United Airlines Holdings, Inc.
Q1 2013 Earnings Call Transcript

Published: 25 Apr 2013

[Operator:]

Good morning, and welcome to the United Continental Holdings earnings conference call for the first quarter 2013. My name is Larissa, and I'll be your conference facilitator today. [Operator Instructions] This call is being recorded and is copyrighted. Please note that no portion of the call may be recorded, transcribed or rebroadcast without the company's permission. Your participation implies your consent to our recording of this call. If you do not agree with these terms, simply drop off the line. I'll now turn the presentation over to your host for today's call, Nene Foxhall and Sarah Murphy. Please go ahead.

[Irene E. Foxhall:]

Thank you, Larissa. Good morning, everyone, and welcome to United's First Quarter 2013 Earnings Conference Call. Joining us here in Chicago to discuss our results are Chairman, President and CEO, Jeff Smisek; Vice Chairman and Chief Revenue Officer, Jim Compton; Executive Vice President and Chief Financial Officer, John Rainey; and Senior Vice President and Treasurer, Gerry Laderman. Jeff will begin with some overview comments. After which, Jim will review operational performance, capacity and revenue results. John will follow with a discussion of our cost and capital structure and guidance. Jeff will make a few closing remarks, and then we will open the call for questions, first, from analysts, and then from the media. [Operator Instructions] With that, I'll turn it over to Sarah Murphy.

[Sarah Murphy:]

Thank you, Nene. This morning, we issued our earnings release and separate investor update. Both are available on our website at ir.united.com. Let me point out that information in this morning's earnings release and investor update and the remarks made during this conference call may contain forward-looking statements, which represent the company's current expectations or beliefs concerning future events and financial performance. All forward-looking statements are based upon information currently available to the company. A number of factors could cause actual results to differ materially from our current expectation. Please refer to our press release, Form 10-K and other reports filed with the SEC by United Continental Holdings and United Airlines for a more thorough description of these factors. Also during the course of our call, we will discuss several non-GAAP financial measures. For a reconciliation of these non-GAAP measures to GAAP measures, please refer to the tables at the end of our earnings release, a copy of which is available on our website. Unless otherwise noted, special charges are excluded as we walk you through our numbers for the quarter. These items are detailed in our earnings release. And now, I'd like to turn the call over to Jeff Smisek, Chairman, President and CEO of United.

[Jeffery A. Smisek:]

Thanks, Nene and Sarah, and thank you, all, for joining us on our first quarter 2013 earnings call Today, we report a loss of $325 million for the first quarter or $0.98 per share. Although we're unhappy reporting a loss, we're encouraged by the progress we're making. Our operational performance, customer satisfaction scores and unit revenue results all significantly improved this quarter, thanks in large part to the efforts of my co-workers. Our top priorities for 2013 remain the same

[James E. Compton:]

