United Airlines Holdings Inc
NASDAQ:UAL
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United Airlines Holdings Inc
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Good morning, and welcome to United Airlines Holdings Earnings Conference Call for the Second Quarter 2021. My name is Brandon, and I'll 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 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 will now turn the presentation over to your host for today's call, Kristina Munoz, Director of Investor Relations. Please go ahead.
Thanks, Brandon. Good morning, everyone, and welcome to United's second quarter 2021 earnings conference call. Yesterday, we issued our earnings release, which is available on our website at 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 expectation. 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.
Also, during the course of our call, we will discuss several non-GAAP financial measures. 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 the Q&A.
And now, I'd like to turn the call over to Scott.
Thanks, Kristina. Good morning, everyone, and thanks for joining us today. It was great to see many of you in person at our United Next event last month in New York. And personally, it's been great to be back out on the road during the quarter, talking to employees and customers and hearing anecdote after anecdote about how great it is to be back traveling.
Thank you also to all the people of United Airlines for all that they did to take care of our customers and each other through the crisis and for all that they're doing now to really and truly change the customer experience at United Airlines.
Before I really begin, I thought I'd take a moment to address the most talked about issue among airline investors recently, the Delta variant. As you'll hear from our [indiscernible] today, we haven't seen any impact at all on bookings, which continue to just get stronger and stronger every week. But of course, that is backwards looking data. Since early 2020, however, no airline has been more willing to candidly acknowledge the risks and challenges posed by COVID-19. And importantly, no airline has been quicker to aggressively confront them than United. We've worked hard to protect that operational flexibility. In fact, it's part of why we haven't had the same mass group cancellation challenges that our competitors have faced as we ramped our schedule over the last couple of months.
That all said, we think the most likely outcome is that the continued recovery in demand continues largely unabated. That's the most likely and logical outcome because the evidence is overwhelming that someone who's vaccinated is highly protected against severe disease, hospitalization and death. The unvaccinated still face an elevated risk of serious illness and death from COVID-19. In fact, recent reporting says that over 97% of hospitalizations are for unvaccinated people, which implies that you're about 50x more likely to wind up in the hospital for COVID, if you're unvaccinated. But the unvaccinated are also a smaller and shrinking percentage of the general population and an even smaller minority among the most vulnerable groups. And for United Airlines specifically, our customer surveys at the end of June also revealed that 84% of our MileagePlus members were already fully vaccinated. And so, while we expect case doubts to rise, given the vaccination rates they will still remain well below the peak and hospitalizations and deaths will not rise nearly as much that leads to the logical outcome that the reopening continues on track. I’d acknowledge that shutting down or continuing the reopening also has a political dimension to it and that's a lot harder to predict. And so it's possible we'll have a temporary pullback in the reopening. But given the data science around vaccines, that seems like a lower probability outcome and regardless, it will be temporary, even if it does happen.
Turning now back to our results. Gerry and Andrew will provide a lot more detail and I was going to briefly summarize where things stand right now, I'd say the demand is recovering even faster than we had hoped domestically, both leisure and business demand and internationally, we see the exact same pattern every time new borders are reopened. And while the U.S. isn't yet open to Europe, the data and science including the demonstrated safety of air travel, similar vaccination and case rates, and similar level of variance in Europe and the U.S. support an opening and we expect that to happen at some point. And when the borders do, we expect to see the same robust hockey stick increase in demand that we've already seen domestically.
On the cost front, we remain on target for the near and long-term. And as Gerry will detail, assuming the grounded 777s are back flying, we expect our 2020 to CASM x will be lower than 2019, which means we're right on track to deliver CASM exits, 4% lower in 2023 and 8% lower in 2026 as we shared at our United Next event last month.
Today, with the robust demand trends that we see in our return to profitability, we don't just see the light at the end of the tunnel. We're exiting the tunnel. We're focused on upgauging our hub, significantly improving the product and decommoditizing air travel by transforming our customers onboard experience. This opportunity is unique to United that’s why we're so confident in our 2023 and 2026 financial targets.
As we exit the tunnel, there's still a steep hill to climb, to get back to and then exceed our pre-COVID margins. But we also have some important upcoming tailwinds that will benefit United more than others. First, our coastal hub and our decision, which stands alone among large network carriers not to retire widebody aircraft means that we're ready to capture the pent-up demand for long haul international travel.
Second, our opportunity to upgauge our fleet while also driving increased connectivity as part of United Next means we can accelerate the margin improvements we saw from investments in the mid-con hubs in 2018 and '19. And of course, our confidence in United future is also fueled by the incredible performance of the United team. Even in the midst of a global pandemic, our NPS score rocketed up 30 points year-over-year, and our 50 point year-over-year improvement that JD Power survey was the largest of any U.S. airline. This customer-centric service culture and influx of nearly 500 new aircraft along with an unprecedented retrofit of our existing narrowbody will transform our customers experience. It will also usher in an incredible new post pandemic era for United customers, employees and shareholders creating a new era driven by innovation that makes the travel experience better. And I'm really proud of the work the team did in the second quarter to innovate with customers and our employees.
And with that, I'll turn it to Brett.
Thanks, Scott. I want to start by congratulating the entire United family on our expected return to profitability in the second half of this year. United teams worked towards this milestone of achieving positive adjusted pre-tax income for over a year and could not be more proud. During the second quarter, United continued our work to make the travel experience safer and more convenient for our customers. We recently made new enhancements to our already industry leading app to allow customers to schedule COVID-19 tests and have results directly verified through the travel ready center platform within the United app.
