United Airlines Holdings, Inc. (NASDAQ:UAL) Cowen 14th Annual Global Transportation & Sustainable Mobility Conference September 7, 2022 11:20 AM ET
Company Participants
Gerald Laderman – Executive Vice President, Chief Financial Officer
Patrick Quill – Senior Vice President of Global Network Planning and Alliances
Conference Call Participants
Helane Becker – Cowen
Helane Becker
Good morning, everybody. This is Helane Becker, Managing Director at Cowen. I’m in charge of airline research. Welcome to the 15th Annual Global Transportation Conference and the second part of or Second Annual Sustainability Conference. They added sustainability to us last year. This morning, we’re joined by — I just want to make sure I cover the titles right. I always get them wrong, I usually give people promotions, but Executive Vice President, Chief Financial Officer, Gerald Laderman; and Patrick Quill, Senior Vice President of Global Network Planning and Alliances. So hopefully, I got that right and didn’t promote or demote anybody. So thank you both very much for being here. I’m really sorry we are virtual. This is me in my office, this is you not in Boston with me, so I apologize for that. But thank you very much for your time this morning. And I guess, do we want to start with the update you provided this morning? I don’t know, Gerry, do you want to make some comments about that that was a little bit better maybe than people were thinking?
Gerald Laderman
A little bit better…
Helane Becker
A little bit better…
Gerald Laderman
I think so. Let me talk about my favorite part first, which are costs. And I was actually particularly pleased with cost essentially in line with what we expected at the beginning of the quarter. One of the problems the world has had over the last year was trying to get a handle on this nagging inflation. And we’ve been relatively conservative in our approach, and I’m just pleased that there were no surprises this quarter like the industry has had in the past. And so very pleased with our cost performance. Obviously pleased with capacity now expected to be a little better than what we said. First time in a while. We’ve also had, as you know, one disappointment after another and the ability to get the capacity that we want. We’re obviously still not where we’d like to be. But as we get the aircraft that have been promised to us and as we get utilization back up, we’ll get there, but it was nice, again, to just have a series of very pleasant updates.
Question-and-Answer Session
Q – Helane Becker
That is nice, for a lot of reasons, right? So my favorite subject, Newark, how is the runway construction? Are we nearing the end? Is it — can we expect better performance there?
Patrick Quill
I’ll take a stab at that one, Helane. So look, as you’re aware, the port is investing in new runways or refurbishing the runways. And so throughout September and into October, there’s temporary runway closures when they’re doing work on the runways and there’s also times when they’ve shortened some of the runways. And so because of that, there’s an FAA waiver in place, and we have reduced our schedule. It’s already published and selling but we’re flying a smaller schedule in September and October because of the runway closures and runway work. That is on track, the port tells us everything is on track for the end of October, and they’ve been a fantastic partner. And so we’re looking forward to getting back to a full schedule at Newark.
Helane Becker
Okay. And then how is Terminal A coming? Because you guys have operations in current Terminal A. I don’t know what they’re going to call new terminal. It looks amazing from afar, but how is that construction coming?
Patrick Quill
Yes. So new Terminal A is the name we call it internally, too. So NTA, New Terminal A. Look, it’s again, it’s going to be a world class facility, which we’re really excited about welcoming our customers into that facility, And it’s going to create a lot of operational assistance because you’re right, it’s a real challenge right now with parking spaces and the reduction in gates where they built the New Terminal A. That’s coming online later this year, so hopefully before the holidays. Again, working with the port and they’re working very, very hard to get that opened up. But we’re optimistic and they’re optimistic that later this year, it will be open.
Helane Becker
Okay. And then I don’t know who wants to take this, Patrick or Gerry. There have been — one question I get a lot of has been not so much disruptions in the US I think people are finally, I don’t know, they’re just accepting of it. And they just have the — are surprised. I mean, what’s the completion factor? It’s still over 98% or 99%, and on-time performance may be a little low. But in general, where we’re seeing a lot of disruption is in Europe. And as you’re thinking about Western Europe going into the winter months, are you concerned about fuel shortages and other issues that may affect your operations over there?
Patrick Quill
Gerry, do you want to?
Gerald Laderman
I’ll start. For fuel, I would say, no, we’re not yet worried about that. I think they’ve done a good job so far managing fuel supply. I can’t predict prices. So we have a continued moderation in prices. But I wouldn’t say that’s at the top of our list of concerns.