Thanks, Jeff. I'd like to join Jeff in thanking my co-workers for all their efforts this quarter. We made significant progress on operational reliability and customer service this quarter, and we couldn't have done it without the hard work of the entire team. I also want to thank all of our customers for choosing United. We are working hard to win your business each and every day. 2013 got off to a strong start operationally, with the team achieving its best first quarter on-time performance in a decade despite significant storm activity. United averaged 81% in on-time performance in the first quarter, and we paid out $22 million to our co-workers for domestic and international on-time performance exceeding our monthly goal. Our operational performance was particularly strong during the busy spring break travel period, which overlapped with the Easter holiday. During the last 3 weeks in March, load factors were 87.9%, nearly 2 points higher than the comparable period a year ago. Over this period, the United team worked together and achieved an 82.1% domestic on-time performance, an improvement of 4.5 points versus the same period in 2012. This was the first true test of our operations since last summer, with an extended period of high load factors and not only met our goal, we exceeded it. One initiative that will support our operational performance is the new passenger service system interface called Aero [ph], which we rolled out to our gate agents in March. Aero [ph] is an integrated user interface which has intuitive and practical navigation to make the functions our agents perform easier and quicker. Hundreds of our front-line agents were involved in the design and development of Aero [ph], and it equips our co-workers with more accessible information and intuitive point-and-click access and also brings them added functionality. By June, gate agents will be able to perform all aspects of departure management within Aero [ph] at airports across the system. Later this year, we'll begin rolling out Aero [ph] to lobby agents, and then we'll roll it out to reservation agents beginning in early 2014. Moving to capacity. Our first quarter consolidated capacity decreased 4.9% year-over-year. This was at the low end of the range we guided to in January, in large part due to higher-than-expected winter storm activity. Capacity discipline remains a key tenet of our strategy, and the trans-Atlantic region is a good example where we reduced capacity 10.2% year-over-year in the first quarter as we rightsized our footprint in response to the economic weakness we continue to see in Europe. One of the benefits of having a balanced global network with strength in each entity is that we're better able to respond to any change in economic conditions in a particular global region. We expect second quarter consolidated capacity to decrease between 1.7% and 2.7% year-over-year and expect full year 2013 capacity to decline 0.75% to 1.75% versus 2012. Full year capacity guidance was lower than we guided to in January primarily due to the effect of the grounding of our 787 Dreamliners. We've made some schedule changes because of our inability to put the Dreamliners into service, and we expect to resume 787 domestic flying in May, with Denver to Tokyo, Narita scheduled to begin on June 10. We expect to begin flying 787s from Los Angeles to Tokyo, Narita; Los Angeles to Shanghai; and Houston to Lagos in August and have delayed the launch of our San Francisco to Taipei route on a 777 from 2013 to 2014. These flights represent a substantial amount of ASMs. And while the delays lower our 2000 (sic) [ 2013 ] capacity outlook, they will increase our expected 2014 year-over-year capacity. Turning to our revenue results. First quarter consolidated passenger unit revenue increased 5.9% year-over-year. A few items positively impacted first quarter PRASM results, including Easter shifting into March and overlapping with spring break this year and higher-than-expected weather-related cancellations, which lowered capacity. In 2012, we underperformed our peers by 1 to 2 PRASM points, and we're beginning to close that gap with our first quarter revenue results. The depreciation of the yen reduced first quarter passenger revenue by approximately $20 million, and we expect the year-over-year yen pressure to continue throughout 2013. Despite the negative yen impact, the Pacific continued to perform quite well for us in the first quarter. Pacific PRASM increased 7.2% year-over-year due to both higher yields and loads. China was again a standout, with first quarter PRASM increasing 13% compared to the first quarter of 2012. Corporate revenue began slowly recovering in the first quarter, increasing approximately 4% versus 2012. Despite the momentum we've seen with unit revenues since the start of the year, we are facing some headwinds. Certain economic indicators, including U.S. GDP outlook for the second and third quarters, have weakened since the start of the year. We have seen some impact on our April business mix, and we'll continue to monitor the outlook closely and make appropriate adjustments necessary. Also impacting business mix, government contract travel declined approximately 25% in the first quarter year-over-year, and we expect this trend to persist in the near term. Government contract travel, while an important piece of business for United, represents only about 2% of our overall passenger revenue. Competition has increased in the transcon markets, and the associated pricing actions have stimulated demand on New York to San Francisco and Los Angeles routes. This month, a competitor introduced new service on Newark transcon routes and lowered fares by more than 20%, which will negatively impact our second quarter PRASM. With lower fares, demand between Newark and San Francisco and Los Angeles has increased, and we've shifted some capacity from other markets to this market to add frequencies and strengthen our position as the New York area's leading airline. These added frequencies supplement our existing service between these hubs, as well as our popular p.s. service between JFK and our hubs in Los Angeles and San Francisco. Like any other company, large or small, that faces a new competitor, we will make sure Newark transcon customers can find a seat at a competitive price on a United flight. Part of our business plan at United is the continuous assessment of economic and demand trends. And as I mentioned, the latest macroeconomic outlook for the remainder of 2013 has softened. We'll continue to evaluate the demand environment as the year progresses, and we'll respond appropriately should conditions change. Turning to our near-term revenue outlook. Yields have softened as a result of the factors I've just discussed, and we currently estimate United's April consolidated PRASM to be flat to down 1 point year-over-year. This PRASM estimate is preliminary based on the data we have for April thus far. Ancillary revenue continues to perform very well, with first quarter ancillary revenue up 13%, and ancillary revenue per passenger up 14% versus the same period in 2012. Our goal is to grow ancillary revenue per passenger by at least 9% in 2013, and our first quarter performance positions us well to achieve that target. Improvements in Economy Plus and paid premium upgrades continue to drive much of the year-over-year growth in ancillary revenue. Sales of both Economy Plus and paid premium upgrades increased more than 40% year-over-year in the first quarter. A portion of the increase in preferred seating sales is due to more of our customers using direct channels for booking. The shift towards united.com and our mobile app allows our customers to take full advantage of our product and services that they value and comes at a lower cost to United than other distribution channels. We relaunched our Premier Access product in the first quarter, which allows customers to enjoy the convenience of priority security and check-in lines, as well as priority boarding. Service charges related to ticketing and itinerary changes grew about 10% in the first quarter due in large part to our improved operational performance, which reduced the need to waive these service charges. This is an example of how running an on-time, reliable airline directly benefits the bottom line. In addition to improving our network and ancillary product offering, we are upgrading United's product on the ground and in the air. We expect to open a new United Club in Seattle in the second quarter, with a similar modern look and feel as our new United Club at O'Hare's Terminal 2, offering comfortable space for our customers to work or relax. We're investing in our onboard products as well, with Economy Plus on nearly all of our mainline aircraft and most of our larger regional aircraft and lie-flat seats on 182 aircraft. In addition, as Jeff mentioned, we have 51 aircraft with Wi-Fi today, 38 of which have global satellite-based Wi-Fi and 13 of which have ground-based Wi-Fi. With the world's best network, our modern fleet and leading product offering, a great team of co-workers and a significantly improved operational performance and customer service, we are well positioned to drive strong revenue results going forward. We're encouraged with the progress we've made this quarter, but we're not yet where we need to be. With that, I'll turn the call over to John.