In May, we announced a first of its kind collaboration to use Abbotts COVID-19 home tests and app to enable our customers to self-administer a rapid antigen test and use the verified negative test result to board an international flight to the United States. As borders continue to open, we're working to make the return to international travel as convenient as possible for our customers. These initiatives make us uniquely ready to facilitate international travel and further position us a leading international airline in the U.S.
In addition, we recently launched our “Your Shot to Fly” sweepstakes, working effectively with the Federal government to creatively encourage people to get vaccinated and ultimately get back on planes again. We feel optimistic from the recent progress among European countries allowing U.S. tourists to enter the various vaccine and testing requirements. Countries such as Iceland, Croatia, Greece, Italy, France and Spain, have all began accepting U.S. travelers for the summer tourist season. And we look forward to more destination options for our customers in the coming months. We continue to encourage the Biden administration to open up international travel and appreciate the bipartisan as well as industry support to ease international travel restrictions.
Andrew will detail further the demand surges we've seen to countries once restrictions are loosened gives us even greater confidence regarding the long-term outlook for international travel.
On the domestic side, all states have reopened local economies and removed travel restrictions enabling the surge in domestic leisure travel that we are currently seeing. We remain focused on United's transformation to be the airline customers choose to fly. We have already eliminated change fees, and with our new aircraft order we will improve the customer experience. We're adding feedback entertainment all of our aircraft, improving Wi-Fi and innovating with customer friendly technology like connection saver, which saved over 140,000 connections in the second quarter.
News from Washington DC continues to be a focal point for United. We are encouraged by the bipartisan efforts to make needed investments in our nation's infrastructure. Infrastructure is the backbone of our economy, and it must be robust, sustainable and resilient to meet the needs of today and tomorrow. We support modernizing our nation's air traffic control system and advancing sustainable aviation fuel is important to aviation infrastructure investments that also reduce industry admissions.
Moving on to other highlights within our global network. At United, we continue to be a proud partner for our communities. Throughout the quarter, we expanded efforts to support those impacted by COVID-19 prices in India. United remain the only U.S. carrier to serve India. The distinction we hold to-date and help transport more than 300,000 pounds of critical medical supplies to the region. We additionally launched a fundraising effort to enable our customers to donate to the group partners.
In the quarter, we announced new initiatives with multiple partners to advance our sustainable goals across the United States. These partnerships cover a range of sustainable initiatives, including decarbonisation, sustainable aviation fuel and sustainable agriculture. During the quarter, we also announced a new order with Boom Supersonic for the overture, the first large commercial aircraft optimized to run on 100% sustainable aviation fuel.
We also announced our latest investment under United Airlines ventures in Hartville space, an electric aircraft startup developing an aircraft that has the potential to fly customers up to 250 miles before the end of this decade. United continues to lead the industry with a multi-pronged approach to our commitment to reducing our greenhouse gas emissions by 100% by 2050, without relying on traditional offsets. And we look forward to more to come on this front.
And with that, I will turn it over to Andrew.
Thanks, Brett.
I'm going to start off today by thanking the best commercial team in the business. Our combined efforts and agility over the last 18 months led us to this moment today, announcing the generally positive TRASM and PRASM and yield outlook for the second half of 2021, something hard to imagine just 12 months ago. The revenue outlook is allowing for a much improved and profitable financial results on an adjusted pre-tax basis for the second half of the year. And Gerry will talk about that in just a bit.
Our realistic view of the pandemic's impact on our business and industry was sometimes questioned. However, a realistic assessment from day one combined with capacity corresponding to real demand, not what we hoped demand would be for the keys and prepared us for what comes next.
We'll let facts guide us the entire way and I'm pleased to report today the facts point to a strong recovery of our business across all segments. As Scott said, we're coming out of the tunnel, we now have a clearer path not only to profitability in the near term, but a path to higher long-term margins even in an environment with elevated industry domestic capacity.
During the crisis, we were pleased with our TRASM performance and in the second quarter our TRASM was down 11% versus 2019. Our performance in Q2 was well ahead of our original guidance, but largely consistent with our updated mid-quarter expectations. International long haul demand, business demand and yields just improved faster than expected three months ago. We still face significant headwinds for the second half, with borders being closed and business traffic not fully back but ultimately we expect these headwinds will transition to tail.
Our ability to adjust our global network to transport record amounts of cargo is one of our proudest accomplishments and a clear differentiator versus others. In fact, during the quarter united generated $606 million in cargo revenues, our highest cargo revenue quarter ever, up 105% from 2Q 2019. With long haul passenger demand now increasing, we will see most of these cargo only flights for the remainder of 2021 although we continue to put a strong cargo yields for the remainder of this year.
During the crisis, we also carefully planned and collaborated across divisions to execute a bounce back plan for the second half of 2021. Our summer capacity plan continued a measured phase-in of that capacity. For Q3, we expect the system capacity to be around 26% versus Q3 of 2019 or up about 39% versus capacity flowing in Q2. We expect domestic capacity to be down about 20% versus Q3 2019 and up 43% versus Q2.
Business travel which was down over 90% versus 2019, for most of Q2 has inflected sharply in June is currently down about 60% versus pre pandemic levels. We expect two more inflection points in business demand first at the end of the summer and second, the new budget cycle beginning in January. We expect business demand to improve by the end of the third quarter to be down about 40% to 45% versus 2019.
Our recent survey of business customers now indicate over 90% plan to return to travel, including international travel in the second half of '21. That is up from around 55% earlier this year. On our last conference call, we talked about the fact that domestic yields for United would be positive this summer, and that we still expect that to be the case. Overall, domestic yields are still likely to be slightly negative in the quarter due to business traffic slower recovery.