Helane Becker
Okay. I don’t know, Patrick, anything? Like Lufthansa was going to have a big interruption this — today and tomorrow, and they managed to reach a pilot agreement after a strike last week. So I know I would book United before booking Lufthansa if I were going to Germany. But like how are you thinking — and maybe this is more of a question for you, Patrick, over alliances. How are you thinking about ensuring the product that you guys have worked so hard to develop over the last, I don’t know, four, five years, gets delivered to customers in light of some issues that may existed. Toronto, for example, with Air Canada and we’ve just talked about Lufthansa in Germany. How do you work with your partners to ensure that your loyal, most loyal customers aren’t disappointed?
Patrick Quill
Yes. No, that’s a great question. And look, we are laser focused on the customer experience, and we have made a renewed and double downed effort on that, Helane. And we have significantly increased — for example, there’s a couple of key areas with our immunized partners and then globally with all of our Star Partners, paid or free seat access. So when you’re booking a ticket, a United ticket that then is connecting on to Lufthansa or another partner, that you can then take your seat, that’s a point of frustration today where a lot of passengers don’t have that ability. And they don’t understand it because we’re selling them a ticket, a joint ticket, and we need to be able to provide that. And so we’re investing in Lufthansa in this example is investing heavily to get that done, and we have that done with Air Canada. Working on also call centers to be able — if you’re calling a United call center, you have a problem with Lufthansa flight, rather than having to say hang up and call Lufthansa, to be able to have a warm transfer over to someone at Lufthansa.
And then also on being able to contact each other. So being able to, where legally permissible, and again, there’s different regulations within the EU than in the United States, and you go — it varies by jurisdiction as into data and access to data. But if you’re on — just sticking with Lufthansa example, who is a fantastic partner, by the way. They’re a fantastic partner. But sticking with that example, if for example, their flight was delayed or the United flight was delayed, Euromiles-Plus member, I know you are. And we would text we’d say your flight is delayed, please rest, you know what I mean. Please take your time. We don’t have the ability to do that with a Lufthansa passenger. So how do we manage that data so that we can then notify them and they can notify our passengers if there’s a delay, a cancellation or a weather event? And so we’re really, really, really focused on that. It’s a big priority. And you’ll see — you hopefully have seen some big improvements over the last year during the pandemic, and you’ll see some into 2023 and 2024 as well.
Helane Becker
Got it. As we’re thinking about the balance sheet, Gerry, how should we think about debt paydown in the same context that you’re growing the fleet by taking new aircraft deliveries. Where do you stand with the 777 fleet and getting those 52 planes back in the air? Maybe they’re already back in the air.
Gerald Laderman
Patrick keeps, I think, daily tabs on how many of those 52. So he knows the exact number.
Patrick Quill
44.
Gerald Laderman
There you go.
Helane Becker
Okay. That’s more than I would have thought.
Gerald Laderman
Yes. So it’s been terrific progress there and terrific focus. And we do give credit also to Pratt-Boeing for being good partners and really dedicating resources to solving that problem. It obviously took longer than anybody wanted, but in the end, it was a good collaboration among the three companies. In terms of debt paydown, that’s if not number one, in the top two on my list of goals over the next few years and [Andrew] and corporate finance team are very focused on that. As we’ve said in the past, we’re limited right now because the debt that we would be interested in paying down, we can’t because it’s not prepayable. And to prepay it, you’re effectively also prepaying all the interest on it. It’s just not economical. And what we’ve been doing this year instead is something that, in my past, I haven’t done very much of, but actually pay cash for aircraft. And so one way of thinking about some of the debt that we raised during the pandemic was effectively, it was prefunding the debt for the aircraft for this year. So no need to raise much debt for the aircraft deliveries this year.
As we go forward, and if Boeing lives up to their commitments to deliver us the aircraft we have on order on a timely manner, there would be a mix. It would be a mix of some aircraft financing and using some cash to pay for aircraft. And we have the normal debt amortization over the next few years, call it — I don’t have the numbers in front of me, but let’s call it about $3 billion kind of a year. And then eventually, we get to the point where some of this debt we would like to prepay becomes economical to prepay, and so that becomes an option, too. So we’ll balance all of that. And I just want to remind everybody that as we grow and as we hit our margin targets under our United Next plan, the cash generation from that plan puts us on our plan to hit those leverage metrics. So it is, as I said, one of our primary focuses right now.
