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

Okay. Let's keep flying high. Sorry, I'm going to work all the airline analogies and with United Airlines next. And very happy to welcome back to Laguna, CFO, Michael Leskinen. Mike, welcome back to Laguna.

Thank you, Ravi, and good morning. It's a great time in the airline industry. This industry is continuing to decommoditize. You've seen the winners in this industry really create a value proposition for the consumer that's differentiated, and that's creating, I think, healthy financials through cycle. We're starting to see that in the valuations for our stocks and I'm thrilled to talk a little bit more about it today.

That's awesome. We will get to the long-term value prop in a second, but if you can just start with maybe a lay of the land as you see it, obviously, a lot going on in the space. The airlines had a very strong summer. Obviously, transitioning from summer to the fall, kind of how do you see the world [indiscernible]?

Let me start with demand because demand is incredibly resilient. This is an industry that historically has kind of priced to the lowest common denominator. But the American consumer is becoming a lot more sophisticated, and they care about the quality of the product, the resiliency through regular operations. whether you have Starlink or not, et cetera. And the consumer has disposable income and wants to spend on experiences. And so the industry, to maintain profitability, has had to push through some price to offset rising fuel prices. And I wouldn't say to our surprise, it was our expectation, but it's proven out that demand is incredibly resilient. We have not captured price as an industry for the last 5, 10, 20 years relative to other categories in the travel spend bucket. And I think we have finally put together a product and a service that is demanding some recapture of that. And so it is nice to see that resiliency in this business.

I will say that Scott Kirby was spot on when he said that you guys saw that fuel prices would remain elevated for longer. How has kind of having that longer-term view that this is going to be a sustained issue helped you with planning capacity, planning yields and maybe kind of giving you advantage of your peers?

Look, I think at United, it's -- we have a philosophy. It's a no excuses philosophy and we have a business plan, a culture of driving profitability in all environments. And so when the world changes, we change. We don't kind of stick our head in the sand. And so you saw that as fuel prices spiked, and we expected them to be higher for longer. We made some adjustments to our schedule because every airline has a bell curve of profitability if you look across the routes, and there are some routes that were on the lower end that could pushed into not profitable when fuel spikes like this, not a lot because, as I said, the consumer has been incredibly, incredibly resilient. But there's some marginal routes that don't make sense in a higher fuel environment so we cut them. And you should see us continue to behave that. You will see us continue to behave that way. So as you look into the fourth quarter, there'll be some flights in December that we won't fly that we thought we were going to fly. If fuel remains high, we'll make some adjustments into the first quarter. and beyond into 2027. And so you always will see United do that. We are not flying to maximize market share. We're flying to maximize profitability and free cash generation. So we'll make those adjustments.

Got it. As you look at the fourth quarter as well, do you have a sense of what demand is shaping up as you kind of said demand is being very resilient through the third quarter, kind of do you have a sense of what holiday season booking curve is looking like -- and kind of how much are you booked so far?

It's really strong. In the third quarter, there's been some calendar items, the Jewish holidays, when Labor Day fell that caused a little bit of -- I think when you look at the TSA data, it caused a little bit of a false indicator. But as we look into the fourth quarter, bookings are tremendously strong. We talked about that on our conference call. It's -- bookings have continued as we expected. So that piece of the equation is resilient, very little evidence of demand destruction. I mean if you squint at some of the lower priced tickets, you might be able to find something there, but very small for United Airlines. And in the premium cabins, just kind of humming along very nicely. Corporate business has been ticking up a little bit. We're still back from what we think trend line is, but we've seen a little bit more of an uptick in corporate and premium, but economy also very, very strong.

Got it. Just a couple of follow-ups there. Just on the yield curve, obviously, you guys had a very strong first half of the year. And you have been able to both as United and industry kind of pass through the jet fuel with getting back up to close to the high watermark on fuel prices. Is there room for further jet fuel pass-through do you think, for yourselves?

Absolutely. Jet fuel price gets passed through with the lag period. We were talking about 100% recovery in the fourth quarter. Fuel prices have spiked pretty rapidly. We've got about 35% of our tickets booked already in the fourth quarter. So you can't go back and reprice those tickets. So there's a lag and you all should think about that when you when you run your models. But there is nothing that is changing that causes us to not be able to pass through 100% of fuel with that lag.

