Great. Hopefully, everybody had a great lunch, and for dessert, we have a threefer of continuous airlines content for you, starting with United Airlines, and happy to welcome back to Laguna, CFO Mike Leskinen. Mike, thanks so much for being here.
Ravi, thanks for having me.
Nice. So, unlike some of your peers, you didn't put out an update this morning, which in itself is somewhat of a good thing, I think. So maybe you could start off with just talking about kind of what you're seeing out there. Obviously, lots of puts and takes on demand and supply across the industry, particular focus on RASM. So how is the 3Q shaping up for you?
Yeah, I appreciate that. Look, you saw a lot of updates from our competitors this week. You saw a couple last week. We talked very confidently on our Q2 call about how we expected a positive inflection in RASM, in domestic, and Atlantic in August.
Yep.
We saw that. We talked very proactively and positively about what was gonna happen in September, a continuation of that trend. We're seeing that. I think there was some skepticism on the call. I think that's reasonable, but we've seen a lot of money-losing capacity come out of this market in a very rational way, and you're seeing a very logical follow-on with some improvement in yields as a result, and that is absolutely to plan and to what we expected for the Q3 . In addition to that, you've seen, and you can see it every day, tracking oil prices. Oil prices have moderated a little bit, and so that's a nice small bonus.
Got it. Would you say that positive RASM year over year is the kind of ultimate smoking gun, that enough capacity has come out and kind of... So if it flips back negative, do you think the industry kind of is like, is that the industry's kind of North Star right now about how much capacity to put out there?
I think the North Star for this industry that has been cyclical, boom to bust, the North Star is that, at least the leaders in the industry have returns on invested capital that are nicely above their cost of capital.
Right.
And at United, we're well on that path, as we've decommoditized the product. We've got more work to do. Our relative returns are really, really strong. We're very proud of the relative returns, but our absolute returns do need to march higher. I'd like to see, and expect to see our margins move into the low double-digit range, in coming years, and that's consistent with United Next. I would say since we announced United Next, the absolute returns have lagged a little.
Mm-hmm.
The relative returns, if anything, are better than what we-
Right
... had expected and modeled for. It's time for the absolute returns to catch up.
Got it. I have a few questions on United Next in a second, but maybe kind of just to round out the story on demand, can you share a little more color on what you're seeing out there? Obviously, a lot of concerns around the consumer right now, but our surveys are showing us that travel intent still remains very, very robust. So if you can break down into domestic, international, and corporate, are you seeing this continued momentum in all three of them? Any signs of cracks anywhere?
As far as I can see from the releases you've seen from our competitors, the incremental news has been positive across the board.
Right.
We expected that.
Mm-hmm.
But it's nice to see it come to fruition. Corporate revenue for us is up 15%. Really proud of that, and so strong, corporate results. Domestic results are inflecting very nicely positive. As I said, the inflection being in August for us, as we talked about on the Q2 call. International, Atlantic, we expected maybe a little bit of a softening at the Atlantic, but the Atlantic's been actually very strong as well, so.
Yep.
If anything, if I wanted to differentiate, there is a little bit more weakness for the lower-end consumer-
Mm-hmm
... and a little bit more strength for the premium consumer. Those trends continue. There's nothing that we can see in the data that suggests those trends abate anytime soon. United has been on a, you know, we've been on a journey for seven years, preparing ourselves for that elevated demand for the premium product, both domestically and internationally. And so we've got a seven-year head start on those that haven't been on that journey, and, it sure feels like the economy is set up in a way where, premium is gonna continue to lead.
Got it. Just on that note, kind of to your point, kind of, I think you and maybe one of your peers are kind of really leading the industry when it comes to the premiumization there. How do you think about what more you need to do to kind of satiate that demand and kind of keep that momentum going? And second, when you think of the ULCC carriers launching a business class product, right? I mean, is that good for the industry as a whole because it's a rising tide of premium for the entire industry, or does that mean the industry is kind of closing up and gets more competitive?