[John D. Rainey:]

Thanks, Jim. I'd like to start by thanking my co-workers for all of their hard work in the first quarter. By working together, we made significant progress in building the infrastructure we need to produce the level of returns our investors expect. Today, we reported a first quarter loss of $325 million. But during the quarter, we made significant investments in our operations, our fleet, our product offering and our people, and these investments are the right ones to make for the long term. We have also significantly improved our balance sheet since the merger and made more progress this quarter by paying down high coupon debt, reducing the size of our term loan and doubling the size of our revolving credit facility. Our first quarter consolidated operating expenses increased 2.1%. We made a number of decisions to accelerate certain expenses into the first quarter, including preventive maintenance work as we prepared our operations for the summer peak. First quarter consolidated CASM, excluding fuel, third-party business expense and profit sharing, increased 11.1% versus 2012 in large part due to a 4.9% reduction in our consolidated capacity. Holding fuel rate and profit sharing constant, our first quarter consolidated unit cost increased 7.2% year-over-year. The increase in first quarter CASM, again, excluding fuel, third-party business expense and profit-sharing, is slightly below the guidance range we provided in our March investor update. At the end of the quarter, we signed a contract extension with a maintenance provider that resulted in more favorable terms and muted some of the increase in first quarter maintenance expense. Our cost increase in the first quarter was higher than what's acceptable, and we are committed to becoming more efficient in every aspect of our business. The achievement of our long-term financial goals relies on providing the best product and service to our customers and doing it in a far more cost-effective manner than our first quarter results reflect. As we previously announced, we are in the process of reducing management and administrative workforce by 6% and are about 2/3 through that process. We now expect our full year capacity to decline further than we had anticipated due in part to the grounding of the 787, and we need to reduce our cost commensurate with that additional capacity decline. As our operations continue to improve and become even more stable, we will run them more efficiently, which will permit our people to focus even more on delivering great customer service every day. Concurrently, we are investing in technology for our customers like our mobile app and tools for our co-workers like Aero [ph], the enhanced front end to our passenger service system, to make the airport experience easier and more efficient. Another example of our commitment to efficiency is fuel consumption. In addition to operating a fuel-efficient fleet, we have several operational initiatives underway to reduce fuel consumption. We are constantly looking for opportunities to improve in this area because even small improvements have a meaningful impact on the bottom line. For example, this quarter we became the launch customer for the new Split Scimitar Winglet, built by Aviation Partners Boeing, which will help us further reduce fuel burn on our Boeing 737 Next-Gen fleet by up to 1.8%. For the second quarter, we expect CASM, excluding fuel, third-party business expense and profit-sharing, to increase between 6.7% and 7.7% year-over-year. We expect full year CASM, excluding fuel, third-party business expense and profit-sharing, to increase between 5.5% and 6.5% year-over-year on lower capacity. Our full year CASM guidance is higher than our original expectation at the start of the year because of a lower capacity outlook and the impact of accelerated depreciation from an agreement to sell aircraft to FedEx. We reached an agreement during the first quarter to sell up to 30 Boeing 757-200 aircraft to FedEx and delivered the first aircraft to them this week. We had planned to retire these aircraft in the coming years, and this agreement will permit us to accelerate the elimination of older, less-efficient aircraft from our fleet. As a result of this agreement, we accelerated the depreciation of some of these aircraft, which will increase depreciation expense by approximately $80 million in 2013, $12 million of which was in the first quarter. While the accelerated depreciation will adversely impact 2013 earnings, this agreement results in a positive economic outcome over the time period that these aircraft are replaced and provides a better product for our customers. It's another indication of how we are managing the business with a focus on creating long-term shareholder value. During the first quarter, we took delivery of 6 new Boeing 737-900ERs and retired 2 Boeing 757-200s and 3 Boeing 737-500s. In the second quarter, we expect to take delivery of 6 more new Boeing 737-900ERs and retire 12 mainline aircraft, including the last 5 Boeing 737-500s and 5 Boeing 767-200s. We made substantial progress in strengthening our balance sheet in the first quarter, and our capital structure is the best that it's been in years. We made $1.3 billion of debt and capital lease payments in the first quarter, including $1 billion of prepayments. During the first quarter, we took 2 actions that significantly improved the health of our balance sheet