To give you some color on yield, Q3 right now, both domestic yields today are running ahead of 2019. That higher yield is also matched with higher book load factors relative to 2019. We really have set ourselves up from an RM perspective very well. International demand is also recovering, but as we anticipated at a slower rate. For Q3, we expect international capacity to be down 36% versus 2019 relative to down 53% in Q2.
The demand bounce back does differ considerably by cabin and by region and even within the region depending on travel restrictions. While business demand is down, we've used special incentives to get our MileagePlus members back onboard with better access to [superior] [ph] seats via awards and upgrades. Asia was the first region to be impacted by COVID and continues to be the slowest to recover, there is largest number of border restrictions, who will likely be 2023 at least until we see a normal schedule to Asia. In the meantime, our global network already includes new service to India and Africa to compensate for reduced Asian flying.
Our European schedule this summer is quickly ramping back up. However, with continued restrictions on Europeans from entering the U.S. and on U.S. travelers from entering key countries in Europe, including the U.K., we anticipate that it'll be the spring of 2022 prior to resuming a normal schedule. We expect our summer Atlantic load factors to be around 70% in 2021, 16 points lower than 2019, we have to add that we think the summer of 2022 across the Atlantic has the potential to be our best season ever, with pent-up demand and easing border restrictions.
We continue to see structural changes in global long haul flying that we believe will create tailwind for united as borders continue to open. We expect to have 30 incremental widebody jets available to schedule in the summer of 2022 versus 2019, which is why our recent aircraft order was focused on narrow body aircraft only. We continue to operate our 767 fleet, which we used just a few weeks ago to begin service to Croatia, the optimal plane for this type of mission. Overall, we expect that our TRASM for Q3 will be positive.
Premier members of the MileagePlus program are rapidly returning to flying on United, a great sign for 2022 business demand. Year-to-date, three quarters of our top premier members have already flown with us or have booked a flight. Of the premier members that have not planned to fly yet, our research shows that they tend to be fliers focused largely on global long haul markets that simply haven't opened up yet. Many of our premier members are also maintain an active spend on one of our credit cards, increasing the level of program engagement in 2021 among our top members to more than 90%.
Our Chase co-brand card programs are thriving. Our June 2021 new accounts domestic sales and account retention metrics all exceed June 2019 figures. I just want to also spend a few moments today talking about United Next. United Next is simply our acceleration of many of our pre-pandemic strategies. It's a plan to close the short gaps in our commercial strategies, customer focus and passenger amenities. Most importantly, our plan is to engage to increase by 30% by 2026. 50-seat CRJs allow United to grow scheduled depth as we built our mid-con hubs, but it's now time to replace many of these jets with modern and more fuel efficient 737 and A321s, lowering our unit costs and increasing profits, while at the same time increasing our product quality with amenities such as seatback entertainment at every seat and larger overhead bins.
Most importantly, United Next is not about increasing seat density in planes, reducing comfort, lower and onboard amenities or reducing the number of first class, or economy plus extra leg room seats, as others have done. In fact, our premium seat counts will increase by 75% in North America per departure by 2026 versus 2019. And of course, that's aligned with the revenue potential of our United hubs.
United next will allow us to differentiate and decommoditize our network, segment our products and put customers first, but also maintain fair competitiveness with low cost competitors, while offering a superior product. We're excited to come out the other side of this tunnel and plan for an amazing and bright future. I'd like to thank the entire United team for their efforts as well. Together we've made an amazing difference.
With that, I'll turn it over to Gerry and he'll talk about our financial results for Q2 and the outlook for Q3. Gerry?
Thanks, Andrew. Good morning, everyone.
For the second quarter of 2021. We reported a pre-tax loss of $600 million and an adjusted pre-tax loss of $1.6 billion. Our adjusted EBITDA margin for the second quarter ended down 10.7% in line with our prior guidance, with our adjusted EBITDA margin a positive 9% for the month of June.
Our adjusted operating expenses for the second quarter ended down 32% versus the second quarter of 2019, which was slightly worse than prior guidance of down 33%. The entire difference though is attributable to greater fuel consumption, higher fuel prices, as compared to what we anticipated when we provided second quarter guidance. All of our other costs came in as we expected, giving us continuing confidence in our ability to achieve our near-term and long-term cost targets.
As previously noted, as the demand environment continues to improve, we expect to generate positive adjusted pre-tax income in the month of July. In fact, as we have said we expect to generate positive adjusted pre-tax income for both the third quarter and fourth quarter this year. Despite business and long haul international demand not being fully recovered, we are pleased that our return to profitability is expected to occur well before prior expectations. And we anticipated another step function improvement once business and international demand fully return.
Turning to our outlook on costs, we expect our third quarter CASM x to be up approximately 17% versus the same period in 2019, with capacity down 26% versus 2019. To put the CASM x number in perspective, while capacity may be down 26%, we are not simply flying 26% less of the same network given our current international domestic mix, where we are currently flying more short haul domestic flights and combined with the temporary grounding of our fleet of prep power with 777 widebody aircraft. This has created an incremental 6 points headwind to our
CASM x because of lower stage length and lower gauge versus 2019.
Our cost outlook additionally includes investments necessary for future flying, such as training and maintenance costs. On the positive side, embedded in this outlook is also the early success from our $2 billion structural cost savings plan. We expect CASM x will better represent our true cost performance once our capacity reverts back to 2019 level and when the network begins to be reshaped with our United Next plan, and we achieve the full implementation of our cost initiatives.
