Brandon, I'm going to just give a quick legal disclaimer. Today's discussion may contain forward-looking statements which represent United's current expectations 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 latest SEC filings for a more thorough description of these factors. We may also discuss United's financial metrics on a non-GAAP basis during this discussion. Please refer to the related definitions and reconciliations to the most directly comparable GAAP measures in our latest earnings release and investor update. Thanks.
Kristina, appreciate that. So good morning, everyone. I think this is our last session of the first day before lunch, so I know everyone's looking forward to that, at least I am. But I'm very excited to have United Airlines on stage here with Mike Leskinen, CFO, and Kristina Munoz just did the intro there from IR. But before we get into the conversation, just want to go through the audience response questions really quick for United. So if we can queue up number one, I'm sure everyone's used to this at this point. I see Kristina picking it up. Do you currently own United? One, overweight; two, market weight; three, underweight; or no? I think we know your answer, Mr. Leskinen. All right. Number two, what is your general bias towards United right now? Positive, negative, or neutral? I'm very excited to see a full room here for airlines.
This is great, especially.
I like having 62% that don't own us yet. That's a lot of opportunity.
That's right. Skewed positive bias, too. And then question number three, please. In your opinion, through cycle EPS growth for United will be above peers, in line with peers, or below peers?
This is an IQ test.
All right.
Lots more people.
Well, Mike, it's been trying for the airlines the last four or five years, right? But finally seems like we're on a good track. We've got domestic industry capacity growth at much more controllable levels, I'd argue. We've seen an inflection in unit revenues. I think you guys guided to positive outcomes in the first quarter. I don't know. Tell us what's really working well.
Brandon, it's a pleasure to be here. I love this conference in February. It's one of the best in the business. So thank you for having us, first of all. This is an incredible time to be in this airline industry. This industry, you said four or five years, it's had two or three decades of commodity business that's focused on scheduled price and scheduled commodity business. And so in that business, you have margins that gyrate, guardrail to guardrail, from below zero negative, let alone below your cost of capital, to some short boom times. But we're transforming. This industry is transforming. It's transforming not because of the capacity. The capacity the industry grows at is a consequence of that transformation. It's an industry that is transforming from that commodity business to one that is a brand loyal business. It's happened in the hotel industry.
It's happened in the cruise line industry. It is happening in the airline industry. Our customers are choosing to fly United because we've got a great loyalty program, because we've got great hard product, because we've got great food, because we're going to have the best Wi-Fi in the business. All of that is causing our customers to choose a differentiated experience. Not all of them. We still have some price-sensitive customers, and those customers are up for grabs. We've got products to go after those customers competitively and at a profit, but we have so much to drive the premium customer, so much with the lack of change fees to drive the road warrior to United Airlines, and so much to drive the price-sensitive customer through Basic Economy, so it's a wholesale transformation in the industry, and we start with recognition from Wall Street on that.
The results have, you're starting to see a big margin GAAP break out between the haves and the have-nots. Now in 2024, you started to see our valuation expand as there was some recognition of that. At 8x earnings, there's a whole lot more road in front of us. I think it's an understatement to say it's a good time to be part of the airline industry. It's the best time since deregulation to be part of this airline industry. We've got a lot more great opportunity in front of us.
I mean, we're pretty bullish on what your valuation says today. But a lot of investors are a little worried that maybe they missed it because your stock did do very well, especially late last year. But I guess in that perspective, I want to focus on the long term. Demand trends holding up? Yield?
They are. And I understand it's like PTSD for this space. And listen, I sat in your seats not so long ago. You're looking for the capacity discipline, because it's not capacity discipline, but you're looking for something to disrupt this path we're on. And you should. It's not that you're short-term focused. It's that that short-term maybe informs your view of the long term. But I'm here to say that you don't transform overnight. And so as we decommoditize our businesses, customers increasingly choose to fly us because they're brand loyal. We're growing in areas where we have high profit margins. Some airlines in the sector are growing where they have low profit margins. And they're growing there because they think it's still a commodity business. They're growing there because they think that flying in the off-peak times is going to bring down their unit costs.
