United Airlines Holdings, Inc. (NASDAQ:UAL) Q1 2023 Earnings Call Transcript April 19, 2023
United Airlines Holdings, Inc. beats earnings expectations. Reported EPS is $-0.63, expectations were $-0.73.
Operator Good morning and welcome to the United Airlines Holdings Earnings Conference Call for the First Quarter 2023. My name is Silas and I will be your conference facilitator today. Following the initial remarks from management, we will open the lines for questions. [Operator Instructions] This call is being recorded and is copyrighted. Please note that no portion of the call maybe recorded, transcribed or rebroadcast without the company’s permission. Your participation implies your consent to the recording of this call. If you do not agree with these terms, simply drop off the line.I will now turn the presentation over to your host for today’s call, Kristina Munoz, Director of Investor Relations. Please go ahead.Kristina Munoz Thank you, Silas.
Good morning, everyone and welcome to United’s first quarter 2023 earnings conference call. Yesterday, we issued our earnings release and investor update, which is available on our website, ir.united.com. Information in yesterday’s release 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 expectations. Please refer to our earnings release, Form 10-K and 10-Q and other reports filed with the SEC by United Airlines Holdings and United Airlines for a more thorough description of these factors.
Unless otherwise noted, we will be discussing our financial metrics on a non-GAAP basis on this call. Please refer to the related definitions and reconciliations in our press release. For a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please refer to the tables at the end of our earnings release.Joining us on the call today to discuss our results and outlook are Chief Executive Officer, Scott Kirby; President, Brett Hart; Executive Vice President and Chief Commercial Officer, Andrew Nocella; and Executive Vice President and Chief Financial Officer, Gerry Laderman. In addition, we have other members of the executive team on the line available to assist with Q&A.And now I’d like to turn the call over to Scott.Scott Kirby Thanks, Kristina and good morning, everyone.
I want to start by thanking the entire United team for delivering exceptional operation this quarter. Given our hub geography United almost all has the most flights impacted by weather, air traffic control delays of any U.S. airline. But despite this in Q1, we had the lowest mainline flight and seat cancellation rates of any airline in the country. That’s important, not just for the obvious customer and brand impact, but it’s also the key to hitting our planned capacity and CASM-ex target. I am going to leave the detailed quarterly results and guidance to Gerry and Andrew.But today, I will take a few minutes to talk about four emerging themes that have come to the foreground that I think are important to the United investment case. One, there appears to be a clear change in seasonality that is causing peak leisure demand months, March through October to be even stronger, while months that were historically reliant on business demand are weaker, that particularly impacts January, February, and the first half of November and December.
We believe demand is just structurally different than it was pre-pandemic and we are still figuring out that new normal.Second, as we have expected all along, long-haul international is moving into the lead over domestic. Andrew will give more details, but this is a multi-year structural change based on aircraft retirements and pilot downgrades as essentially all long-haul U.S. airlines around the world except United. But my third theme is an appropriately cautionary point. Our guidance and everything we are discussing today is our base case scenario based on what we are seeing right now. And what we are seeing right now is still strong demand. At airlines, the macroeconomic weakness is being offset with a counter trend of consumer spending continuing to rebalance back to services.
And by the way, we still remain below our historical GDP relationship arguably indicating more room to run in the revenue recovery. However, it seems clear that the macro risks are higher to-date than they were even a few months ago as demonstrated by the banking scare of Silicon Valley Bank. We saw an immediate drop in [closing] (ph) business demand that lasted for about 2 weeks, but now appears to have recovered.Our base case therefore remains a mild recession or soft landing which is consistent with what we are currently seeing in our bookings. But we agree that the tail risk is higher than normal. While we feel good about our 10 to 12 full year EPS, if the economy softens further we have prepared for it by a) having a lot of flexibility in the business line capacity if needed, b) improving our balance sheet to withstand the near-term issue with approximately $19 billion in liquidity and having reduced our total debt including pension by $4.6 billion over the past 12 months, and c) is actually my fourth theme which is controlling what we can and hitting our CASM-ex target in this new, different and more challenging operating environment.
We can’t control what happens with the macro economy, but we can and are doing a great job of controlling our cost. We can’t run your airline like it’s 2019, it’s different and harder now.Cancellation rates are the leading indicator of forward capacity and therefore CASM-ex and United is leading the way on this front. Gerry will discuss some of the year-over-year tailwinds that will drive lower CASM-ex in the back half of this year, but we only need CASM-ex to be approximately 1 point better in the second half of the year to hit our full year target. We remain solidly on track.To wrap up, over the last 3 years, our industry has confronted a rapidly changing environment. United hasn’t been perfect, but we have got a lot more right than normal.