Got it. And you briefly mentioned corporate, if you can unpack that a little bit, and you said still 4.5 points below what you thought would be baseline. There are many baselines here? So is that a pre-pandemic baseline? Is there where it should be given GDP? Is that where it should be given where fuel is?

A pre-pandemic baseline. And the point of sharing that is there's -- while corporate has been very, very robust, and we're seeing volumes pick up. There's plenty actually more room to run there.

Right.

That's the point you should take away, but incredibly robust. In fact, it's the premium cabin and corporate has been very strong for quarter after quarter after quarter. It's an economy that has caught up through that with some with some really strong pricing in the economy cabin as well. But I would say it's just kind of caught up to parity. It's not like it's getting on top of premium.

Got it. On Main Cabin, that has been a source of weakness for some time now for the entire industry. Very encouraging to hear you say it's kind of caught up on the yield side. how are load factors in Main Cabin, and kind of do you guys have a sense of why and how that's catching up because I think 1 of the themes of this conference has been just how resilient the customer has been. Clearly, it seems that you're seeing that as well. So any color you have on kind of how and why that's catching up.

I think that it has to do with differentiating the product and consumers really choosing to fly on United for what we're bringing. And it's not just that we're making the premium experience better. We're making the experience better from those detail. And I think it's also a secular trend in society where customers care a lot more about experience than hard product. So more of their wallet is shifting in that direction. If you look at what -- and I talked about a little bit earlier, but if you look at what consumers pay for hotel nights, frankly, this conference, you can't even get a room here right now. But even hotels, I understand the Marriott paying $1,000 a night in Marriott. Uber prices to and from the airport often cost more than the airfare. The percentage of the trip cost that is dedicated to airfare has shrunk over the years because this industry has often competed in irrational ways. And you've got players that have been willing to lose money almost permanently lose money. And I think that the industry structure is moving in a way that as that low-hanging fruit as those kind of worst actors are forced to produce at least a positive return, certainly not their cost of capital, but a positive return, that's creating this opportunity. to get a return, not just a pretax margin, but a return on capital. And so we're determined to do that at United Airlines. We've made great progress. And as I said, as we pass through fuel with a lag, SP-2 We're completely on track.

Got it. Three months ago, when you guys were doing 2Q calls, we thought the biggest debate at Laguna would be we would see evidence of how resilient pricing was going to stay in a lower jet fuel environment. That obviously didn't happen. But if we were to eventually go back to that debate again, kind of you guys said about 90% of the recent pricing improvement is structural cost inflation and harmonization rather than short-term capacity actions or jet fuel. Can you give us a little more color on kind of how you have -- how that thinking has evolved since and kind of how confident you are that this is a new baseline for pricing?

I love the question, Ravi. And as I think about the setup, there's 2 ways we can win. You can see fuel prices rapidly stabilize and hopefully fall as we start to see traffic move through the straight over moves. I've got no special insight into when that may or may not play out. And I think in that environment, we'll be able to maintain a heck of a lot of the price and our margins expand. And that could have happened 3 months ago, it could happen 3 months from now. I don't know the timing. But that is absolutely a path to getting to the double-digit margins we've been talking about for so long. And by the way, double-digit margins for United really, I think, right around 9% margin is when we get to investment grade as well. So it really is the key to a whole lot of goodness financially for United Airlines. But the second path is actually pretty favorable as well. And the second path is that fuel prices stay higher for longer, maybe go higher from now in the short term. And if that plays out, you're going to see more and more structural change in this industry. You're going to see there's such a bifurcation between the players that have positive margin and the players that have negative margin. And the balance sheets between those 2 players is becoming more and more stark. So then this difficult environment with fuel price plays out, the more structural change that plays out and the stronger our margins are on the other side because we will be in an even more differentiated position versus those weaker players. So I think it's kind of a situation where heads we win, and tails we win.

Yes. That sounds like a good setup. Just kind of on that note, and I've said this a few times so far this conference already, but I'm going to be a greedy sell-side analyst and kind of say that, hey, you just pointed out that there is so much room to normalize on yields for yourselves and as an industry to kind of real adjusted inflation levels. So this is not just about keeping jet fuel pass-through that you've already done because you need to offset structural costs and such, there is more room to come on yields over time. So let's assume that jet fuel goes back to something in the high 2s, low 3s and stays there.

There's more room for the airlines that are providing a differentiated customer expense invest in the customer. This is not getting something for nothing. This is providing a better product, a better service, a more reliable airline, StarLink Internet. Better segmentation itself. I'm sorry, didn't mean to interrupt you.