And it will bring down their unit costs. But it's going to bring down their revenue by more. And that is not, and it's going to lead to lower profits. It's going to lead to a widening chasm of margin GAAP between the players that are growing where they have competitive advantage and those players. And it will reverse. And so I want to remind everyone that we set our guidance, whether it's the quarterly guidance, but certainly the annual guidance. We build in an act of God. We build in for some things in the industry to not be perfect, because it's very important to me and the entire leadership team that we deliver when we make financial promises. We won't deliver every quarter, but we feel really good about the full year.
We fully expected second quarter and third quarter capacity at the industry level to be higher than first quarter. We also fully expect, and we are seeing that demand is higher in the second quarter and third quarter. It doesn't mean that the light switch happens and the industry transforms and everybody behaves in a profit-maximizing way immediately. But we were firmly on that trajectory, and we're very confident in the full year.
Okay. So I guess that doesn't give me much read on first quarter or second quarter incrementally.
We expected the capacity that we're seeing. We expected the bookings that we are seeing. There is nothing that discourages us about either the short-term trajectory or the full-year trajectory. If I was looking for, let me give you a little bit more than that. I hate talking about the short term, but we are at this critical inflection in the industry. International business is great right now. Strong dollar is very helpful for United Airlines. 80% of our business internationally is U.S. point of origin. So strong dollar is good. Business is really robust. Don't feel any weakness in business right now. International leisure is very strong. Domestic leisure is kind of okay. It's fine. It's what we expected, and then what is a relatively small piece of our business, about 2% of our business, is government. And government has fallen off here post-inauguration.
I don't know how long that's going to be persistent, but it quickly gets filled up with other demand for our business in other pieces of the economy. But we have seen some slowing in government sales.
Okay. I appreciate that and I do want to keep this focused.
Did that answer your question fully?
Yes.
Good. All right.
I think it's helpful. I guess specific to the United Next plan, you guys had expected a lot of aircraft deliveries the last two or three years, but obviously Boeing and Airbus couldn't deliver against those expectations. Where do you sit with the fleet plan this year, and do you have that pretty much under control looking ahead?
I think we have it. We have a much better grasp of what is likely to be delivered than we have in any of the last few years, and Boeing is doing a pretty miraculous job of turning around and becoming more reliable as a supplier. I'm really pleased with what Kelly has done and the leadership there, entire leadership team has done there. Our confidence that our max aircraft are going to be delivered on schedule has never been greater at my tenure at United Airlines, so I feel really good about that. I do think that there remains some uncertainty around wide-body deliveries, particularly 787 deliveries. I have built into our plan what I think we're going to get, and I do think Boeing will make progress on wide-body deliveries as well. It'll just be a bit behind narrow body.
That said, we're going to take delivery of certainly less. In a perfect world, I would like to see 100 narrow bodies and something like 24 wide bodies annually for a period of time. And it's going to take Boeing and Airbus both time to get to that rate of delivery.
But how does this impact your cost structure, having more certainty or clarity on the deliveries you're going to be taking this year?
It impacts my cost structure. It's a negative for my cost structure. I'm flying older aircraft, smaller-gauge aircraft, longer than I otherwise would like to, and probably a little bit less capacity. But it's a mixture of I'm sweating the older assets beyond their economic life more than I would prefer. It's profit maximizing, and so we're going to do it. And as production rates ramp, we'll be able to replace some of those older, less profitable aircraft.
I mean, if you just factor in 100 narrow bodies a year, that would be a pretty high growth rate. So we should be expecting some retirements against that delivery book, right?
One of the idiosyncratic things about United that's really special, that it drives the United Next margin trajectory to double-digit margins, as we've talked about, is the huge benefit we get from gauge. And we've been talking about the benefit from gauge for like the last five years. That benefit from gauge does not occur until we start to retire some of the smaller-gauge aircraft. That's when it really ramps. And so a big portion of those aircraft will be for replacement.
Okay, and how important is the MAX 10 certification to that gauge outlook?
I like the MAX 10, and we are gaining confidence that it will be certified in the configuration that we at United Airlines need. It is very good as well, but I have growing confidence that 10 is going to deliver and it's going to be a great economic aircraft for United. As it is certified, we will shift some of those aircraft to MAX 10s, but if I'm not taking risk here, if the MAX 10 takes longer, 9s work very well in our fleet.