Helane Becker
Okay, that’s very helpful, actually. So one of the questions I had was — and I guess I’m going to shift over to Patrick for this one. The major airlines, for a while, were upset with Emirates and Etihad for taking government money. I’m not going to talk about the government money because, without it, the industry wouldn’t be where it is and it would be even more fraught for people who wanted to travel. And since everybody seems to want to travel, it’s an okay thing. But there have been discussions in the press that you guys are talking to Emirates about a code share, a possible code share. Just kind of wondering if that’s accurate and how you’re thinking about that.
Patrick Quill
Yes. I guess…
Helane Becker
And the why of it, I guess.
Patrick Quill
So here’s what I would say. I would say, one, we put out an invitation for an event on September the 14th in D.C. And so I don’t want to get in front of my skis and make any announcements as to what that is today, Helane, on your conference, as much as I would love to. I don’t want to — I think that would be disrespectful of all the people who are doing a lot of hard work for September 14th. So I’m going to hold off on that. I would just comment that, look, I view my job as kind of like the Secretary of State for United Airlines. And so I think it’s better to have good relations with airlines around the world than to have bad relations. And so I spend a lot of my time traveling around and talking to people. And all I’ll say is they’re a world class airline, they have a fantastic management team, and they serve a lot of unique destinations from Dubai, which is, again, a fantastic hub. So I and all of us at United really respect them as a company and their management team and we have fantastic partners. We have Lufthansa Group, right? And so if you look at our joint venture with Lufthansa and Air Canada, it’s the largest joint venture in the world, and it’s really our core focus. But there’s obviously things that can enhance that and enable more for our passengers, our collective passengers.
Helane Becker
Yes. I would think, just looking where Dubai is and where India is, from an expansion perspective, you would be able to grow into — just conceptually into that market, the subcontinent where I imagine given where United’s hubs are now, there are a lot of expats that would be interested in doing that. So maybe that’s an easier connection than going over Frankfurt or Munich. But maybe there will be more information about that next week.
Patrick Quill
Yes, you’re baiting me, and I’m tempted to take the may, but I’m not going to — I’m not going to take the bait…
Helane Becker
I’m not baiting you, I’m just thinking about it conceptually.
Patrick Quill
Yes. I think you’re conceptually thinking really well, and you’re obviously a very smart individual, and you’re thinking of the network very clearly.
Helane Becker
Well, thanks for thinking I’m smart. I don’t know if I agree with that. Okay, wide body order. There’s been a lot of discussion about that, Gerry, that maybe there’s going to be a wide body order coming. Is that — anything to say there or do we have to wait for that, too?
Gerald Laderman
Nothing to say there when we have orders, whether they’re wide bodies or narrow bodies, we announce them, but there’s really no news there. I would point out, however, that you look at our fleet of wide bodies, which are terrific airplanes to fly, some of them are not young. And so we do have to focus on some of the oldest of the 777, 767, also the international 757 and determine what we want to do on the cadence of retirement plan for those aircraft, but nothing specific to announce right now. And of course, if — I was about to I say I think, at least once a week, Patrick is always asking for airplanes. So there’s always that to address.
Patrick Quill
Gerry, I’m consistent. If nothing else, I’m consistent. But Helane, the only other little bit of color I would add is that you should just keep in mind with Gerry’s comments is, look, we were materially different than most airlines around the world who have grounded most of their wide bodies during COVID. And Gerry and Scott and Andrew and Greg and everyone were committed to keep our wide bodies flying. And as a result, we have some wide body aircraft that are getting up there in age and so those aircraft do need to be replaced. And I would just add that a little bit of color, is that when you look at it, a lot of airlines retired those aircraft during COVID we didn’t, and so those aircraft are coming up to where they’re hitting major checks, that it’s more economic to retire them.
Helane Becker
To retire, yes. Because sometimes the economics work out that it’s better to — depending on cost of capital, it’s better to do the maintenance and keep them flying until they are older. But that presupposes that customers like those planes or they’re still reliable. I mean, really reliability is more important I think sometimes, so there is that to think about. And I think United also has an old A350 order on the books. So maybe you have to address those planes, too, and work out some kind of deal.