Segmentation has been a universal good for this industry, and so any time we talk about additional segmentation at the industry level, I think that is a, a step in the right direction from the commodity product to a decommoditized product, where we compete on the product and the service. And so I would applaud the efforts of some of our peers to do that. It takes a long time to put first-class seats in. It takes a long time to put in seatback entertainment. It takes. I think sometimes it's impossible, frankly, to duplicate the club network that we have, to duplicate the loyalty network, the credit card network that we have.
We are constantly thinking about what we can do to continue to increase that competitive gap with premium products, from improving the food we serve on our planes, to improving our loyalty program, to improving our Wi-Fi product, to improving particularly our Polaris product on international first class. And so, we're out in front. We're running hard. We're not gonna slow down. We've created a competitive gap. We're gonna do everything to increase that competitive gap. I do think that...
We and one other domestic competitor are increasing the portion of our planes dedicated to first-class seats and premium products, and I think the demand for that, as far as we can see, is. It's not insatiable, but the level of increase in supply is being metered in at a pace that I feel very comfortable. We will continue to see demand that is in excess of supply.
Got it. Just a couple more questions kind of on 3Q itself. One is, obviously, we had the impact of the tech outage hurt everybody in the industry. How do we think about kind of how that impacted 3Q and kind of has it been? I mean, I'm sure that was just a one-time thing, and we moved on very quickly.
You know, I'm so proud of what we've done at United Airlines around setting guidance and then hitting that guidance, and I like to say that we set our guidance in a way that if there's an act of God that goes against us in a quarter or a period of time, one act of God, we prepare for that in the guidance, and then it's not gonna cause us to deviate from the range. If that ever occurs, and there will be periods when we have two acts of God in a quarter, and it's just too much, and in that case, we'll be out here quick to bring bad news. I'm not gonna sit on bad news.
But at United, I'm also incredibly proud of the team, because we have hubs that are in very expensive cities with very congested airspace, particularly the New York area, and Newark is one of our crown jewels. And weather hits in Chicago, and San Francisco occasionally has weather issues as well, that creates irregular operations that we then need to quickly adapt to and recover the operation, and do that while minimizing the impact on our customers.
Mm-hmm.
We have become incredibly strong at that relative to our competitors. And so while we have some of the best digital technology assets in the business, we also face some of the hurdles of CrowdStrike, just like our competitors. But just like we are faster at recovering from a storm, we are faster at recovering from an event like that, and I think it really differentiates United, and we should be really proud of that.
Got it. And the other issue was, I think you and your peers would had to suspend flights to Israel. How do we think about dimensioning that? I think you've said that in the past, but kind of just given where the network is right now, kind of how do you think of sizing the impact of that?
Yeah, Israel traffic represents about a little less than 1%, 0.8%, to be precise, of our capacity.
Mm-hmm.
We are tremendously proud of the franchise we have serving Israel from multiple hubs with more frequency than any other U.S. carrier. We were the first carrier to get back to Israel. We were the last to leave, and I sure hope that when the hostilities cease and we can safely return, we'll be the first U.S. carrier back to Israel. The big issue for us is when you land there, we have to overnight our aircraft and our crews, and that was a risk we weren't comfortable with in the short term, and so hopefully, this passes, and you will see United return.
Got it. Just kind of going back to the RASM dynamic, right? I mean, one of your peers this morning pointed out that the fact that the industry is seeing positive RASM inflation in a deflationary fuel environment is a very good sign and kind of tells you that this industry has basically needs to recover cost inflation in other areas in the form of price, right? Would you agree with that view, and kind of, you know, how sustainable do you think that is?
Yeah, I love the question, and I've probably been one of the most vocal proponents of not hedging fuel because a healthy industry passes through increases in their input costs to the consumer.
Yep.
And I think this is an industry that is long overdue for that. Now, when I say that, that means that it's not a direct correlation, not causal, rather.
Yep, mm-hmm.
You see rising fuel prices, and as a result of that, some of the incremental routes that weren't making money are losing more money, and so you see those carriers then cut that capacity, and as that capacity is cut, supply and demand would dictate higher prices.
Mm.