We are currently in our 2022 planning process and that we won't share details today, we feel confident that our 2022 CASM x will be lower than 2019. We expect that our 2022 outlook demonstrates substantial progress towards hitting our long term CASM x target of down 4% in 2023, and down 8% in 2026 versus 2019.
In addition to the structural cost reductions, our United Next targets are enabled by our recent announced order for 270 new narrowbody aircraft, which when added to our existing order book, provide them with 500 narrowbody aircraft on firm order. We expect 191 of these aircraft to be delivered through the end of 2023. And for those of you in the aircraft financing community, this includes 13, 737 MAX 8 through the remainder of this year 20 MAX 8 and 20 MAX 9s in 2022 and 56 MAX 8, 16 MAX 9, 50 MAX 10 and 16 A321 NEOs in 2023.
Regarding capital expenditures this year, we currently expected adjusted CapEx for the full year to run about $4.5 billion. This assumes we take delivery of all 8, 787-10 aircrafts scheduled for later this year. With Boeing's recent announcement regarding delays in delivering 787, it is possible to some of these aircrafts and the related CapEx may slip into next year.
In closing, our expectation for adjusted pre-tax profitability in both the third and fourth quarters represent a milestone that the entire United family has worked towards the beginning of the pandemic. Gone are the days of talking about empty aircraft, cash burn and job losses. We have now shifted our focus fully towards the long-term path for United Airlines and the United Next plan. We believe our achievements throughout the crisis fully prepared us to execute on our plan to both maximize earnings power and be the airline that customers choose to fly.
And with that, I'll hand it over to Kristina to start the Q&A.
Thank you, Gerry. We will now take analyst questions, please limit yourself to one question and if needed one follow up question. Brandon, please describe the procedure to ask a question.
Thanks, Kristina. [Operator Instructions] And from Raymond James, we have Savanthi Syth.
Your 3Q revenue guide is very strong and both relative to 2Q and compared to one of your peers. I was wondering, what factors are driving that strength and what assumptions you are building in for that business demand recovery?
What I’d say about our guide is that, when I said this, I think over the last few conference calls that in particular our coastal hubs have really suffered during the pandemic, traffic goes down. And those hubs are a lot more than mid-cons and small community -- mid-con hubs and small communities around the country. We really see an acceleration in demand now, out of those hubs, including leisure and business for domestic in particular, which is really great to see. And, it goes to say again, that those headwinds, which were so significant during the crisis, are going to flip to tailwind for United and provide us I think, a lot of opportunity kind of going forward, a little more color, for example, Newark in Q2 of this year. So it was really our worst performing revenue hub. And we expect Newark in Q3 to be one of our best to give you up a little bit more color on what we're seeing there. So there's a lot more to come. I think I'm really excited about this, because these headwinds were just so significant during the crisis and I think there'll be tailwinds as we come out of the crisis.
Andrew just a follow up to, just it seems like you did a lot better job of also kind of tilting towards leisure EFR lately, maybe not similarly at some other airlines. But just wondering, what mix of those new markets or capacity remain on as things normalize and just really trying to understand if there's an opportunity here to change the seasonality of the network?
Excellent question. And thank you for the vote of confidence there. I'm sure our scheduling folks really appreciate it. We did, as I would say, tilt our capacity towards more leisure-oriented markets during the crisis. And we continue to do so and will do so for at least the rest of this year. And tilting of those ASMs towards more leisure-oriented markets, I think has helped us during this recovery. To the extend, we did that better than others. I think our revenue forecast will be better than others.
And so we're pretty proud of that. We do intend to keep a bigger footprint in these leisure markets going forward in particular, Florida, were United was undersized. And that undersizing had led to Q1 results for United that could seasonally trail others and we're hopeful that on the other side of this crisis, rebuild the airline and we rebuild the network. We're going to build this better. And we're going to be a bigger player in these leisure-oriented markets in the Q1 time period than we have historically been.
And from Bank of America, we have Andrew Didora.
Just really kind of a follow on to Savi's question on revenues. Maybe Andrew can maybe talk about how the booking curve has sort of changed over the course of 2Q now into 3Q, I would assume you have a lot more visibility today in terms of your 3Q revenue outlook as compared to back in April? And is there any color you can maybe give us in terms of what percentage of your anticipated 3Q revenues are already booked right now and how that compares to normal periods?
Sure, everything is starting to return to normal, which is great to see. So right now, about 60% of our revenue for Q3 is on the books. And we have obviously, I think really good visibility in July and August. And in particular, I'd say August looks really quite good. September we have less visibility into, but we still feel very bullish about that as business traffic returned. So overall, things are returning to normal. The booking curve isn't exactly normal yet, but it is quickly getting there particularly from the domestic point of view. So hopefully that takes care of your question. But again, about 60% is booked and I'll also add that we do expect positive PRASM in all three months for the domestic entity for the quarter.
Got it. That's helpful. And then, Gerry, you called out the CASM impact from the stage engaged differentials here in in 3Q [over 6 point] [ph]. As we think about that as a similar impact on TRASM as well.
Yes. Stage and gauge, obviously impact all those stats. So there is going to be some impact as well on TRASM.
I will add. There is -- the dilemma we faced from a capacity point of view is the 777 aircrafts that are grounded are large capacity domestic Movers. And we used those for Hawaii and hub to hub. And so right now, we're flying well below where we like to be in Hawaii. And it goes without saying that Hawaii is an incredibly strong part of our network. And so we would have absorbed that and I think we would have still done very well in Hawaii, even with those extra seats we are really disappointed, they are missing. And then, domestically, within the continental United States on the hub-to-hub missions, where our load factors are just off the charts, we are, the simple way to describe it is like clog in the system because we don't have enough gauge between our hubs to flow the appropriate number of passengers over them. So we really want those aircraft back. And we think those aircraft are really important to our CASM. But they also unlock, at least right now in Hawaii better results and they unlock a lot more connecting traffic through our domestic system. So hopefully that gives you color as to how we think it impacts CASM as well as TRASM.