Gerald Laderman
That is a true statement. There is an A350 order on the books.
Helane Becker
Yes. Okay. Anything to add to that?
Gerald Laderman
No, that’s all part of the mix, what to do when. But to your comment about the economics of older aircraft, yes, it really depends on the aircraft type and how they’re flown. And one of the great things that Patrick and his team have done, they’ve become experts on [both], the layout of passenger accommodation, how to size each of the cabins in an aircraft, and they’ve just done some remarkable work on the 767 fleet to make that a terrific fleet. But even the best of aircraft ultimately hit an age where for an assortment of reasons, they have to be replaced. And then there are other aircraft that the new generation technology, this is true, both narrow bodies and wide bodies, there’s an easy case for replacement. The economics are just so much better for the newer air craft.
Helane Becker
Right. Well, speaking about — you guys have been an industry leader in SAF and carbon recapture and all the other things that you’ve been announcing over the last year and half. And then you just did the predelivery payment to Archer, I think, for $10 million, I think. That’s a lot of money in the whole scheme of things. But how are you — how should we think about the whole trend and where you guys want to be in, I don’t know, 2026 or ’27? I don’t know that those aircraft that you were thinking were coming in 2024, or coming then. And then there — and then how do you do that? And then crew is the other part of it, right, with — I mean, I would think having Boom aircraft too getting to Tokyo from New York or Chicago to London sooner rather than later is also an environmentally positive development.
Gerald Laderman
So that’s — you’ve asked a lot in that.
Helane Becker
I know I always ask a lot of questions. So you can pick which ones you want to answer.
Gerald Laderman
So I’ll start. But Helane, as you know, focus on climate change is part of United’s DNA at this point. And it’s led from the top, with Scott’s commitment that all of us support very much. And as you know, we formed United Airlines Ventures, whose most significant mandate in my mind is to invest in both the technology of the new environmentally friendly aircraft as well as SAF opportunities. And one thing that’s been very encouraging is we were an early proponent, but we’ve seen a lot of companies step up, even in the energy sector. And what’s important is that there’s money invested in research and development. We don’t know when we make these investments, which one is going to be the most successful. But if we don’t push the research in as many ways as we think makes sense, – we’re never going to solve the problem. And so we’ve been a proponent, we’ve been very outspoken about it and we’ve seen terrific support. So I can’t tell you which of the aircraft are going to kind of rise to the top and which processes for creating sustainable fuel is going to win over. The important thing is we need to try as much as we can until we come up with those solutions.
Helane Becker
Got it, that’s helpful. And how do bookings look here in September? I know you updated guidance this morning. The New York Post carried a story that Scott Rodino to the FAA asking for slots at JFK, or else, which I always think of that as kind of funny. So how should we think about like the booking curve and bookings in here going into into the fall as people are being increasingly ordered back to the office?
Patrick Quill
Yes. I would — I’ll take a crack at this and then Gerry can obviously jump in. Look, what I would say is we’re seeing a really strong September, and it doesn’t — it does not appear that summer has come to an end. It’s that strong. We look at Mexico, you look at the Caribbean, you look at Europe, kids are back in school, but the demand for our product to those places is the same as it was during the summer. And we historically don’t see that because historically always a drop off between August and September, and we’re not seeing that. So that’s fantastic. The other thing is, obviously, the booking curve has elongated. And so we’re seeing really, really strong yields. We’re seeing really strong demand in the premium cabin and also in the leisure cabin, the premium leisure cabin like Premium Economy. And it’s a premium leisure demand ultimately that’s driving this strength.
So overall, corporate bookings, if you define it in the strictest, purest sense of corporate bookings, the absolute number of passengers is down versus 2019. The revenue is actually in line or higher than 2019 just because yield has gotten so strong. But we think there’s a lot of opportunity for upside here because of the pent up demand for travel on the leisure front as well as, as you correctly pointed out, people are being ordered back in the office. And so when you layer that in going forward that’s going to produce, again, really strong yields. And what I would say is I was really proud of our guide this morning. Hopefully, you’re really pleased with it as well. And we expect to continue to see that strength in the fourth quarter and next year.