That's how it gets passed through, and the same in the reverse. But now we find ourselves in a spot where the have-nots in the industry have margins that are, you know, mid, mid-teens losses, and you get a nice tailwind from lower fuel. Maybe that's two or three points of profitability, current magnitude, and so you're losing 15%, now you're losing 12%. You're not gonna add more capacity because of that, and therefore, I don't think that the path to lower fares is as clear as it has been in the past. So there's probably some areas around the margin where that is true, where maybe there's a flight that was gonna be cut that doesn't get cut.
There's nothing in the Q4 , certainly not in the Q3 , nothing in the Q4 that I see around the schedule change that would lead to lower, that would lead to higher supply because of the move in fuel and therefore lower prices. I still don't think even in Q1, maybe by Q2, if fuel prices stay at this lower level, we could see a little bit of a degradation, all else equal. But there are much more tailwinds for yield right now than headwinds to yield.
Got it. Do you believe, are you hoping that there is something like a two- or three-quarter lag between passing through jet fuel on the way down? Kind of, is that kind of what you would hope to be the industry standard going forward?
I think that it is directly related to what the margins in the industry are.
Okay, got it.
... and if you have a player that is sitting around its cost of capital margin, you know, I don't know, 7%-9%, then there's gonna be some marginal routes that shift, depending on the fuel price.
Yep.
But right now, you have the haves with premium product that have margins that are above that and moving higher, and the have-nots that have margins that are so low that I think that the movement in fuel becomes somewhat irrelevant. So I do think that in a more normal environment, when this industry right-sizes, when the money-losing routes are curtailed so that the margins for even the have-nots have improved, that the relationship with fuel will reassert itself. And I think that lag can be anywhere from ninety days to, you know, a hundred and eighty days, and it depends on how tight the supply-demand balance is.
Got it. Last question on this topic. Scott Kirby was the first CEO in the industry to very vocally point out that some players have, like, fantasy growth plans, and it's almost eighteen months ago that he said that, or maybe even longer. Do you think that enough capacity has come out of the 4Q schedule, that we are in a sustainable place right now, or do you think more needs to come out?
I think we've seen the capacity we expected to be curtailed because it was losing so much money, has been curtailed, and it's happened faster maybe than even we expected.
Right.
But I do think that there is more to come as we roll into 2025. But I think it is very encouraging, the pace at which these decisions have been made. There has been some very rational decisions. And I think having activists involved in the space, more and more carriers talking about capital discipline-
Mm-hmm.
More and more carriers talking about return on invested capital, not just margin.
Yep
... is a critical step in gentrifying this industry. We have historically been too quick to manage to margin and not consider the long-term returns on capital necessary to invest in growth in this business. And so I think it's a very, very healthy dynamic, and I'm optimistic it's gonna lead to several years of a much more robust and stable industry, which, by the way, is gonna benefit all the stakeholders. It's gonna benefit our customers, because you're gonna have more stability. You're gonna have more stability. It's gonna benefit our employees, and I think it will benefit all of our financial stakeholders, both creditors and equity shareholders.
All right. Gentrifying the industry is a great phrase. I may steal that for my note.
Yeah
... if you don't mind.
The neighborhood matters, and our neighborhood has been, you know, under attack. And, you know, we can have a really, really nice house in a bad neighborhood, and nobody's gonna pay full price for the house. And so we want our neighbors to have nice homes, too. It increases the value of ours.
You need a Starbucks there first, and then everything follows. I wanna shift gears a little bit and talk about United Next. Obviously, when you guys came out with those 2026 targets in 2021, I think people were like, "You know, what are they talking about? Five years of visibility in the airline space, especially in 2021, was crazy." You guys are, to your point, kind of, you know, maybe getting there in a different way than you thought, because obviously a lot has changed. Can you just talk about how you see those 2026 targets today, where you sit in 2024?
I don't think it's that different. I think that, there's been a bit of a delay, and the mixture of cost and revenue is different. But that is different for every company in this country-
Yep
... because inflation has been higher, and inflation has definitely impacted the airline industry, maybe even a little bit disproportionately. But the path... You know, we started this journey, we had an unfair advantage. We hired the leaders from the airline industry, who had built the strongest connecting, most profitable hubs in the industry. And we had the DNA at United, with hubs that were undercapacitized, that didn't have the connectivity, that were surviving on the profitability of our crown jewel, which is our international franchise, but the domestic franchise wasn't carrying its weight.