And from JPMorgan, we have Jamie Baker.
So Scott, kind of a follow up to a question I asked you in New York at the event a couple of weeks ago, I noticed that bad things seem to happen to the industry every 10 years or so. So as it relates to the 2026 guide, it looks like we're probably in the clear. Anyhow, the follow up here –
Definitely glad to have full perspective.
So you have these financial targets. You have your largest aircraft order in history, if we do hit some sort of a speed bump. Do you sacrifice the targets? Or do you adjust the CapEx and the delivery schedule? Basically, is the order book sacred? Or is it a lever you can pull to protect the financial targets just trying to better understand the priority there?
Well, I actually will let Gerry start.
Yes, Jamie, as we said, at that event, certainly starting in 2024, we have enough flexibility in the order book to be able to adjust based on what the macro environment would dictate. So that's a decision we can make as we approach the later years of it.
And I just want to add also that we -- I think we've created a track record and it is certainly true that we are committed to target. We have target targets out there. We're committed to achieving those targets and we're going to achieve our 2023 and 2026 targets. And if that requires adjustments in the plan one way or another, we'll make adjustments to make sure that we achieve those targets.
And Jamie, yes, one of the nice things about this order as well as our fleet that has some aircraft, as you know, that are aging, simply replacing those aircraft and not doing anything out, helps us with gauge which helps us with those targets.
Okay, that's helpful. Thank you both. And then, just a bit of a modeling question. There wasn't a huge change in fuel efficiency, just looking at $0.08 per gallon from the first quarter to the second quarter. I mean, a little bit of an improvement. But with more international turning on in the current quarter, can you give us some consumption guidance, fourth quarter as well if you happen to have it.
Jamie, I can give you a precise number right now, but keep in mind just given the mix with a higher proportion of regional flying by definition as -- the widebodies come back and become a -- revert back to normal that will help the fuel efficiency.
From Goldman Sachs, we have Catherine O'Brien.
So maybe one more on cost, as we move to unit cost being down from 2019 levels next year, outside of capacity, what are the other tailwinds we should be thinking about? I know, you called out the 6-point impact from gauge and the 777 grounding. But outside of that, or are there some ramp up headwinds today that we should think about abating as we move into the fourth quarter in 2022. And just any color on the size of that impact? Thanks.
I think the most significant tailwind actually aside from gauge and stage length kind of reverting back is the ramp up of the structural cost saving. So if you want to model something right now, we'll give you some more color as we finalize '22. But right now, you could model that about half of those savings are in our numbers for the rest of this year. And then starting in 2022 early in the year, first quarter, let's say that 80% ramping up to 100% by mid-year. So that's probably the most significant tailwind I can think of, as we normalize the business.
Okay, great, that's really helpful. And then, one maybe for Andrew, throwing it back to 2020. In February 2021, you got the Chase extension you entered into, I believe at the time of the announcement, you noted a drive 400 million increase in annual cash and when we were about to get some more details on that, and then COVID hit. So we didn't really -- I don't remember getting a timeframe for one you hit that. I'm guessing the pandemic maybe hit pause and the ramp up. But can you give us some color on what portion of that uplift, you've seen flow through your P&L to-date and how you expect that to trend over the next year or two? Thanks.
Yes. Definitely everything has been interrupted by the pandemic, although, we have seen recently, where are our numbers are now equal to or greater than 2019. So we're pretty excited about that. With our new agreement with Chase was effective then and it's impacted in our everything we do here in our financials already. But the real, I think the real value in this is our working relationship with Chase is just incredibly good right now. And we're coming up with all creative ideas, new products, and that's fueling the card growth and the new number of cards we're putting out there and spend on the historic cards. So that's maybe not every answer to the question you'd like to hear. But what I would say is that the relationship has gone well, which gives me great faith that we're going to hit the targets we put out there. I don't have the exact timeline as to when that will happen. It was clearly interrupted by the pandemic, but we're back on course.
From Jefferies, we have to look Sheila Kahyaoglu.
So maybe, it seems like capacity additions are coming back at a faster rate. And I appreciate the coastal hub. Can you maybe provide a little bit more color around CASM x below 2019 and 2022? What are your assumptions around capacity and maybe mix of international and domestic?
So it's still a little early to give you the capacity guidance, we will do that in the normal course but I can tell you, just given the size of the fleet, as it stands today, we expect 2022 capacity to be higher than 2019. But we'll give you more precise numbers in the normal course.
I think with the incremental widebody jets that we have available, along with our expectation about what the transatlantic market is going to look like next year, it wouldn't shock me that we see international growth faster than domestic growth for next summer.
Yes. I guess on that note, somewhat related to that big picture, you mentioned in your prepared remarks, on the international side, you're one of the carriers that have kept your widebodies going. So that supply/demand picture might look more attractive as international comes back. But domestically, what we're seeing as low-cost carriers are doubling their fleet or expanding their fleet substantially, as you guys are to and increase engage, how do you think the supply/demand picture plays out through 2026? How do you think United is positioned with that?
Well, I'll just go back to our United next plan, where I think we thoughtfully talked about all the details there. We are working to make sure that we build our connectivity, our schedule, depth, and most importantly, our gauge. And we think those factors along, of course, with our customer focus are really going to drive our profitability in really unique ways relative to many of our competitors over the next few years in industry, where we absolutely expect elevated domestic capacity growth for everybody over the next few years. So we feel really good that we've identified this, we've articulated a way to manage it here at United together from a revenue and a cost perspective and a customer perspective to make sure that we can meet the targets that Scott laid out in New York a few weeks ago, and he laid out in just a few minutes ago here.