Got it. I guess along the lines of capacity, I think in your schedules, you're growing about 6% or 7%, give or take, right now. Is that roughly the range that you want to be in looking out longer term?
You know, we don't give capacity guidance. It was a good try. It's certainly what we're growing at right now, and it's growing because that's what we think maximizes profitability. There's connectivity that grows out of our hubs where we need to grow to match the scale of some of the great profitable hubs, connecting hubs like Atlanta and Dallas and Charlotte. And so we have significant room to grow to create that connectivity that we still have not maximized. But as I said, we also have the ability to replace some of our aging aircraft very profitably as well. And so we'll see as the industry develops, as we see macro demand develop and how that matches with supply. And all I will promise you is that the growth rate will be the growth rate that maximizes long-term profits.
It's like your boss says, there's no excuses on the guidance. Is that right?
There's no excuses on the guidance.
Appreciate that. Can you expand on the mid-continent hub strategy? Because I think this is something that you guys identified right before the pandemic, and we're just getting going with it. And obviously, it's been start and stop since. But where are you in places like Denver and Houston?
I think we've made good progress, but the lack of availability of aircraft has meant we're flying more regional aircraft, less mainline aircraft, and less overall aircraft than we would prefer, and so we are behind the United Next schedule. As I sit here today, we've got visibility out until certainly 2026 and probably through 2027, where we need to continue to expand the connectivity of those mid-continent hubs, and it's a better question when we get my Chief Commercial Officer, Andrew Nocella, on stage, but certainly, there's high visibility for the next couple of years.
That's just recap or capturing what you believe should be your natural share in those markets.
It's creating the right banked structure to create the right connectivity and the right level of frequencies and the right number of destinations at each of these hubs.
Talk about international and long-haul flying, because you guys have the largest wide-body fleet by a measurable amount. How successful is this strategy going to be going forward, and isn't it going to be constrained for a while, just from an industry perspective?
Profitability in our international lanes is excellent right now. It is the Crown Jewel of United Airlines, our international franchise. And what happened during the pandemic is many of our competitors sat down aircraft, retired aircraft, and didn't place orders for new aircraft. And so there is a supply constraint at the industry level for wide-body aircraft and therefore international capacity. And while I wouldn't say that that is permanent, it is going to take many, many years for the production rates at Airbus and Boeing to catch up with the demand that exists in those markets. So I feel really good about that structural, that long-term, maybe not quite structural constraint on aircraft. But I feel even better about the brand loyalty that we're creating with the flying public, especially U.S.
Point-of-sale customers, that once they have enjoyed our Polaris lounges, our Polaris cabin, our improved food, our loyalty program, that we will have a permanent structural advantage in those brand loyal customers in the international lanes, even after there are more wide-body aircraft available.
Your JV structure across the Atlantic and the Pacific, how important is that?
I think our partners are critical. And the relationships we have with Lufthansa, Air Canada, ANA, they've never been stronger. Our Senior Vice President, Patrick Quayle, who runs Alliances, has done a really excellent job at strengthening those relationships and strengthening in a way that's commercial. So we have antitrust immunity with those partners and to work with them in a way to maximize our product offering to our joint customers. And then we share the profits in an appropriate way. And so that structure has never worked, never been stronger. We've got more work to do, but it is a critical piece of our strategy.
All right. And I want to come to what you guys are doing on the commercial side and frequent flyer, because I think that's all very exciting. But from a cost perspective, and I think you were maybe on the last call, Quayle, as it's like, hey, if we're going to be a high-end airline, that comes with some costs as well. So can you talk about the puts and takes on how you're shaking out on cost inflation, especially with new labor agreements in place?
I think about costs in three buckets, and this has been an evolution for me from when I was an investor to now sitting in this seat as the industry has evolved, but let me try to take you through the three buckets. There's one, the first bucket of cost that is inflationary. It is cost that we have to pay for labor. It is the cost we have to pay for aircraft. It is the cost we have to pay for higher aluminum prices if there's tariffs. It is the cost we have to pay for fuel. It is the cost we have to pay per employment at our airports that have billion-dollar projects that gets passed on to the airlines that fly out of those major city hubs.