Mm-hmm.
And that was obvious. It wasn't obvious to Wall Street, for sure, but it was obvious to the leadership we hired in Andrew Nocella and Scott Kirby and Patrick Quayle. And, and so we set on that mission, and so it seemed strange to this audience to say, "Well, hey, we're planning five years out." But we knew it was gonna take five years to fix that, and so we're marching along that journey. And, what that has done is it has created a competitive moat around our business relative to the ultra-low-cost carriers-
Mm-hmm
... just as we expected it would. The premium product, just another degree of segmentation, is it strengthened that competitive moat? And that has led to relative margins that are, you know, 20+ points higher than those low-margin airlines that we're competing with. Now, what is different is that we thought that maybe they would not allow their margins to fall so deep-
Mm-hmm
... deeply negative. In that industry dynamic, if their margins were a little bit higher than ours, they would be in the double digits sooner. But I think, and I'm incredibly optimistic, that we, as we enter 2025 with some wind in our sails, that we're firmly on that path. I'm not gonna hazard a guess or change guidance today to talk about the specific timing.
Sure.
But, I feel as confident as ever that we are on that path to low double-digit margins at United Airlines, and that's gonna create a much nicer neighborhood, and shareholders are gonna be richly rewarded.
Got it. A central pillar of that plan was obviously capacity growth. Not just capacity growth, but a fleet renewal, right? Kind of a bunch of new narrow-body aircraft. Do you have the confidence that you will have those tools to deploy that plan?
... Yeah, I mean, in the Q1 of this year, we talked about level loading CapEx at $7 billion-$9 billion.
Yep.
over the next three years, and I've got various tools, regardless of OEM delays and other issues around the supply chain, that I think will keep us in that range of CapEx, and with a CapEx like that, I think with reasonable expectations for profitability, free cash is going to start to grow pretty meaningfully at United, so from that standpoint, feel very, very strongly, and operationally, because we're now gonna very deliberately level load the growth-
Mm-hmm.
I think it'll be a smoother ramp in ramping capacity from here as well. And we've been doing that, and I kind of I would have actually sat in the audience and not even believed it, but we've been doing that, adding capacity at an aggressive clip. And you would think that would depress our yields.
Right.
and that RASM at United would be lower than the industry. But quarter after quarter after quarter, because of the segmentation, because of what we're doing with the connectivity, we have outperformed the RASM on elevated growth. That is a special recipe, and that says to me, and it should say to all of you, that the strategy is working.
Got it. Are you confident you can get the planes?
Yes. Let me, let me expand on that, because we haven't always been able to get the planes. Boeing is doing much better, particularly on 737s , their delivery rates have stabilized. We have growing confidence. There is the risk of the strike. I'm not gonna opine on that. That would certainly be a speed bump, but, but we're very encouraged by the recent narrow body deliveries from Boeing, and I think very encouraged, frankly, by the new leadership. Kelly was a great leader at Rockwell Collins. I got to know him when he was the CEO there, and I think he is the right leader to, to fix Boeing and put them on the right track. And Boeing is an incredible partner for United.
There's a little bit more concern around ramp rates on 787 with supply chain. I'm a little bit concerned about seats.
Mm-hmm.
So I'm not gonna run away from those. If there are some constraints in capacity, by that factor, I think United will still get more than our share. For Airbus, the A321 is a really spectacular aircraft, and we're thrilled to have the number of aircraft we have in the fleet. I was excited to lease a few more A321 aircraft. The constraint there is the engine.
Mm-hmm.
With the GTF engine supply constraints, I think that's gonna persist for some time, but the aircraft's very good with the LEAP engine as well.
Yep.
So, there could be a little bit more slowness for the 321 . But in aggregate, I feel very good, very good about United delivering about a hundred or taking delivery about a hundred narrow bodies a year in each of the next three years.
Got it. Maybe shifting gears a little bit, and obviously, a lot of the focus so far has been on the demand environment, the supply environment, but you guys have also really, you know, idiosyncratically focused on the cost side of the house, and you did it during the pandemic. You were the first one to put a cost-cutting target out there, and kind of, in your tenure as CFO, kind of, you have been very vocal about kind of continuously targeting cost take out opportunities kind of over time, so can you just help us dimension, you know, how big is that opportunity pipeline and kind of how quickly you can tackle that?