Helane Becker
Okay. Yes, I was not unhappy to see that. United was our best idea for 2022. So hope it works out. But as you’re thinking about Asia, how should we think about demand in that market? There is like a recent tit for tat with the government of China and US. And then Tokyo, I guess Japan is starting to loosen up a little bit, but you still need a visa to go there. So how should we be thinking about international recovery? I feel like Europe’s already recovered.
Patrick Quill
Yes, you’re thinking about it correctly. So Europe has recovered. Demand is very strong in Europe. And so you see that — you’ve seen it in our results, you are seeing in our results. And so probably no point to focus on that other than to say it’s really strong. We’ve done a fantastic job growing our network. We’ve done a fantastic job diversifying our network. And for the first time in our 96 year history, we are the largest airline across the Atlantic Ocean. And so that’s a point of pride that we at United have, that we can serve more destinations, more breadth. And we have a diverse portfolio of flying both into our partner hubs as well as smaller states throughout Africa and the Middle East. And so that’s a real point of pride. Flipping to Asia Pacific. Look, we see robust demand. Whenever countries reduce the entry requirements or eliminate entry requirements, we see really, really robust demand. And I think there’s almost a tale of kind of two Asias., There’s like China, Japan, which is a bit more metered and a bit more cautious and then there’s everything else, from Korea to Singapore through the South Pacific. And it’s all coming in incredibly strong and we’re very proud of the yield, we’re very happy with the margins. And Asia Pacific is just — it’s actually our strongest entity. Of all four entities, Asia Pacific is the strongest entity right now for United.
Helane Becker
It’s strongest because of pricing or unit revenues, or — margin…
Patrick Quill
It’s the strongest in terms of margins. So we look at profitability for the company and for domestic Atlantic Pacific and Latin. Pre-pandemic, Asia Pacific in aggregate was profitable. And so I don’t know if a lot of airlines can say about, but at United, we can say that all four entities were profitable, but Asia Pacific was the least profitable of all the profitable entities. Right now, Asia Pacific is the most profitable. And so it’s — we’ve been very intentional. It’s not by accident. We’ve been very intentional about how we’re building back our network, and we’re trying to make sure that as we build it back and as we are building it back, that we’re phasing it in a way that continues to capitalize off of profitable flying and a structural change in the region.
Helane Becker
We only have another minute. And I know Brett doesn’t like to talk about this, so I’m going to give it a little bit of a go. Gerry, you guys had a tentative agreement with the pilots. They were all getting — they were doing their roadshows, getting set to vote on the contract. And then American came in with their contract. And since then, rates have like gotten a little out of control for pilot pay. I mean, as an observer, if you’re a pilot, you’re probably really happy. So now you have to go back and renegotiate the contract. How should we think about that? What’s — I don’t know. What can you help us understand about next steps?
Gerald Laderman
Sure. I’m not going to talk about our discussions with our pilot group…
Helane Becker
Fair enough.
Gerald Laderman
That’s a process that we’ll go through its normal process basically. But you touched on the regional pilot issue. I think with American and what they did with their regional subsidiary pilot pay, that has a real impact on the regional space. If you were to ask any of the regional carriers what that means, it basically means that there’s been a reset there, that — and you saw one airline come out with more or less matching, or at least in the ballpark, that all of us going to have [Technical Difficulty] dynamic of the regional flying, and what is the right balance of regional versus mainline flying that all of us are going to have to deal with. So that I think will have a real impact and it really changes the economics of regional flying.
Helane Becker
Yes. We — unfortunately, I wanted to talk about that, but we ran out of time. So we’ll have to see, that’s part of another discussion. But thank you very much for being here. Thank you very much for your time today. I’m sorry we’re not in Boston. But I don’t know, Gerry, if you’re run to Morocco in a couple of weeks, but if you are, I’ll see you there.
Gerald Laderman
Unfortunately, we have a Board meeting. So I will miss Morocco, but it sounds like it will be a well attended and fun event…
Helane Becker
Yes. Well, it’s good that events are well attended, it’s just not the easiest place to get to, at least from the Eastern Coast of the United States. But anyway, thank you very much for your time today. Thank you, Patrick. Thank you, Jerry. And we’ll talk to you soon.
Gerald Laderman
Yes. Thank you, Helane.
Patrick Quill
Thanks, Helane.
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