[Jeffery A. Smisek:]

Thanks, John. None of us is happy with our first quarter financial results, but all of us believe that our operational and customer satisfaction results for the quarter offer proof that we're taking the right steps in building the foundation for our future. We have high aspirations and the focus and determination to achieve them. Not only do we want to create the world's leading airline, but we want to create an airline that is actually a real business, a business that consistently invests in its product and customer service, a business that invests in tools and training for its co-workers, a business that competes and wins against its competitors and a business that consistently earns a sufficient return on its invested capital. We still have much work ahead of us before we can achieve these goals, but we're confident we're on the right path. I'll now turn it over to Sarah to open up the call for questions.

[Sarah Murphy:]

Thank you, Jeff. First, we will take questions from the analyst community, then we will take questions from the media. [Operator Instructions] Larissa, please describe the procedure to ask a question.

[Operator:]

[Operator Instructions] The first question comes from David Fintzen from Barclays.

[David E. Fintzen:]

A question for Jim. You kind of walked through some of the moving parts of RASM in the quarter from comp to sort of weather and the like. I'm curious sort of on 2 pieces potentially. One of is, can you quantify what you think the weather -- I wouldn't want to say benefit, but the weather impact to RASM in 1Q was? And then is there anything you can disclose in terms of corporate share and sort of how much corporate share gain? Or do you think there's corporate share gain that's happening as you start to bring some of that business traffic that was on detour back on to the system?

[James E. Compton:]

David, this is Jim. Weather-related capacity was down about 1%, and so we haven't assigned a RASM contribution to that. But clearly, that was one of the pieces of it. We've talked about the Easter shift, and we estimate that to be about 0.5 to 1 point of that RASM so that piece, we feel pretty comfortable with identifying. In terms of corporate, what I'd like to say is that what we're hearing from our corporations, first of all, and from our corporate travel managers is they're clearly recognizing the work the team has done in operations to bring back reliability. We're getting that feedback as we continue, as always, to have dialogues with them through the quarter. From a share perspective, though, I'd like -- we're seeing that recovery of the revenue that we lost last year. And so when you ask, where is that share gain, I'd say that share gain is positive versus where we're off last year, but we still feel we have a lot of work to do and to upside in terms of regaining what we lost last year. As well as by -- again, as I've talked to before, the dialogue with the corporations is not about the operational difficulties that we had last year. It's really about how we can bring value to their travel needs, and we think that has upside to us in the future also.

[David E. Fintzen:]

Okay, that's helpful. And then maybe just a quick one for John. Just you -- we have the CapEx guidance for this year. But just any sense how we should be thinking about CapEx kind of beyond this year?