Let me start with setting the table. CASM-ex has been under pressure with inflation, labor in particular, and as we roll the table into 2025, we have some headwinds from our own labor agreements.
Yep.
I think probably two to three points. I think that's a headwind the industry faces. I know that's a headwind the industry also faces. So we have a headwind in that. We also, though, and you know, I would. Well, it was not so many years ago I was sitting in the audience. And so I think, well, how do you measure an airline CFO? And I said, "Well, CASM-ex discipline." My view on that has evolved. We need to have the best CASM-ex and competitively better CASM-ex versus versus the rest of the industry.
Mm-hmm.
But as we segment this business, making sure we invest in the product, is gonna further decommoditize it. And so, Andrew and I talk about investing in food. And well, nobody cares about the food. Our customers care about the food. Investing in clubs. Our customers incredibly care about the clubs. Seats internationally, our customers care about that a lot. And so we are gonna continue to widen the moat by thoughtfully investing in the business. That will create, I don't know, a point of CASM-ex headwind, as we invest thoughtfully in making the product a superior product.
Mm-hmm.
But we're gonna more than make up for that on the revenue side. Now, let me end on the CASM-ex side, where I'm excited, though. As we roll into 2026 and 2027, United has this unique opportunity to upgauge our aircraft.
Right.
We've been talking about this for some time. In 2025, we will be upgauging the mainline fleet. In 2026 and 2027, we're upgauging the mainline fleet a lot. In 2025, though, we are gonna be flying more regional aircraft, and we're gonna be flying them harder. And so that will mute the CASM-ex goodness of upgauging in 2025. But in 2026 and 2027, we get a couple of point advantage that will be idiosyncratic to United that I think we'll be having superior revenue in those years, but I think also we should have industry-leading CASM-ex performance in those years as well. So it's a really good story and unique to United because we had been uniquely under-gauged historically.
Got it. Any questions from the room? Okay, Connor.
Thank you. I think you mentioned that you had anticipated the Atlantic demand growth might be a little bit weaker, but it turned out to be quite strong. Just wondering why you thought it might be, and, you know, what kind of surprised you in that regard?
Look, the team did an incredible job in COVID. When COVID hit, we realized, wait a second, air traffic is gonna kind of grind to a halt, and we curtailed expenses and prepared for that storm faster than any other global airline, and so that was a real key strategic decision, but probably even more important than that decision was realizing when everyone else in the world was saying that air traffic's never gonna rebound, that it would rebound, and it would rebound with a vengeance, and when it did, international travel would be a pretty exciting place. If you hadn't taken a lot of vacations, you probably want to go to Paris instead of, you know, to visit your relatives in Ohio.
We spent some extra money through the pandemic to prepare to be spring-loaded, to grow into some of those international lanes, particularly the Atlantic. We gained a step on the competition. If you look at the growth rates coming out of the pandemic for the Atlantic, they were very elevated for several years. I'm just a Chief Financial Officer, you know, being the pessimist I'm supposed to be, saying, "You know, trees don't grow to the sky. It's gonna, at some point, it's gonna bite." You know, I had had a little bit more pessimism around that, and thank goodness Andrew didn't listen to me because we prepared and grew the capacity the right amount, and yields held in.
Any further questions? Okay.
Thanks for taking my question. Earlier this year, you had postponed the Investor Day, and I'm just curious if you had any update there, on timing?
Yeah, it's a great question, and I appreciate you asking. I'm so excited to have an Investor Day. We have so much, so many special initiatives at United, from updating you on where are we on in United Next, to updating you on MileagePlus and Kinective, our loyalty program, and a fulsome update on capital allocation. And so we're excited to get that out there. However, and we've been talking about this theme throughout the day, right now, this industry is in a bit of a storm. We have players that are negative mid-teens margins, and then we have two players that are premium carriers at the top of the leagues, with margins still absolute sense aren't adequate. And I will continue to share what we think the future holds, which is a very bright future.
