing more strength internationally in the premium cabins than main cabin.

Okay. But Main cabin has incrementally improved?

It's better.

And that's where the challenge has been for the past year.

Both -- let's be clear, both have improved. International premium has improved from more profitable levels.

Okay. And any mix of corporate or leisure?

Corporate is feeling pretty strong, but really, it's broad-based strength right now.

Okay. And visibility looking good into like peak spring break periods?

I think I opened by talking about how we're trending towards the high end of our quarter's earnings guidance. So you can take that to me and the spring break looks strong as well.

Okay. Appreciate that. When you talk about a brand loyal customer, can you unpack that for us a little bit?

It's a customer that increasingly books directly on united.com or through our app. It's a customer that loves our clubs. It's a customer that has been on one of our E175s and experienced Starlink. So it's a customer. We always have to be schedule and price competitive. But it is a customer that as long as we are competitive, has a distinct preference to be on a United aircraft. And so we're seeing that more and more. I think that's what makes for a healthy industry. It's why the hotel industry has done so well. It's why some of the cruise line industry is doing really, really well. And the airline industry was just a little bit slower to pick up on that trend. But we are now there. 2 airlines in the U.S. are now there, and it's going to create not only a differentiated level of profits, but it's going to create stability in those profits. And you already -- you don't have to take my word for it, you're already seeing evidence of it.

I've experienced Starlink on one of your E175s. It was pretty amazing.

It's better than the Internet of my house. talk to Xfinity about what's going on with fiber to my house.

What's the rollout schedule for that, though, fleet-wide?

We're going to have a significant amount of mainline aircraft by the end of this year. And then by the end of '27, we should be substantially complete.

Okay. Apart from Wi-Fi, what else is coming on the brand-loyal side, especially in terms of product?

Well, I can't give you all of my secrets today. We do have a Media Day coming up, is it next week? In March. And we'll share a little bit more then. We also have plans, as Andrew Nocella alluded to on the earnings call, to improve our loyalty ecosystem. I think that will end up driving some card acquisitions to United, but I'm not going to give any of those details today either.

Okay. But I think he did mention relaunching the website. Is that right?

You're going to see more details in 2 weeks.

Okay. We'll keep our calendars open. So apart from those changes that are coming, what are network priorities in 2026?

We are continuing to grow out our mid-continent hubs, and we're getting closer to that. We talked about that on the conference call. So this is about upgauging and continued growth in connectivity.

And I think Andrew maybe mentioned that a lot of that had been accomplished. Is that true?

We have seen peak growth around connectivity of mid-continent, and that's what he said on the call.

Okay. And I think what was important for me and maybe other investors, too, you guys did mention that the high watermark, and correct me if I'm wrong, for domestic capacity growth for you guys would actually be 2025. Is that correct?

You did say that.

So how do -- and I know you guys don't want to guide to capacity, so I'm not trying to tease that out, but how do we think about the right long-term growth rate for your network, maybe domestically and internationally?

You are teasing it out a little bit. This is about driving profits, not capacity. And so as we are determined to get to a double-digit level, double-digit margin, you're going to see us bring capacity in, bring capacity up, bring it down to flex utilization to drive the maximum profits long term. And so you're going to continue to see us do that. We think that the connectivity in the mid-continent has largely been built out. And now as Boeing continues to deliver more MAX aircraft, we need to get 787 rates to be a little bit more stable. But as we see more narrow-body deliveries, we can accelerate our upgauging.

Okay. So should we assume that there's going to be maybe some accelerated retirements to older aircraft?

We'll see.

Okay. And as we think about cost performance and the MAX 10 and upgauging, how important is the MAX 10 to your long-term unit cost?

The MAX 9 is a great aircraft. The MAX 10 is incrementally better for us. But we're going to have a good path forward with either. I am excited about the prospects of the MAX 10. And I think it's really -- it's built for the United network in a lot of ways. So I think it's going to be powerful. But our path to double-digit margins is not predicated on it.

And when you say double-digit margins, is that pretax or operating margin?