[John D. Rainey:]

Well, David, we talked about when we gave our CapEx guidance at the beginning of the year that there was a disproportionate amount of onetime items in this year. I think we said it was roughly half of our CapEx was more anomalous, sort of once-in-a-generation type items like building a data center or 2 new maintenance centers or maintenance hangars, like we are this year. Going forward, just sort of from a run rate perspective, we're going to continue to focus on our fuel-efficient fleet. We've got 700 planes, and if we fly those planes 25 or 30 years, we're going to replace 25 to 30 a year. So from a fleet CapEx, that's what a normal run rate will be. That's going to be a little bit lumpy from one year to the next. I think the real area of improvement is in the non-aircraft CapEx, and I would expect that to come down appreciably. We still do have some CapEx needs related to this integration, I mean one of the things we're doing is sticking 2 airlines, putting 2 airlines together. So it's not going to just plummet next year, but we do hope to see that come down in the very near future.

[Operator:]

John Godyn from Morgan Stanley is online with a question.

[John D. Godyn:]

Jim, I just wanted to follow up on some of your PRASM commentary there, just clarify 2 things. I think you just mentioned that you weren't quite at that sort of 2% run rate even though we've seen some of these months show very strong PRASM, like we did in March. That's not representative of yet being at that 2% sort of gap that you're looking to close. And secondarily, when we think about the nature of that 2% that you estimated for last year, I think not all months are created equal. As we look into this summer, isn't that gap -- I mean, is it fair to assume that, that gap that could be closed could be significantly more than 2% just because that period was particularly soft last year? Just curious what your thoughts are.

[James E. Compton:]

John, I think it's a good point that you allude to. I think looking at RASM month-to-month basis, there's all kinds of things that can affect any individual month. So that when we talk about the 1 to 2 points last year, it's really a smoothing over the year of what we thought we lost, right? And so we talked about a year ago at this time, the first quarter with some items related to our cutting over to our revenue management system to a single optimizer, and we've talked about that, as well as some conservative booking around March 3 in PSS, that's attributing to about a 1-point RASM negative to us. And as you went through the year, I think different issues came up for the company. As you run into the second quarter and some of the stress that we put on our customers and our employees through the integration, the complication of the integration also affected our performance. And to your point, in the summer, particularly in July, our operational reliability hit its lowest level. So I think getting back to where I started, I think that we really feel that the 1 to 2 points in lost RASM points in the revenue associated with that was with a number of things last year, with the integration of the airline. And we feel comfortable we're on track in terms of regaining that, as first seen in our first quarter RASM performance. But still, we know we have a lot of work to do and really focused on getting all that back and again, building on the strength of the network.

[John D. Godyn:]

Great. And John, just one on cost. I know that this year is sort of a transition year with some CASM x fuel and inflation. But when we just sort of take step back and think about what a normalized CASM x fuel growth rate trend should be in a flattish capacity environment, how should we think about that?

[John D. Rainey:]

John, probably 2/3 of our CASM increase on a full year basis is related to the some of the mark-to-market on our new labor agreements, and that is clearly more one-time in nature. Going forward, you'll see more normal sort of standard yearly increases, and so I think this is clearly a blip for us. I think in a flat capacity environment, we ought to be trying to maintain our unit cost to something at an inflation level or below.

[Operator:]

Mike Linenberg from Deutsche Bank is online with a question.

[Michael Linenberg:]

I have a couple here. A couple of carriers around the world who fly the 787 have publicly indicated maybe what the impact was to them. I suspect that, that's not your style. Some of these are much more aggressive in going after the manufacturers for penalties. When we think about the March quarter, how much of an impact did the 787 grounding have? And I mean, you've already given us the capacity, a revised number which, for the year, it's a 75-basis-point hit. But is there anything else you can say about maybe additional costs incurred carrying a core of 787 pilots not being able to fly in some of these markets, maybe some revenue impact. Anything that you can give us on that front would be great.

[John D. Rainey:]

Mike, this is John. In terms of the costs that we can specifically ascribe to the grounding of the 787, we took a special charge in the quarter, which included about $11 million related to the 787. Clearly, there's some other kind of revenue impact, if you will, which is much smaller and is not necessarily included in special charge. But we're excited to have the plane back and get it back flying next month. It is a great airplane. And Boeing has been a great partner with us, and we fully expect them to continue to be.

[Michael Linenberg:]

Okay, great, John. And then just my second question, and this is to Jim. We have the capacity plan, which is -- which has been revised lower. As we look at the business that you have tuned from Japan, you to do carry a fair share amount of Japanese leisure traffic. I know we are heading into the peak summer season. But is -- the bias, with respect to capacity, is it to the downside when we think about where the yen is, where the forecasts are for the yen later this year and as a result, what that will do to the demand from Japanese travelers to U.S. dollar-denominated destinations like Guam?