But while that plays out, and I think, make no mistake, I think that plays out through the remainder of this quarter, Q4, probably a little bit into Q1, as this industry goes through that transformation. I don't know that this audience is gonna be the most receptive to a major Investor Day, talking about how bright the world's gonna look in 2027. I think that there may be a lot more receptivity for that type of event in the springtime when the storm has passed, and you can see that we have delivered some higher margins, that you've seen yield in a positive way for a few quarters. And so we have not made a final decision, but there is a lot of thinking that we will want to push the Investor Day into the spring.
Until then, if I can touch on both of those things, kind of. So, MileagePlus, obviously, big, big asset for you guys. Kind of you led the industry in kind of monetizing it during the pandemic. You since paid down that debt. How do you think about. Again, not to take away kind of from the Investor Day, but just what can that entity do over time? Kind of is it just a case of educating Wall Street about how good it is, or kind of do you also have plans for, like, a huge amount of growth there?
No, it's, Educating Wall Street should be the last thing on my mind. We needed to educate Wall Street during the pandemic because we needed to raise capital to save the business and to save the industry.
Yeah.
Everybody copied us in the structure to save the industry. What we need to do is, and it was one of the first things I did as CFO, is think about how we allocate capital, think about how we allocate operating expenses to grow the business. We have a business, we have a segment of our business that is high margin, low capital, high growth, has nice, is nicely exposed to inflation. The more inflationary world, the more people spend on our credit card.
Yep.
We've underinvested in that business over time and overinvested slightly in aircraft.
Mm-hmm.
And so I believe it's uniquely my job to shift that balance, not moving the dial from a 10 to a five, but to move it from a 10 to a nine on aircraft and to move it from an eight up to a 10 on investing in the loyalty program. And through so doing, we'll be able to increase. I think we'll be able to greatly increase the cardholder base.
Yep.
And that will drive more loyalty to United, but also more loyalty revenue through our P&L, but also the relationship we have with our customers and how we can monetize that data and through advertisements and, well, mechanisms that I'm not quite ready to share with you today. But it does require investment, does require new leadership. And so the most important thing is not communicating to all of you. The most important thing is to allocate the resources so that that business becomes supercharged, and you start to see earnings and cash flow being spun out in an accelerated rate. And I think we're on the cusp of that, and I think there's some big news for you very, very soon that's gonna form the foundation of, part of the foundation of accelerating that growth.
I think it will, you know, talking about when the Investor Day timing. I think that by the time we roll forward to the spring, we'll have even more results to share versus just promises.
Got it. And just very quickly, can I say, you've been very clear about your CapEx plans on aircraft, investing in the loyalty program. How are you thinking about cash return and potentially kind of when and how that happens?
Near and dear to my heart, this industry needs to get better at returning cash to shareholders. We need to have more regular returns of cash to shareholders. Now, I passionately believe that those returns, when you're trading at four and five times earnings, should be in the form of buyback, not dividend. I think dividend, you need to... A dividend is great and attracts different types of shareholders when you've already - when you're already trading at 10 or 12 times.
Right.
Four or five times, it's so opportunistic to buy back shares. But listen, we had to invest in the strategy of United Next first, because that's the foundation of making this business sustainable. We've had to invest in our people. We've done both of those. Post-pandemic, we needed to improve our balance sheet. Our balance sheet now is in a great spot. I talked on the Q2 call of a couple of pieces of debt that we had to repay. We have repaid those pieces of debt.
Yep.
Now my incremental debt cost is 5.125%-5.25%. There's no more expensive debt to repay. I've got some debt that I can prepay next year, but right now, there's a prepayment penalty, which leaves two things to do with cash: further deleveraging-
Mm-hmm.
-and share buyback. I do want to get United on a path to two times net debt to EBITDA. I think that's the right level of leverage longer term. But the pace at which we get to that level of leverage will be consistent, will be paced by what our equity multiple is.
Right.
And at four times, I think that pace to two times leverage will be a little bit slower. So, you need to stay tuned on shareholder capital allocation, but we have checked off all of the boxes that are priorities before we were to announce a buyback.
Got it. That'll be out of time. Mike, so much. No, thanks for the time.
Thanks, Ravi.
Thank you.