In the big picture, we have got it right and took the steps in the last 3 years to thrive in exactly this environment. International is stronger, the operating environment is more challenging, which means reliability is harder, but also had a premium for producing bottom line results and we had confidence that our gauge growth and execution are keeping United uniquely on track for our near and long-term CASM-ex trajectory, that not to say that there aren’t real near-term risk, because we all know there are, but we feel really good about the strategic setup and tactical execution here at United.I want to again thank the entire United team for their hard work this quarter. We had a busy summer season ahead and I look forward to achieving even more operational and financial records.With that, I will turn it over to Brett.Brett Hart Thank you, Scott, and thank you to our United team for their hard work this quarter.
As Scott mentioned, we continue to see the benefits of running a strong operation. In the first quarter, United led the industry with the lowest seat cancellation rate despite around 20% of our flights being impacted by weather, the most out of any of our competitors. This was the first time since 2012 that we led on this metric.Additionally, United was first or second in the quarter for on-time departures at nearly all of our hub locations, including those heavily impacted by winter weather like O’Hare and Denver. Our airline is built to run well and recover fast and we expect our operation to reflect that in the peak summer season. We continue to navigate the challenges in the current operating environment. Specifically, constrained industry infrastructure, United is working with the U.S. Department of Transportation and FAA regarding operational disruptions and air traffic staffing challenges.
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The FAA’s decision to consider commercial air traffic with managing the growing number of space launches combined with the FAA’s recent move to give carriers more flexibility in how we all fly in and out of New York area airports shows that the FAA is listening to feedback and finding ways we can all work together.In March, we took steps to reduce our schedule in the New York region and DCA by around 30 daily departures over the summer period to provide the air space relief requested by the FAA. The scheduled reductions are largely regional jet focused and will be redeployed at our other hubs minimizing the capacity impact to the system. It is our hope that this will drive improved customer experience, while flying United in the New York area and throughout our network.We are excited to announce that we reached a tentative agreement with our nearly 30,000 employees represented by the International Association of Machinists.
With volume on the agreement expected to be completed by May 1, we are very proud of the work that our team does daily to support our operation and create a positive travel experience for our customers.Regarding other labor agreements, a new contract with our technicians represented by the IBT was ratified in January and we are still in active negotiations with our flight attendants represented by the AFA and our pilots represented by ALPA. As a reminder, we reached an agreement with our Dispatchers represented by PAFCA last year. We look forward to sharing further updates in the future. I once again want to thank our team for being the best in the industry. We remain confident in our outlook as we leverage our industry leading operational performance and network advantages.And with that, I will hand it over to Andrew to discuss the revenue graph.Andrew Nocella Thanks, Brett.
First quarter top line revenues of $11.4 billion finished consistent with our updated guidance of up 51% versus 2022. TRASM was up 22.5% year-over-year. While we were below our initial guidance, we expect that our TRASM performance in the first quarter will be top tier. As expected, other revenues in the quarter while strong are growing at a slower rate than passenger revenues, the opposite trend we saw last year and over the course of the pandemic. While cargo revenue declined 37% year-over-year, it remains 39% above the same period in 2019.MileagePlus other revenue had yet another strong quarter and was up 25% year-over-year, driven by our strategic partnership with Chase. United’s credit card continue to set records in Q1, including the highest first quarter ever per card spends, new accounts up over 30% year-over-year and account attrition near historic lows.
We also welcome Richard Nunn to the United team as the new CEO of MileagePlus.As Scott indicated, we believe we are seeing different revenue seasonality for the United network post-pandemic and that change should impact our relative margin in Q1. New seasonality positively impacted March through October 2022, where new remote work schedule simulated business, particularly premium leisure. Ultimately, if these trends continue, we expect to be able to operate a more consistent level of capacity between March and October in future years.However, we believe the new seasonality negatively impacted Q1 in January or February, along with the first halves of November and December. With United’s relatively small presence in the Caribbean and Florida, where demand is usually strong in Q1 and over the winter months, the United network is more reliant on business traffic that is not fully recovered to pre-pandemic volumes in these periods.
United’s global network and East West trends were simply better align to March through October post-pandemic where leisure and premium leisure business compensates for less traditional business traffic.As we head into Q2 2023, we are tracking ahead of 2022 in all the ways that we measure business traffic, a really good sign for revenue momentum. While it’s still early on, we do see corporate business for May and June tracking well ahead of their previous months at this time. The business traffic rebound we are seeing is strongest in global long-haul markets, where videoconference is not a substitute for an in-person meeting.The recent banking scare did initiate a slowdown in demand across multiple customer types in the quarter. Impacts on business demand for domestic flying was the most significant, impact on domestic leisure was smaller and impact over on overall international demand was actually minimal.