[James E. Compton:]

Mike, Jim. The -- I think our capacity and guidance is right in line with kind of -- with where we expect the yen to be and the demand associated with it. The Japanese -- those packages, particularly the Guam, are baht- and yen-denominated, and so we think our capacity is lined fairly well in terms of the demand, in terms of the passenger traffic through there. But to your point, as always, when I make the macro assumption that we'll monitor the environment and so forth, we'll do that at a regional level also and make sure that we adjust capacity based on the demand that we're seeing.

[Michael Linenberg:]

Okay. Jim, just asking it another way. Is it -- does the fleet forward schedule actually already incorporate some drawdown in capacity in some of those markets?

[James E. Compton:]

No, no. At this point, it's still our -- it's our plan that we've had for this year.

[Operator:]

Hunter Keay from Wolfe Trahan is online with a question.

[Hunter K. Keay:]

John, correct me if I'm wrong, I may be looking at this table wrong, so please, first of all, tell me if I'm incorrect. But it looks like if Brent goes up by $40 per barrel, you're only saving $0.09 on your hedge book. And when I look at $110 million of hedge losses being run through the P&L, it just -- I think it begs some questions on sort of the strategy between keeping premium costs down and hedging against sort of these spikes that may be sort of exogenous-driven. So I guess the question here is, what is the hedging strategy? And when I see stuff like this, should I maybe think that it's open to changing?

[John D. Rainey:]

First of all, Hunter, I'd say that we always look at what's going on in the oil market, and we are -- we take into account changes in the oil market with respect to our hedging strategy. What we've done, over the last year, probably is more what I would describe as hedging with a range bound mindset in terms of what happened to fuel. If you look at 2008, 2009, fuel ran up to $140 or whatever it was. Jet fuel, I think, was at the $170 level, and clearly, that created some demand distraction and you saw new sources of supply come on. And it appears now that the range that oil is trading in is much closer in. And so what we've done with our hedge book is reflect that, and so you see us taking these 3-way positions where we might buy a call at, say, for example, $110 Brent and then sell it at $125. And so we're protected in that range from $110 to $125. And so in your question, your example, yes if it goes to $140, we're not protected at that point. But I think what we've seen is that there's a certain amount of demand distraction that occurs at that point, and that's not something that can be sustained. And I think to insure for that is very expensive. Our hedge book today, we're about 34% hedged over the next 12 months, and we've spent $11 million or $12 million on the hedge premium. So I think it's a prudent use of our cash, considering that this is almost $13 billion of our cost structure, and it's something, I think, we're pretty thoughtful about. What you're seeing, in respect to the possible hedge loss, that's simply a mark-to-market swing from one month to the next, and we've seen prices come down appreciably here in the last week or so. And so as we mark-to-market that hedge position that doesn't get hedge accounting, that's going to swing the other way. We had a $50 million positive swing, a gain, this month and that could bounce back. But this is one way that we try to minimize and mute the volatility. As I said, fuel efficiency is another way. We spend a lot of capital and focus on that. And then lastly, I think we continue to believe that as an industry, we need to be able to price through our cost inputs. And that's one of the benefits, I think, that we've seen with some of the consolidation is a healthier, more structurally sound business.

[Hunter K. Keay:]

Okay, John. That's helpful. In terms of -- another question maybe for Jim or Jeff even. I'm a little surprised to hear you guys mention specifically the Newark, San Francisco route. Given that -- I kind of thought that it would be -- your network would be big enough to absorb sort of turf defenses like this without it showing up. And some of the pushback that I get a lot when I push a bull case for airlines is this whole concept of barriers to entry and airlines defending turf. With the realization that this is obviously a trunk route for you and it's of utmost strategic importance for the long term is clearly not helpful for your ROIC right now. And I guess, the question is how long are you willing to defend this turf? How willing do you think Virgin is to stay here and bleed losses for an extended period of time before something actually has to give?