No, no, that's exactly what [indiscernible].

It's key to it. This is not just pushing price and giving nothing back to the consumer.

Got it. Let's talk about giving back to the consumer. Kind of you introduced kind of base fares and premium cabins kind of you're doing the segmentation there earlier this year. In 2Q, you said that the buy-up rate on standard Polaris was significantly higher than you initially expected. What have you learned from that rollout so far? And kind of is this bringing the if I was in the middle of the plan to the front of the plane or kind of how is that shifting dynamics within the cabin?

Yes. I love your questions this morning. Thank you for that question. When I left Wall Street to come to United Airlines, I was very cost focused, like this is -- you win by having a low cost. And what this most recent iteration of segmentation with the basic Polaris fair has proven is that customers love our clubs. They love our clubs. And they're, by the way, the club is pretty expensive and take a long time to build. And we have a huge head start on much of the competition in that. But the buy-up is an indication to me -- it's not an indication. It's a proof point that customers love the club experience, they're willing to pay for it. And so it shows that we're not done with segmentation and segmentation is -- in the end, it helps us drive yield. But it's customers paying for what they want. It's giving the customer choice and the customer is choosing to have that full premium experience.

Got it. So you're seeing buy-ups within that premium cabin as well, with post segmentation. It's not a case of people are saying, "Hey, I'm just okay, flying the front of the plane, and I need the club too."

That's right.

That's incredible to know.

In fairness, it continues to surprise me. But it is what the customers want. So we're going to provide it.

I want to say that you guys have been one of the most, if not the most innovative airlines in terms of new products out there kind of you mentioned StarLink, but also the main cabin product where you can like put the 3 seats down and kind of make it a flat bed. I mean that was in same kind of I want to experience that at some point.

Great for families.

Great for family, right? So how -- what is the product ideation process within United like? How do you come up with ideas like that, and kind of how much more runway do you have to do innovative things within the cabin.

Well, we've got just an incredible commercial team. And Scott -- starting with Scott Kirby, we've got this culture of having a 5-year startup within a 100-year-old airline. And so we are encouraged as the entire officer core and down through managing directors and directors encouraged to be creative and try new ideas, and the idea works great. If it doesn't, we fail fast. And so I think nowhere do you see that more than in what we've done with the hard product. And as I said, it's from those detail for the aircraft. So what we're doing in the economy cabin is pretty incredible and differentiating for United, I don't think that's going to end. And so we've proven that Starlink, I'll use that as an example. When we first started to think about Starlink, look, it was more expensive than any other options. But we thought about what customers, what can really differ -- especially in long-haul flights, what can really differentiate the experience. And so we kind of took a little bit of risk and that has been an incredibly reinforce incredible bet for United to make. And you've seen a lot of the industry trying to catch up. There'll be a few years behind. But a lot of loyal customers coming to United. And once we get those customers and put them in our loyalty ecosystem, I think that they're going to be permanently United customers. So more and more bets like that to come.

Got it. Another big change from your fleet and premium perspective was the XLR coast liner kind of elevated 787 coming to the fleet. What does that mean -- obviously, probably the first time I think you're flying a narrow-body but a full cabin, a full suite product to transatlantic as well. How is the customer reaction in the early days to that announcement been like? And just overall, if I can ask you a bigger picture premium correction, it feels that the entire industry is becoming more premium, which I think is a -- I don't even know if it's a high-quality problem, but it's a good trend for the industry to have. Do you think there's room for this much premium across the industry?

All society is becoming more premium. This is not just an air travel experience. This is hotels, cruise lines, car service, et cetera. And we're just jumping on to that trend. Andrew Nocella, Patrice [indiscernible], brilliant in bringing the 321 XLR into the United ecosystem. You've got to see it, if you haven't seen it, you got to get on board and see the experience, the Polaris suites on those aircraft are incredible. And if you think about living on the East Coast, it's such a special competitive advantage for United Airlines to be able to fly direct to so many cities in Western Europe. It's going to be high margin. and it's going to be a unique opportunity for United because we order those aircraft, and we're configuring them a way to fly those routes. You don't have to fly to -- you don't have to fly to Paris and have a connecting flight, go straight to these destinations. They're going to be incredible for these new cities on the map, too. So I think yet another example of the creativity of our team the destination in driving a differentiated network to match the differentiated product, and it's going to lead to continued strong financial