From Wolfe Research, we have Hunter Keay.
Do you think that investors, Scott, should just ratchet down our permanent expectations for pricing power for this industry?
No.
Why not? I mean, it's so clear that the market puts multiples on the industries that can price and the decision to deflate pricing and outrun it with lower CASM. It's hard to see why that makes sense, when it is such a clear track record for this industry works is when they're pushing price. And look what he just did right now with the yield performance, not suggesting you're going to be down 25% forever, but I'm sure it was pretty satisfying to be able to push that price.
First, I disagree with the premise of the question. And look I recognize you've got a perspective respect that. But we had a pretty good track record in 2018, 2019. I think it was your research report to pointed out we grew EPS by 74%. This is in a large degree a continuation of the strategies is working well, with the improvement. I think that we're really focused on decommoditizing air travel and getting customer choice. So it's about far more than growth. But even the 2018, 2019 plan was working. It is in your research report. It seems like the best evidence that we can do this without disinflating, I think was the term you used. I'm confident that we're going to do that, I'm particularly confident that when you take the mix of what the international market is going to look like and the percentage of our revenues, combined with I think our ability to decommoditize travel domestically that our targets for 2023, 2026 are arguably conservative and that's going to ultimately be good for our shareholders.
Okay. Yes, thanks for the time, Scott. I don't want to be disrespectful here. I'd appreciate the conversation. A quick modeling question for you, too, I have you, Gerry. Should we assume that the SWB CASM is going to be in ‘22 and ‘23 above or below 2019, if you are willing to help us out with that?
I'll follow up with you offline Hunter.
Sorry. No, we'll get to those numbers.
From Cowen and Company, we have Helane Becker.
So kind of a different question. You have an open contract with your pilots. And I know you have the letter agreement to agree to the differentials, so that you are able to ramp up as the recovery occurs. Can you just talk about how you're thinking about entering those negotiations again? And I don't know whether it's 2021 or 2022. But when should we think about that contract again?
I think part of the underlying premise of your question also points out that we, obviously, we've had a really good working relationship with our pilots throughout the pandemic, work hand in hand with them. And at the end of the day, we are confident that we do get to an agreement, that will be one of the work for our pilots, and for the overall company. But as you can, I'm sure appreciate -- we don't get into discussing the specifics of our discussions or negotiations or the timeframe for reaching agreements in public or on earnings calls. But I appreciate the question.
Okay, well, that's helpful. Thank you. Just the other question is, as we think about the improvements that you're talking about, and efficiency, I don't know, Andrew or Gerry? How should we think about it, like working through the next 2.5 years? Are you just going to give us guidance every quarter for how we should think about those deficiencies? Or is there some number beyond minus 4% in 2023 that we'll be able to mark to?
Helane that's really the heart of the $2 billion of structural cost saving. And as I said earlier, by next summer, I would expect 100% of those in the numbers. And then, you know, we will continue and will continue to provide guidance. Keep in mind those structural savings include savings that will continue to grow as we grow the airline. So, it'll come out through our continuing CASM guidance over the next few years.
From Evercore ISI, we have Duane Pfennigwerth.
Just a couple from me on cargo. And, Andrew, I think you said no more dedicated freighters. I assume this is just a function of passenger demand coming back. But maybe you could just expand on that. And if we think about sort of your cargo capacity in total, maybe no more freighters, but more longer haul flights coming back. How do you think about your cargo capacity in total?
Sure, correct. We are not going to be able to do more cargo only flights, we're obviously disappointed by that, given where yields currently stand. The reason for that is the aircraft can be better deployed in passenger markets. However, many of those passenger markets are also not exactly optimal cargo markets, they do have cargo, but they're not optimal cargo markets. The 52 777s that are grounded means we just have less flexibility on this front than we would otherwise had. If those aircraft are flying, we clearly would continue our program missions because we'd have the ability to do both. So then when we look at capacity available to fly is still really significant as we put all these passenger planes back in the air, and we think we've got this properly accounted for in our forecasts and we think we're going to have another great cargo quarter in Q3 and it's already gotten off to a really good start.
That being said, it's going to be different in the amount of cargo flights. So when I tell you it's all -- we don't really know those details, but all the numbers are in there. And hopefully we can do a little better on cargo than we are currently planning. But there is a marked change in our cargo footprint starting today -- really starting a few weeks ago obviously and we'll see where it goes. But we're feel very bullish on cargo for the remaining half of this year.
That's super helpful. And just for my follow up on Scope. Scope is something that United talked a lot about in the past, obviously in the recent investor update you talked about big upgauge from 50 seaters. But I have to think, just thinking about high frequency with 50 seaters going fully to Main Line, maybe that implies less frequency, I have to think there are many markets where a 70 or 76 seater would be optimal. How should we be interpreting a kind of a lack of commentary around Scope? And is it something maybe longer term maybe beyond the forecast period that you're offered, that you think still makes sense.
To be clear, when we induct a MAX 10, or an A321 NEO, it's not replacing the 50 seat CRJ [route] [ph] out. There's a cascade it starts at the top that goes all the way down. So 50 seater routes today will often go to 70, 60, to route in the new United Next vision. So just the economics of that are a little bit different than maybe you described, I'm not 100% sure, but so we still will do that.