In the weeks after the scare, we saw business demand relative to the same period of 2019 decline by 8 points after steady progress experience to the quarter to that point. This trend has since reversed back to pre-banking scare levels.In Q2, we expect total revenue to be up 14% to 16% versus the second quarter of 2022, with capacity, up approximately 18.5%. Our expectations for revenue in the second quarter continue to show strength with approximately 8% to 10% growth in domestic revenues and almost 30% for international. Second quarter bookings and revenues do look good versus the same point in 2022, with book deals up 13% and 31% above 2019 respectively. For 2023, we expect to expand international flying by approximately twice the rate of domestic leaning into the favorable supply demand balance that we expect.
We will be focused on extending United’s leading position across the Atlantic and to Asia and the South Pacific. We believe this capacity deployment plan will set us up to meet our financial objectives given the stronger revenue outlook we are seeing for international flying and the rebound in Polaris cabin.We will also pass two critical milestones by this summer, with all United international wide-body jets having the latest generation Polaris seat and a premium plus cabin. While further return to corporate business will help profitability in all quarters, we are not assuming that will occur in our 2023 revenue outlook. United scheduled capacity this summer is up 39% in the Atlantic, but industry capacity, excluding United, is estimated to be down about 1%.
United will operate an average of 207 daily flights across the Atlantic this summer. Across the Pacific, United plans to be up 14%, excluding China, with industry capacity down about 7% both versus 2019. Overall, international ASMs will be 46% of United’s capacity this summer versus 43% in 2019.Yesterday, we announced another set of capacity increases to the South Pacific ideally timed for the Southern summer later this year. These include the first-ever nonstop service from San Francisco to Christchurch, a new service from Los Angeles to Auckland in partnership with Air New Zealand and to Los Angeles to Brisbane, where we will connect to our new partner, Virgin Australia. Rebuilding connectivity back to our original 2019 standards in our Mid-Con hubs and Dallas will also be a long-term focus for our domestic volume.
The loss of regional jets turned the pandemic without mainline jets to backfill them cause connectivity to suffer. Peak bank sizes at our high flow hubs are down 10% to 20% versus 2019.We were able to build connectivity and margins in 2018 and 2019 when we increase bank size connectivity and we expect to execute a similar strategy in 2023 and 2024. However, this time around, we will do it with the appropriately sized 737 jets instead of single-class regional jets. As requested by the FAA, we have reduced our planned flights from Newark City this summer, including to and from Newark. We believe this will be the first time in years that Newark will operate within the airport’s capacity abilities in most hours and consistent with the slot allocations.
We are optimistic that between the new terminals and capacity consistent with the runway’s capabilities, the customer experience will improve dramatically and we appreciate the partnership with the FAA to make this happen.EMEA will gain up to 17 new mainline gates in Terminal A and Newark this summer versus 2022 which will improve Newark’s reliability and customer experience. Along with the new Newark gates, we will open a new United Club in Terminal A and in Terminal C later this year, adding 38,000 square feet and will be up 161% in club space relative to 2019.As impressive as that club space measurement is in Newark, our club members in Denver will experience an opening of 3 United clubs over the next year that include a total of 97,000 square feet, a 149% increase versus 2019.
Construction of our new gates in Denver is also almost complete and will have 90 gates, up from 66 we had in 2019, which we expect will allow us to dramatically increase bank sizes and connectivity in 2024 and 2025.At United, we remain focused on our high ground, structural strengths focused on global long-haul, correcting connectivity issues in our Mid-Con hubs that surface during the pandemic and of course, gauge, increases that are consistent with our large hub markets. Our capacity plan for this year remains in place without adjustment as we operate with strong operational results.With that, I wanted to say thanks to the entire United team. And I will turn it over to Gerry.Gerry Laderman Thanks, Andrew and good morning to everyone. Let’s start with our first quarter results.
Our pre-tax loss of $256 million was in line with expectations and at the better end of our updated guidance issued last month. We saw losses in January and February due to seasonal weakness, but March turned solidly profitable. Our first quarter fuel price of $3.33 came in at the lower end of our revised guidance range. This was still about $0.14 higher than our expectation at the start of the quarter due to a spike in jet fuel prices in late January and early February.Turning to non-fuel costs, our first quarter CASM-ex came in slightly better than our revised guidance range at down 0.1% versus the first quarter last year. Our operational performance in the first quarter was truly exceptional and our CASM-ex fee is largely due to the cost benefit of a reliable operation.