Pretax.

Pretax. I think on the last call, Scott maybe alluded to this as well, like double digit in the near term and teens margin. Is that right?

Well, Scott's always stretching us. That's what makes him a great CEO. He sets high targets and then you march towards them. I have clear visibility to the double digits. And I think that what's going to happen with this industry, we've got the secular trend, which is driven by brand loyal customers to United and preference for United. And so we have within our own control, a path to double digit. And then at some point, I do believe that the low-margin airlines in this industry that have knots in this industry, their stakeholders is not going to allow them to continue to lose money. And so at some point, there's a transformation that those lower-margin airlines become more rational. And when that happens -- and maybe it happens this year. I'm not going to predict when. But when that happens, there's a step function improvement in the profitability of the entire industry that United also benefits from. And so the combination of the idiosyncratic trends that we've built at United and that transformation in the industry, which must happen, it's economic gravity, that's what Scott describes as getting us to mid-teens.

Okay. And by the way, if there's any questions from the audience, raise your hand, we'll get you a mic. Coming back to cost, though, you guys don't want to guide to unit metrics, which I actually appreciate. I think it's good just to having an earnings target out there for investors.

Well, you're just beat me up about stability of earnings and the volatility and all of that. And I think it's fair, like that's a fair criticism. But you must therefore -- if you feel that way, you must, therefore, give us the room to maneuver to deliver on the bottom line earnings per share to deliver on bottom line pretax margin, but give us some levers because fuel prices move, demand moves. There is some level of cyclicality to the industry. But if you give us the levers to control, we can kind of mitigate that and drive EPS and pretax margin. And that's what we're trying to do. And I think more and more airlines are adopting that approach. I think it will create a healthier neighborhood, a healthier industry because you can -- you should hold us very accountable to delivering those bottom line metrics. But in any given quarter, I might want to deliver the bottom line metrics in a different way.

What can we -- I wasn't getting that CASM specifically, but just inflation in the business. Obviously, you have some outstanding labor deals as well, right? So how do we think about inflation this year and next year?

Inflation for aerospace for this airline industry has been running hotter than the overall economy for -- since the pandemic. I don't think that's going to end. At United, we're going to do better than the industry over time on CASM-ex. We've proven that. Last year was a phenomenal year. Specific levels for this year were not given.

Okay. But you do have outstanding labor deals that could add a couple...

I have labor deals. I have the outsized industry inflation, but I have all the global procurement next goodness. I have better operations. I have up-gauging. I have all of that in the mix. And when we give you EPS guidance, all of that is in the thinking. I fully expect to have labor deals done this year, and I fully expect to have to pay that bill, and that's in my EPS guidance.

Okay. Appreciate that. And then I think 2 other areas that have been pretty inflationary airport costs and maintenance costs. What can United do to address those as well?

Airport inflation is -- I'd like to have really nice airports for our customers. It's part of differentiating our brand. And so I want to make sure we're efficient in how we run these projects and manage these projects. But having nice airports is important. So that's an inflationary item that I think is not going away. And you're going to see it at United. I think we'll do -- we'll work hard to mitigate, but it's an industry-wide phenomenon. Maintenance costs at United, we're making a lot of progress. I've got nothing to share today, but we're making a lot of progress at bringing down -- bringing the efficiency of that operation up, bringing the -- making sure we have really competitive contracts for spare parts. And so I think we're going to moderate that trajectory pretty meaningfully in the coming years.

That sounds encouraging because most airline executives that we talk to just say maintenance costs are almost...

Well, it's tough. It's tough and the engine manufacturers have a lot of power. But we have some unique opportunities at United to do better than we've done historically. And you're going to see that. You've already seen some of it. You're going to continue to see it.

Okay. And I think in the past, you guys have really focused on deploying technology across the operations here, right? Where do you stand on AI and potential?