Those inflationary costs are industry inflationary costs that every airline faces and must be covered by the price of our tickets. And at United, we're better at managing some of those inflationary pressures than smaller carriers. And so as I think about that inflationary element of cost, in the long term, it's additive to our profit margins. And I'm not concerned about it. It will be passed through, and we will do somewhat better than the rest of the industry. Bucket two has an A and a B. Bucket two is about utilization. So we have so much fixed costs. How can we sweat our fixed assets and our fixed costs in a way that we drive lower unit costs? And there are elements of that that are technology-related. Can we build the best app in the business?
Can we build flexibility into our operating system so that we recover from irregular operations faster than others? Can we do things with our baggage systems to make them more reliable and less lost bags? All of those elements to drive efficiency, core efficiency into the business, we're doing as much as anyone else. Now, we have more to do. We have a lot more to do. We're going to have some major initiatives in the procurement piece of United. We're going to have some major initiatives in tech ops at United, and those are going to drive efficiency, and we are focused on that. That's 2A. 2B is utilization, and that's what some of the carriers are doing right now that are low-margin airlines right now, and they're going after utilization by flying an extra flight at 11:00 P.M. at night.
The load factor is going to be really low on that, but they're driving ASMs to bring down unit costs. It's about sweating the assets in a way that is not maximizing their revenue. It brings down unit costs. In the old industry rubric, where it was a commodity business, you bring down your unit costs, eventually price settles where it settles. That made some sense. But the players that are executing on 2B, and there are several of them, I'm not going to name them on stage, but there are several of them, that is a recipe for disaster in this new industry. They're going to lose money, and they're going to have to reverse course. The third bucket is investments in our clubs, investments in our food, investments in our people, investments in our hard product.
A lot of these things you can't put in a spreadsheet. I don't know, you know, I say, what's the impact of adding $50 million to food on NPS? Are we going to sell more tickets? Are we not going to be able to sell $10 more because I improved the quality of the chicken that we have on our airplanes? And it's really hard to know those answers. It's near impossible. I think you should try to put some math around it. But in the end, this is about driving brand loyalty to United and those customers choosing to fly us because of that. And so you need to mix that in.
And what I will continue to reiterate in these public forums is that at United, we're going to make sure that we put a healthy dose of that into our business because that is precisely what is decommoditizing the business. That's precisely what's going to make our margins sustainable through a cycle. That's precisely why when someone that doesn't do that adds capacity into our markets, we're not fearful that the customers are going to abandon us and go to those other airlines because we have a differentiated product.
I think that's a great segue into the commercial strategy. By the way, if there's any audience questions, just raise your hand. We'll get you a mic. How has the commercial strategy adapted or changed under United Next, and especially with the push for more differentiated and premiumization of travel?
We're going to spend the last 10 minutes on this question. I won't. I'll try to give you some more time. We have upended it. We historically at United, and I saw it as an analyst covering the sector, we were always playing defense. We were downgauging aircraft from mainline to regional jets so we could just focus on the premium customer. And as you did that, you made your unit costs higher. But even worse than making your unit costs higher, what you did was you had a lesser product. If you could fly on a mainline jet, you want to fly on a mainline jet, not a regional aircraft. And so we were going the wrong direction, focused on a business that we believed that was a commodity business.
And so we're like, we will maintain capacity discipline because that's the only way to drive a return in excess of our cost of capital. And the light bulb took some time, although Scott and Andrew, I think they had the light bulb many years ago, but it took time for some of us to see, wait a second, what we need to do is decommoditize this business. What we need to do is look at what the hotel industry has done, look at what the cruise line industry has done. We need to drive brand loyalty to our customer base and give a differentiated product. And that puts us on the front foot. Instead of playing defense, we're now playing offense.
We're going after customers in a way that they choose to fly on United, they choose to go to our website to book their tickets, they choose to have our credit card. That is a much more resilient business model.
Can you give us an idea on how much upsell you're getting? Or people come in and say, hey, I had Economy, now I want Economy Plus. Is that a pretty significant driver of incremental benefit here?
Let me think about data we can throw at that rather than give you a qualitative answer in the future. But let me leave you with one point that is quantitative. When you see United Airlines growing in the top quartile of the industry, we're growing more than the industry. And at the same time, our unit pricing, our TRASM, is higher than the industry. I don't think there's anything more objective fact you can see that says, oh, customers are choosing to fly United. This is not a commodity product. If you can both grow faster and charge more simultaneously, it is a compelling fact.