As we look at our fleet counts and hubs and scheduled depth. It is not our intention to reduce service to smaller communities in the United next plan. And we've laid that this out in great detail. That being said, it's also really not going to increase our scheduled depth, or size and smaller communities, either we're going to grow by a gauge, which we think is the right way to do it. Given where our hubs stand, particularly our mid-continent hubs, where again, most of the growth is gauged, there's a little bit of frequency, but most of the growth is gauged. So hopefully that helps answer the question.
From UBS, we have Myles Walton.
It's a bit of a follow up to high risk question again. But I'm curious guys, if you've thought about perhaps using a return on invested capital or efficiency metric to go alongside your pre-tax margin, your pre-tax income, financial metrics, which govern your long-term incentive schemes as a way to sort of answer the question around the efficiency of assets being put under utilization?
We actually always look at the return on investments we want to make and kind of our rule of thumb is kind of mid-teens to justify making those investments. So that's always part of the equation. But I do think, at the end of the day, pre-tax, ultimately, is the best way to look at things. The other components of it just all go into that but we do look at returns on investments we're making.
Okay. But not in the form [indiscernible] scheme, just pre-tax income is the governing metric?
I think it's just the one that reflects how we expect to do.
Hey, Myles, this is Mike Leskinen. I would just add that even if you think about replacing some of the older aircraft with new technology, you look into 727 MAX aircraft. Even in that scenario, you're getting a mid-teen return on invested capital. And so the return on invested capital, the gating item, we are driving pre-tax margin, but ROICs are well ahead of our weighted average cost of capital and it is a hurdle.
From Bernstein, we have David Vernon.
So Scott, I wanted to talk kind of at a high level here about how investors should think about the upside you see in decommoditizing travel, we get a little pushback that, that this is just a buzzword, if you will. I'm just wondering if you can talk about how much whether this is just about a revenue premium that you can earn for having higher priced seats on a departure. And if so, if there's a way to think about that relative to kind of maybe the revenue you might have earned without the strategy. And also, if you could talk a little bit about whether this is also about limiting how much of the inventory that you put out in the market is actually exposed to low-cost competition on a day-to-day basis, and how that might be changing over the next couple of years since you implement this United Next strategy.
Well, I'll start and Andrew can add on if you want. On the point about decommoditizing air travel. It's hard to put a precise quantification on it today. But I think customers do care about quality and do care about product. If you get on airplanes and talk to customers or just watch airplanes and people flying. I think that is an inescapable conclusion. There's at least one airline in the U.S. that embarked on this a decade ago and it was quite successful. There's certainly room for two of us in the United States. It's the largest travel market in the country, for two of us to pursue that strategy. And, frankly, United has, I think the most opportunity because our hubs happen to be in the biggest premium markets where our seven hubs are. And so I think there's more upside for us than there is for anyone to pursue this strategy. And so, I don't know for sure how much that turns into in terms of a revenue premium or growth that [RASM] [ph] is faster than the rest of the industry, because it's not as easy to quantify some of the work that we do, but confident that it will lead to stronger results for United.
The only thing I would add is that, flying approximately 300 single class 50 seaters with no premium product on board at all, up against competitors that had premium products is just a step change function for United as we take that number down. We already saw with the introduction of the CRJ 550, which is our 50 seat, dual class aircraft, really great progress prior to the pandemic on being able to monetize those premium seats. We see our competitors do it all day long. And we were simply underrepresented in this category and flying the wrong aircraft into big cities with no premium seats. And by the way, our hubs have a lot of premium demand. And we just under indexed to it. And that was wrong and we're going to correct it and we're going to correct it really quickly.
From Stifel, we have Joseph DeNardi.
Scott or Gerry, can you talk about CapEx needs on the widebody side? When do you need to address that with an order? When does the delivery start do you think? And then based on that, in what year do you see yourselves getting below 7 billion in CapEx?
Actually, I'm looking at Andrew, who always wants to ask me for aircraft. But keep in mind, over the last few years, we've taken 20, some odd, widebody aircraft, we haven't retired and we have a lot of widebody aircraft, Andrews talked about that. And so the focus right now is really on the narrowbody. And Andrew can provide some color, but I can tell you that it really depends on both the speed of recovery throughout the world. And then the opportunities that Andrew and his team has come with.
Yes, Gerry, I'll just add what I think I've said, but I just saw reiterated that because we took delivery of a large number of widebody aircraft, or we ordered some right prior to the pandemic, those aircraft are coming online over the next 12 months. So we'll have available to schedule up to 30 incremental widebody jets for the summer of 2022. So that really does provide a lot of growth and possibly for a number of years, depending on market conditions. So we'll watch this carefully. The second thing that I said a few weeks ago that I'll say again, is we're carefully looking at the economic lifespan of these widebody jets. And I can tell you prior to the pandemic, we were thinking, many of them particularly the 777 and 767 fleet could go 30 years or more. And I'll give kudos to our maintenance team for keeping these aircraft in great shape. So to allow us to have that optionality. So we do have optionality to fly these aircraft longer than I think people automatically assume.
And then, the last thing I'll add is, the interiors on all these aircraft, including the older ones we just been describing have been recently retrofitted, we've completed our entire 777 fleet. And we're close to completing the 767 fleet with brand new interiors, from nose to tail to give a great, great customer experience on board. So with that, we have a lot to think about the widebodies that have just arrived. And we have a lot of brand new aircraft on the inside that are have a long lifespan left. And so we have a lot of optionality and to the extent we want to grow. It will be because we have growth opportunities but we'll monitor that over the next few years. So that's a lot more details than you probably wanted. But that kind of explains where we are from a widebody point of view.