It's -- we're just starting to scratch the surface. For AI, we're doing a lot with customer service reps to be able to access information faster, answers to their questions, to be able to answer customer questions faster. We're doing more preemptive maintenance. We're doing more predictive maintenance. We have iPads in the hands of our technicians that are making them more and more efficient. We have some of the operation where we can create some more automation around ground handling. I think it's going to be helpful to overall cost trends. I don't see transformational just yet, but I do see helpful. I think another good example that I'm really proud of for the finance team is we're getting better at closing the books faster and using more technology to help us do that. In fact, you may not have noticed, but we filed the 10-K a week earlier than we historically have. I'd like to even bring that a little bit closer to when we file earnings. But a lot of that is around modernization of our finance tools.

Okay. Maybe that's a good point for question #4 for the audience. So get your keypad there. And I think we -- there is question number 4, I think [indiscernible] did.

Yes, but I like this question, so we can answer it again.

We can go to question #4, please.

100% nice.

In your opinion, what should United do with excess cash, bolt-on M&A, larger M&A, share repurchases, dividends, debt paydown or internal investment?

That's a good question.

Well, M&A has been a topic at this conference, not specific to airlines, but how do you feel about the environment right now, especially as you're talking about low-margin airlines having to face economic gravity.

Well, this is a brilliant audience. That's about how I feel about it, too. I think it's a unique environment that -- where M&A is possible. We'll see how that plays out. But I do think that this industry would benefit from some.

Okay. Question #5, please. In your opinion, what multiple 2026 earnings should United trade? Less than 10, 10 to 12, 13 to 15. 16 to 18. All right. We can vote, please. I see some folks...

6. They're going to answer 6.

Okay. I think anything in that range would actually be pretty positive.

I think in the mode there, 3, 14 to -- 13 to 15, that feels like we've got to earn it, but I completely agree that that's where we're headed. It might take a year or 2.

Can we pull up question #6, please? What do you see as the most significant share price headwind facing United core growth, margin performance, capital deployment or execution and strategy?

Well, I think that's because none of the answers were good. So people just had to like they're like, oh, I'm out of options, so I have to answer 4.

Well, Mike, there's been a little bit of maybe a dust up, if you want to call it that, in hometown Chicago between you and another airline that maybe has a hub there. Can you talk to us about some context of what's occurred here and...

Temporarily.

Temporarily.

Temporarily, they have a hub.

Well, can you speak to United's perspective on Chicago and maybe why this is such a...

It's our hometown. I mean this is where we're headquartered. This is where a lot of the brand-loyal customers were winning corporate customers, my neighborhood, everybody is switching from American to United and they're doing it because we have a differentiated product, we have differentiated service. And so yes, there's a lot of capacity being added to Chicago, but not all capacity is created equal. And so not only do we have a better hard product, but we have the schedule and we have the connectivity, we have the clubs. So they can fly around some empty airplanes, and there is some gate calculus around that. And so that puts us in a spot where for the long term, we have to protect our gate positions. It's going to be a modest impact to our level of profitability. We've given you guidance. I gave you an update in guidance today. So you can see that it's not leaving much of a mark at this time. So I feel really confident in our strategy. We are making money in Chicago. We made a nice profit last year in Chicago. The other guy that's adding so much capacity is not. There's pretty good math out there. You can create with public data to get at that. And so really, you should talk to them. It's an irrational strategy to accelerate their losses.

Okay. But we shouldn't view this as something that's going to spill over into the broader market between the 2 of you?

I'm not overly concerned about it.

Okay.

You should fight -- I mean, this is an industry where rational players that are focused on their shareholders, which is our obligation to be focused on our shareholders. You should add capacity where you have excess profits and you shouldn't do the opposite. And so economic gravity is going to come up -- is going to catch up with players that are in an ego-driven way, adding capacity where they're losing money.

Okay. You mentioned international remains strong and -- but also that 787 maybe deliveries aren't quite to where you want them. Is that true this year?

We have a great partnership with Boeing. I've got tremendous respect for that leadership team. They've done a lot to turn the company around. We've seen it on narrow-bodies. 787s are still struggling a little bit. But I'm confident they're going to get there. It's taken them a little longer, and we're having -- we're seeing some incremental delay on 787 deliveries. So it is frustrating, but that management team is great, and they're going to -- they will fix it.