[James E. Compton:]

Hunter, Jim. So the way we think about the market is, obviously, it's -- when we've seen competitors come into a market and lower prices significantly, it generates a lot of demand. And it's unique to us because we have such a great presence in both the L.A. basin, the San Francisco Bay area, and we've talked about our great presence in New York. But prices that have been lowered as much as 20% -- starting at 20% down, when you have great presence in those markets is going to generate a lot of demand. And so the way we look at it is that we want to make sure that as we generate significant demand, that customers that want to fly United have a seat and they can get it. I will say that we don't -- we think about that in terms of also our kind of overall strategy right, our overall strategy of capacity discipline. And so as you can see, as we manage ourselves in that market, we haven't changed our guidance, our capacity, and we find ways to do it across the network that, quite frankly, every day what we're trying to do is optimize the network. and I think that's what our goal is and that's what we're trying to do, when someone stimulates that much demand is make sure that we have a seat for our passengers.

[Operator:]

Glenn Engel from Bank of America is online with a question.

[Glenn D. Engel:]

Can you talk about labor? There was a flight attendant agreement that didn't end up happening. Do you end up keeping that in your accruals anyhow even though the agreement was rejected? And where are we in terms of which groups have had their wages harmonized, which still have left? And where are we on integrating contracts?

[John D. Rainey:]

Glenn, this is John. The agreement that there was a TA for, tentative agreement, that did not ratify was for the employees that are represented by the IAM, which is our customer contact and airport agents. That did not ratify, to your point. We're still's optimistic that we will get a deal there. I think that any time that there's -- something like that is voted down, we want to take into account the reasons why it was voted down and see if we can reshuffle the deck chairs and get something that is good for our employees and good for the company. So to the -- we still are optimistic about that and there is still some amount of costs in our guidance for the full year for that. With respect to...

[Glenn D. Engel:]

Is that not reflected in the first quarter as well?

[John D. Rainey:]

It was reflected in the first quarter because we had an expectation that it would ratify. That's one of the reasons our cost guidance came in slightly better than what we expected when it didn't.

[Glenn D. Engel:]

Okay. And the rest?

[John D. Rainey:]

Yes, with respect to the other labor groups, obviously, we got -- made a significant achievement with our pilots in getting a JCBA there. We still need to get -- while we've had individual labor agreements with each of the 2 sides, on the flight attendant side as well as the mechanics side, we are working through the joint collective bargaining process there. I don't really -- I can't really give you an idea in terms of timing, but it's something that we clearly recognize our employees want and we want. I think all being part of one team and being under -- all rolling together is an important aspect of getting these 2 groups together.

[Operator:]

Jamie Baker from JP Morgan is online with a question.

[Jamie N. Baker:]

First question relates to H7N9. It doesn't appear that the virus has driven any revisions in your schedules or your business plan. But in the event we have a repeat of SARS, could you remind us as to what your network options are? What level of capacity can you pull down before you start jeopardizing slot and route rights? Would capacity more likely be grounded? Or should we assume it's redeployed? Just what's -- wondering what sort of network contingency you might be thinking about.

[James E. Compton:]

Jamie, this is Jim. Similar to H1N1 years ago, we actually have good flexibility in order to adjust our capacity. To this point, as you mentioned, the current flu, we're not seeing any significant booking away or any significant impact due to it. We, obviously, watch and monitor the CDC very closely and work with the field and so forth. But based on past experience, we've had tremendous flexibility to adjust, and I think, obviously, with the breadth of the network now, the flexibility is more enhanced in today's environment than even years ago.

[Jamie N. Baker:]

Yes, that's a good point. It was a pre-merger phenomenon. Second question for Jeff, if air travel didn't take so long, I'd do more of it, and I'd be willing to pay more for it. The most recent and best example of an initiative that actually improves the value proposition of air travel is PreCheck, and that's not even an airline idea. It's a government program. It isn't perfect, but it does make things faster. And I would argue that, that's the -- speed is the business that you're in. So programs like global services, concierge key, very lavish benefits. They make the time allocated to air travel more pleasant, but they don't decrease the time that it takes. So here's my question, do you think there's an opportunity for an airline to ever come up with a program that actually improves on the amount of time travel takes? Or do we have to rely on the government to take this out for us?

[Jeffery A. Smisek:]

Well, there's a couple of things, Jamie. First of all, as you probably know, we've -- since 9/11, we've been working with the government to have a more logical and layered approach to security, and you recollect the old "trusted traveler" idea. Well, precheck is essentially that, finally. It's taken the government a long time. As you know, we do not control the TSA and we -- all we can do is talk to them and plead with them. But I must say I commend the TSA for coming up finally with PreCheck. It's an excellent product, and I would encourage every traveler who qualifies for it to do because it's superb. It's like the good old days, and it does indeed save time. We do offer Premier Line and Premier Access to our customers, which speeds them through, our Premier Lines, through security and also boarding at the gate. So we are very conscious of our customers' time. We do -- that's why we also do our very best to run a reliable operation to minimize the delays and to get people where they want to go on time.