All right. Can we queue up question number four for the audience, please? In your opinion, what should United do with excess cash? First to our M&A, three, share repurchases, dividends, debt paydown, or internal investment. All right. And then question number five, please. In your opinion, what multiple of 2025 earnings should United trade?
When? Right now?
I assume so, yeah.
Oh, that's pretty bullish. If we could get there.
I think it's really bullish, and I think it's going to take time, but as we earn it, as we earn it through reliably delivering on our guidance, reliably marching our margin higher, reliably driving free cash conversion higher. I think in a year, two, three, this distribution will shift further right.
And I think I know who picked more than 21. Question number six. What do you see as the most significant headwind facing United today? Core growth, margin performance, capital deployment, or execution and strategy? And Mike, I know we're running out of time here, and your answers are terrific. I want to hit on two topics I think are important. So your MileagePlus frequent flyer plan, and then talk about free cash flow, because that has entered the conversation here for sure.
Let's look at these results.
Yep. Margin performance.
Good. I like that. I agree. Margin performance, driving higher profitability is kind of the keystone of everything. Loyalty program.
Yeah.
This is an incredible asset hidden within United Airlines. It's an asset that is dependent on brand loyalty, the brand loyalty that we've been talking about all day today. That's what drives the program. That's why you want to have a United card instead of a cashback card. And so as we improve our product offering for price-sensitive road warriors to premium customers, but we increase that loyalty to United, the value we have as a partner expands. And we've got a fantastic relationship with Chase, improving. Best has certainly been in my time at United. And so I think there's tremendous opportunity for us to expand, to grow that program more, and to grow the profitability to United more. In addition to that underlying growth rate in the loyalty business, we have an opportunity through Connective to drive smarter monetization in ads on our aircraft.
And so you're going to see that it's something unique that United is doing. And I think that it's something that will be unique to United for as long as we have a major advantage with Starlink. The low-latency nature of that Wi-Fi allows us to sell advertising revenue in a way that you can't do with slower, higher-latency Wi-Fi. So really excited about that piece of the business. So the core business, the path to doubling of EBITDA, the path to growing earnings of that subsidiary at an accelerated rate have never been more confident. Now, how else can we drive value in the shares with this? We need more disclosure. And we've been talking about this for a period of time. And when our stock was at $40, we had a whole ton of urgency in getting that extra disclosure out fast.
I am not losing any of that urgency. We need to get more disclosure on the loyalty program out so you all can see it. You can see the resiliency of the earnings. You can see the growth trajectory. We can set some multi-year targets. And so we're working hard at that. There are a few very important tasks that we need to do internally before we get that data out. But 100% intentions to get more disclosure around that program so that you can see it for yourselves and judge us by the performance quarter- after- quarter. Just give us a little bit more time.
And then lastly, free cash flow.
I bought a pillow for my office. It says, "Happiness is free cash flow." Look, this is an industry where historically we haven't paid enough respect to free cash flow. It hasn't been a high enough priority. We talk about our multiple, and I love that we're looking at a room that thinks the multiple should expand to 10-12. I fully endorse that. When I think about the intrinsic value of our shares and how we calibrate our buyback, I'm certainly thinking about an expanding multiple, but part of an expanding multiple is having a higher quality of earnings. And there's no better measure of high-quality earnings than to drive free cash flow conversion, so on the third quarter conference call, I talked about free cash flow conversion of around 50% in the near term.
Now, as aircraft deliveries and therefore CapEx are lower than we expect, the free cash conversion has actually been materially higher in the short term than that because I have less to pay for my aircraft. As we accelerate deliveries, I think OCF, Operating Cash Flow, is also going to grow, but probably more rapidly than CapEx, and so I see a trajectory where there's a period here where CapEx accelerates, I think it stays below $9 billion, but accelerates as Boeing and Airbus can deliver more aircraft, and so it keeps us in that 50% range, and then as we start to get later in the decade, I think free cash conversion accelerates into the 70%-75% range.
That's pretty bullish, Mike. I think we'll leave it there. And a lot of folks at this conference are asking if they've missed it. I think we're just getting started.
Early innings.
All right. Thank you, Mike.
Thank you, [Brandon].