And what have you guys said about expansion ambitions this year in your major regions?

We haven't. I'm not going to today.

Okay. I think -- but did Andrew talk about transatlantic being roughly the same? Or is that...

He talked about taking a breather in the transatlantic.

Okay. All right. And then on loyalty, I know you teased that when we need to...

Some of the international growth, just to address that head on, since you reminded me, we did say that. We do have a few 777s that are Pratt powered, where I do not have parts for those engines. And so those aircraft are going to be grounded in the summer. And so it's putting a little bit of pressure on our international ambitions in the short term. That will be resolved in 2027.

That's a broader issue for the industry at large, though, right?

It is a broader issue, and I think it's an issue that's going to last for a few years to come at least.

Okay. And again, not to dig too much into what you guys are going to talk about in 2 weeks or 2 weeks' time, but can you speak to MileagePlus and the evolution there? Maybe to date, the performance that you've seen with your co-brand card and...

It's so intertwined with brand loyalty. So you have a loyalty system. And when you were a smaller airline and you were an airline that maybe wasn't differentiated, it was less compelling. But as you build this airline where customers are brand-loyal and we are growing it above GDP, the growth rate in card acquisitions haven't caught up. And so I think what you're going to see is the changes we will announce are going to accelerate the card acquisitions to match the growth in our brand-loyal customer base. And I think that's going to be a really powerful profit driver in years to come. That's a pretty good tease. The details you have to wait for.

Got you. Any concern about capping interest rates and things coming out of the White House?

We've got a partner in Chase that's dealing with all that. So we're following it closely. But that's -- our customers don't revolve largely. So it's not really our fight.

Okay. So the value proposition is coming from other aspects of the car.

The value proposition for our loyalty program is around the relationship with United and the bags and the clubs and the points you earn by flying on United aircraft.

Okay. So it sounds like more to come there. Mike, we only have a couple more minutes left, but nobody from the audience? Any questions in the audience? I think you said you have -- do we have one in the back?

Just going back to the AI question, it's just so frequently asked this week and particularly among some of the other subsectors Brandon covers. You talked about some productivity initiatives internally that it could benefit. Some people are starting to allude a little more to also top line benefit, whether it be pricing or something else. Is there something there that we should be thinking about for the industry and for United?

Yes. We've got a great revenue management team and revenue management system. And we do use a lot of technology, but I don't see a big needle mover using AI at this time for that. What I do see, and I didn't mention earlier around AI is when weather hits and your crews get displaced all around the system, and your customers need to be reaccommodated, technology tools to function in those irregular operations are really, really important. And this is an area where I think because of the geography of our hubs where United is far and away the leader globally is developing systems with how we recover. And you saw that recently with Winter Storm Fern, where it was really disruptive nationwide, but the recovery at United was aided by technology so that we got our crews and our customers all where they needed to go as fast as possible.

Michael, we only have 1 minute left, but adding all this up, especially with your confidence on line of sight to double-digit pretax margins, how do investors think about free cash flow, especially with a still pretty large order book on the horizon here?

I mean double-digit pretax margins should drive an expanding multiple. So you kind of get like a you get a multiplication effect of growth in earnings and growth in multiple. And all of that is on a foundation of a higher quality of earnings, not just more stable earnings, but higher free cash conversion. So I've talked about free cash conversion of around 50% as we go through this growth phase because a lot of our CapEx is growth, not replacement. And then as we exit the decade and you have a lot more -- you get closer to the level of maintenance CapEx instead of growth CapEx, you see movement towards 75%. And then beyond that in the 2030s, I don't know. Let's see how it plays out. I do know that the best companies out there with the highest multiples, you need to get free cash conversion closer to 100%. I'm not ready to promise that yet today.

Mike, this was an excellent conversation, truly the golden age of brand-loyal airlines. So thank you.

Great to see you. Thank you all.