[Operator:]

Ladies and gentlemen, this concludes the analyst and investor portion of our call today. We'll now take calls from the media. [Operator Instructions] Mary Jane Credeur from Bloomberg News is online with a question.

[Mary Jane Credeur:]

[indiscernible] situation. And can you quantify how many flights you're seeing delayed on any given day, what it looks like at peak time versus nonpeak? And what's going to happen when we get a big nasty thunderstorm on a Monday morning?

[Jeffery A. Smisek:]

Mary Jane, I'm sorry, you faded out. But I assume you're talking about the air traffic control furloughs?

[Mary Jane Credeur:]

Yes, sir.

[Jeffery A. Smisek:]

Yes, sure. Right now, let me -- first of all, let me tell you that I think everyone knows that this is very frustrating for everyone, for our customers, for our co-workers, and we're doing our best to help our customers. As I mentioned earlier, we've got great folks not only at our network operation but our airports, working to minimize the impacts on the customers. And so far, we've been able to limit the flight cancellations to our regional operations, not the mainline. That's affects fewer passengers because the regionals carry fewer passengers than the mainline. But the delays are indeed affecting our mainline operations. At United, we -- this is so far affecting, on average, about 20,000 passengers a day, and of course, all of our competitors are experiencing similar effects because this is a network business. We're working with A4A, Airlines for America, which is our industry association in D.C. And this is clearly a network business, and the cancellations and delays will be cumulative. The longer this goes on for us and for all of our competitors and for all of the customers nationwide, it's going to have -- if it continues on, it will have an average effect on the industry and the economy as well. And at both of those, there's got to be a better way. Look, there are very good folks in Washington who understand what's happening and they want to fix it, and we're working with them in every way we can. But one thing I just want to make clear to you is that this isn't the fault of the air traffic controllers. I mean, they're doing their very best to manage flights under really difficult circumstances, and I want them to know that we support them. And we appreciate all they're doing to minimize the impact of the furloughs.

[Mary Jane Credeur:]

And do you think that we'll have -- there's talk just this last day or so of a legislative solution possibly percolating. Do you think that, that will come to fruition?

[Jeffery A. Smisek:]

Well, we're certainly hopeful that -- well, we're certainly working with the good folks in Washington to make that happen. I mean, this is really important for our nation. This is something that, if it continues, it will damage our economy, it will damage jobs. This cannot continue, and I hope the good folks in Washington that we're working with will get that legislation drafted and passed and on the President's desk.

[Operator:]

Josh Freed from the Associated Press is online with a question.

[Josh Freed:]

Further on the air traffic control situation, do you get any kind of heads up or guidance from FAA on where they should be? I mean to what extent are you able to plan ahead? I mean, do you get 6 hours' notice, 24 hours' notice on furloughs? Maybe you can tell us a little more about that.

[Jeffery A. Smisek:]

Well, we obviously are in contact within as much as we can be, and we have morning calls with them. But these are a bit like sort of pop-up thunderstorms, they are not predictable. The problem is there's no consistency to it, and it's very hard to plan for, Josh. The result of that is you can't effectively pull down schedules like you could in a storm system, where you can see it coming and then you can take action ahead of time. This is -- this pops up around the country fairly randomly, and that's what makes it so difficult and that's what makes it candidly so much harder on our customers.

[Josh Freed:]

All right. And do you think it will continue that you'll be able to prevent cancellations on the mainline? Or is it doubtful that, that will -- do you think eventually this will start to hit the mainline more?

[Jeffery A. Smisek:]

Josh, I don't know. It just depends upon how this falls out. I think we'll be a lot smarter over time. I hope that we don't have to be smarter over time. I hope that our -- the folks in Washington will realize how severe this is. I believe they are realizing it and will take action to stop it.

[Sarah Murphy:]

Okay. With that, we're out of time, so we'll conclude. Thanks to all of you on the call for joining us today. Please call media relations if you have further questions, and we look forward to talking to you next quarter. Goodbye.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participating. You may now disconnect.