On the balance sheet, we ended the quarter with approximately $19 billion in liquidity. We continue to leverage the flexibility provided by our cash with financing opportunities and paying down debt. We generated over $3 billion in operating cash flow in the first quarter, the highest for any quarter in United’s history and we produced free cash flow of over $1 billion. Over the last 12 months, our total debt, including pension liability, has declined by approximately $4.6 billion and we remain on track to meet our 2023 target of adjusted net debt to adjusted EBITDAR of less than 3x.Looking ahead, we expect second quarter CASM-ex to be flat to up 2%, with capacity up approximately 18.5% both versus the second quarter of last year. Strong cost performance underpins our confidence in the earnings trajectory of the business in the second quarter we expect adjusted diluted earnings per share of $3.50 to $4, with a fuel price of $2.80 to $3.
As noted in our investor update, this fuel price is based on prices as of April 12.As others mentioned, our strong operational performance in the first quarter sets the tone for the remainder of the year and is key to our conviction in achieving our CASM-ex targets. For the full year, we continue to be on track to keep CASM-ex approximately flat versus 2022 with non-fuel unit costs in the second half of this year declining versus the second half of last year. To give context as to why we expect CASM-ex in the second half of this year to improve on a year-over-year basis versus the first half of this year, it’s helpful to consider the 2022 cost baseline.With COVID still significantly impacting the business in the first half of last year, we have certain unique headwinds in the first half of this year when comparing costs on a year-over-year basis.
Here are two notable examples. Revenue in the first half of 2022 was much lower than the second half of 2022, which meant that distribution costs were also much lower in the first half of last year versus the second half. This drives the year-over-year comparisons for the first half of this year to be commensurately higher than the second half of this year. A similar phenomenon exists with maintenance expense. As Omicron abated and the recovery took hold, we ramped up our maintenance activity in the back half of ‘22 to more normalized levels. Again, the difference in year-over-year costs are much more muted in the second half of this year versus the first half.So simply put, the two items represent a 1 to 2 point CASM-ex headwind in the first half of this year, which won’t exist in the second half.
These drivers, along with strategic cost management, gauge growth and running a reliable operation support our expectation that we will hit our flat CASM-ex target for the year. When combined with our revenue outlook, we remain confident in our trajectory towards $10 to $12 in adjusted diluted EPS for the full year whether we face a mild recession or soft landing.As we have left the starting gate for our United Next plan, I am encouraged by the progress we’ve made not only financially but in our operation and across the entire organization. While we continue to live in uncertain times, I know that we will successfully manage everything under our control as we continue on a path to reach our full year financial objectives.And with that, I will turn it over to Kristina for the Q&A.Kristina Munoz Thank you, Gerry.
We will now take questions from the analyst community. Please limit yourself to one question and if needed, one follow-up question.Silas, please describe the procedure to ask a question.
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Question-and-Answer Session Operator Thank you. [Operator Instructions]
The first question comes from Catherine O’Brien from Goldman Sachs. Your line is unmuted. Please go ahead.Catherine O’Brien Good morning, everyone. Thanks for the time. So there has been a lot of investor concern recently around the domestic slowdown. So I think I’ll just get right to that. I know United is built to win in the international strength. But can you just help us think about what’s driving the domestic unit revenue performance to underperform international, at least based on first quarter versus ‘19.
Is there a shift in leisure demand to international from domestic that might be exaggerated right now post pandemic? That international business is stronger, as you know prepared remarks, something else? And then I saw you had another record first quarter build in the air traffic liability. Would also be helpful just to talk through how much you have on the books, domestic versus international first quarter. Thanks so much.Scott Kirby Sure, Catherine. We’re getting this question about domestic strength a lot and we should really address it. The way when we go back thinking about it, how to describe the conditions of this Q2, we have to recall Q2 of last year, Q2 of 2022 was the best domestic TRASM quarter ever for United with TRASM up 25% versus Q2 of 2019, which, by the way, was a prior record holder.
We simply sent a really hard comp for Q2 2023 and also last year at this time, international markets were not widely open to travelers, in my view, selected domestic trips out of caution, just creating unprecedented demand relative to the number of seats available to sell. This year’s conditions are different. International travel is more or less completely open, and we see customers clearly excited about taking a long-haul trip. Domestic capacity is also now comparable to 2019 levels.So here are the facts, domestic ASMs at United will be up about 10% in Q2 2023 year-over-year. And our TRASM outlook for domestic will be negative low single digits from what I’ve said today. Total domestic revenue should finish well above 2022, given our TRASM outlook on capacity growth of about 10%.