And I'll just add, the fairly straightforward analysis to justify that growth, it goes back to the financial targets that we just talked about, that they need to demonstrate that we can hit those, those returns, which they do.
And I'll add one more because I feel so passionate about this point. The retention of the 767-300 I think gives sending of the airline that has done that a structural competitive advantage. These aircraft between their size and trip costs, CASM and passenger comfort are really amazing machines. And they enabled as I said earlier, this new route to Croatia and many new routes that we're talking about that could otherwise I don't think be flown over the next few years, profitably.
Okay. So this 2025 CapEx, come back down to the $3 billion to $4 billion range or is it still elevated. And then Scott, you talked, I think, last call or the call before about doubling loyalty. EBITDA haven't heard much on that. Is that like an aspirational goal that we should kind of discount significantly? What are the drivers behind being able to do that? Thank you.
Well, it's our goal, I wouldn't discount it, because I think we're going to do it. But you can choose too, if you want. And this is one of those that, until we have something to announce, it's another one of those that we're not going to have something to announce until we have something to announce, though, I saw the team meeting earlier this morning on it, and they're looking for me later today to get an update. So we are doing, there's a lot of activity on it. But we're not going to have anything to say publicly until we're ready to make probably a big announcement.
And pay on CapEx, it's too early to really give CapEx projections beyond 2023.
We will now take questions from the media at this time. [Operator Instructions] Okay. From Wall Street Journal, we have [Ellison Snyder [ph].
Regarding your conversations with the government about lifting travel restrictions, is there anything that the administration is asking for from airlines in terms of contact tracing, or extending the mass mandate or checking vaccine status? Is there anything that you will have to do? It's part of an agreement to lift those restrictions eventually.
We are working closely with the government. And it's a two-way conversation where they're getting input from us, input from them, all of us want to make sure we do this safely and confidently, that when people get back to flying, it's not only safe, but people feel confident and the safety and we certainly haven't advocated for any of those specific policies. But if the government brought those things forward, we've indicated a willingness for example with vaccine requirements, which are happening in much of the world already. United uniquely, our digital team has done a pretty amazing job of creating an automated way for customers to upload that information. I think it's easier on United to deal with vaccine requirements around the world than any airline in the world. So we're doing those kinds of things. And we're very open to any requirements that they have, look forward to working with the administration to get it back open.
In from Bloomberg, we have Justin Bachman.
This question is maybe for Andrew or Scott, but it goes back to Scott's comment at the top of the call on the Delta variant, any impact probably being showed and people are confident in the rebound. I'm curious, like as far as your business today, is this a lot of people who are repeat customers and flying quite a bit compared to during the pandemic? Or are you seeing people come back who may not have flown since 2018, or 2019? I'm just curious about the mix of who's flying today and your confidence about those habits continuing even if the pandemic takes another turn. Thanks.
We track this pretty carefully, particularly from a MileagePlus point of view and particularly from the premier population to MileagePlus and what we can tell you is that while the penetration of MileagePlus on the aircraft is still below our historic norms by about seven or eight points. We see that number gaining strength each month and more and more customers are coming back and our premier members are back to flying again and using our credit cards. And the ones that aren't are because they only generally fly global long haul. And those particular borders are closed or are difficult to get into. So we do see the returning to normal, from all the things we look at.
The other thing I would tell you is, as we've kind of gone through this crisis headlines have driven, cancellation and no show factors higher. And I can assure you right now, or no show and cancellation factors are completely normal. We've seen no change in them over the last few weeks. And they're basically slightly above 2019 levels, which they have been for quite some time. So we don't see any change. Of course, I'm not saying exactly what's going to happen in the future. But I can just tell you right now, things look good. And we do look like demand is recovering and maintaining a strong recovery, even with the negative headlines.
And from Reuters, we have [indiscernible].
I also wanted to go back to Scott's comments at the top of the call. Scott you mentioned a potential temporary reopening pullback. Can you be more specific on what that pullback could look like and where and what kinds of scenarios you're preparing for from a demand perspective?
Well, I don't know what it would look like. I think it would be something government related that there were some new rules or recommendations, which I don't think -- which I think is unlikely. I mean, I think the most logical and likely outcome is that we largely continue unabated. But if that did happen, we've had a history going really all the way back to the last weekend of February of 2020. Reacting quickly, realistically, nimbly and we put a team together last year to deal with kind of the shutdown in March of last year, that team has not been disbanded, that team continues to exist for managing the vagaries and the ups and downs. Because we've known all along, there's going to be ups and downs. And there's going to be ups and downs between now and the time that enough of the world is vaccinated that this really recedes into the background, which we look forward to. But there will be ups and downs and we're prepared to deal with whatever those are, knowing that we can't precisely forecast exactly what the ups and downs are going to be.
One of the things we learned in the pandemic was the need to be able to be flexible financially. So as we've begun to invest money, we also build an off ramp in case we have to bank in one direction or the other.
What are you hearing from corporations in terms of their reopening plans? There were reports yesterday, for example, that Apple is delaying its return to office by a month.
I did read that in the newspaper overall, where you're in return to this new normal as the end of the summer occurs in September. Obviously, some may come back in October or even November, but we're anticipating a return to normalcy. And then, therefore, we're also anticipating step up in business travel. And in September, and then once again, in January, when the new budget season start. We've already seen for example, our advanced business bookings for September are now only down I think about 50%. And we expect that number to continue to get better and finish the month that around 40% to 45% down based on where we are right now.
Thank you. We will now turn it back to Kristina Munoz for closing remarks.
Thanks for joining the call today. Please contact Investor Relations or Media Relations if you have any further questions and we look forward to talking to you in the next.
Thank you, ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.