We’re currently booked about 10% ahead in gross revenue at this point compared to last year, and we’re about 54% into the booking curve for the quarter. I just don’t see these facts as weak when revenue is on target to again break the record and TRASM is likely to be just a bit behind an amazingly strong 2022. In summary, when Q2 2023 is in the books, we will likely be our second biggest best domestic TRASM quarter ever with record total domestic revenues. The only thing negative, I think I can say is that as good as domestic looks, it’s just not matching global long-haul revenue outlook, which is very strong and where United has focused a majority of capacity.Catherine O’Brien On the ATL…Scott Kirby On the ATL, I think it’s seasonally moving in a normal way.
I don’t know, Gerry wants to add anything else on the ATL question.Gerry Laderman Okay. Your question about international versus domestic, you’re actually the first person to ask us that question. So we will follow-up with you.Catherine O’Brien Okay, thank you.Operator The next question comes from Jamie Baker from JPMorgan. Your line is unmuted. Please go ahead.Jamie Baker Hey. Good morning, everybody. Just chuckling it Gerry’s response to Katie there, on the ATL, Gerry, the build obviously helped with free cash flow generation in the quarter, presumably, the ATL will incrementally moderate in the second half as it often does. Do you still think you can cover this year’s $9 billion in CapEx and generate positive free cash flow?Gerry Laderman Yes, Jamie, I think we can.Jamie Baker Okay.
Fair enough. Second to Andrew, relative to the international component, you have got a lot of new route activity. Could you speak to sort of like same-store sales or same-store RASM or revenue, I guess, relative to those new routes? And how does the ramp to profitability in all of these new markets compare to that in the past? I mean, are new markets maturing much faster? Or does it take about the same amount of time as it ever did? I’m just trying to think about the read-through as some of these trends normalize next year.Andrew Nocella There is – for global long haul, there is virtually no [spool] (ph) up right now, Jamie. It gives us – the supply-demand equation is just not what it’s ever been in the past. While United supply across the Atlantic and Pacific is dramatically up and we’re happy it is dramatically up, obviously, industry supply is down.
So what I would tell you is that the new routes come in very quickly with very strong profitability, which is why we keep adding them. That being said, in terms of same-store sales, I will say that London Heathrow is probably our weakest at this point because there is just – that there is a large amount of capacity in London Heathrow relative to the rest of the world, and we’ve grown there. And our connections within Europe in our key hubs are – have not fully recovered, just like they haven’t domestically. And so we actually do see some relative weakness in certain parts of the global network off of a strong base. But the new routes to your question are just coming in with home runs on day 1.Jamie Baker Thank you, gentlemen. Speedy answers.
Take care. Operator The next question comes from Conor Cunningham from Melius Research. Your line is unmuted. Please go ahead.Conor Cunningham Hi, everyone. Thank you. Just the 2023 CASM-ex rate seems pretty encouraging. I know you mentioned maintenance and distribution as being a main driver from the first half to second half, but it still seems to me that you’re holding incremental cost. I mean, that may be the cost of doing business right now. But just curious if you could talk about what potentially rolls off next year as we start to think about CASM-ex there? Thank you.Gerry Laderman So I’m not sure I would call it rolling off. But keep in mind, next year, one of the benefits we’re really going to start seeing is that growth in mainline gauge, as the aircraft continue to come in.
That process is really just starting this year. So next year, we get the full run rate of the larger gauge aircraft and take even more next year. So when you’re looking sort of where the tailwinds are next year, gauge is one. And the comps year-over-year are going to be better. Think of this year is really finally getting to the run rate of the post-COVID sort of full operation. So I think as an industry, we’re done with a lot of the surprises we all kind of saw coming out of COVID with some of the cost pressures. So I think from the cost side, the business has become more stable and a little more predictable.Conor Cunningham Okay. Okay. That’s helpful. And then just on the evolving booking curve and seasonality that you’ve been talking about.
Just curious how going to combat those challenges going forward? I mean Delta has mentioned they are talking about looking at like overbooking and like tinkering with the inventory. Just curious what the strategy is at United, if there is one to combat those changes in the booking curve. Thank you.Scott Kirby Sure. Well, we think we clearly have the best RM system in the world, by the way. That’s what I’ll start off with. While there has been a small change in the number of tickets not flown in the quarter, due to the increased flexibility created when United eliminated change fees it’s our view that it’s not really material and it’s fully accounted for by our RM systems. And I’ll add on to that, our no-show rate is lower as well, and we will not be changing our overbooking levels at this point.Conor Cunningham Okay, thank you.Operator The next question comes from Savi Syth from Raymond James.
