Yahoo Finance United Airlines Holdings, Inc. (NASDAQ:UAL) Q1 2024 Earnings Call Transcript
United Airlines Holdings, Inc. (NASDAQ:UAL) Q1 2024 Earnings Call Transcript April 17, 2024
United Airlines Holdings, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. And welcome to United Airlines Holdings Earnings Conference Call for the First Quarter 2024. My name is Krista, and I will be your conference facilitator today. Following the initial remarks from management, we will open the lines for questions [Operator Instructions]. This call is being recorded and is copyrighted. Please note that no portion of the call 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 Edwards, Managing Director of Investor Relations. Please go ahead.
Kristina Edwards: Thank you, Krista. Good morning, everyone. And welcome to United's first quarter 2024 earnings conference call. Yesterday, we issued our earnings release, which is available on our Web site 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 expectations. Please refer to our earnings release, Form 10-K and 10-Q and other reports filed with the SEC by United Airlines Holdings and United Airlines for a more thorough description of these factors.
Unless otherwise noted, we will be discussing our financial metrics on a non-GAAP basis on this call. Please refer to the related definitions and reconciliations in our press release. For a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please refer to the tables at the end of our release. Joining us on the call today to discuss our results and outlook are our 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, Mike Leskinen. 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.
Scott Kirby: Thanks Kristina. And good morning to everyone on the call today. Before we dive into our Q1 earnings performance, I want to start by talking about the issue that always comes first at United, safety. Safety is the fundamental pillar of our core for net safe, caring, dependable and efficient, and in that order. Safety is at the core of everything we do at our airline to make United a success. As you've read, the FAA recently began evaluating several elements of our operations to ensure we're doing all we can to drive safety compliance. We welcome the FAA's engagement and we are embracing this review as an opportunity to take our safety culture standards to an even higher level. As we undergo this review, I have confidence that first we have a strong foundation and a culture of safety here at United, including training, systems, processes and reporting culture, and that's backed up by our strong track record and success of our safety protocols.
Second, through the FAA review, I'm confident that we will uncover opportunities to make our airline even safer. At United, we have the best team of airline professionals in the world and we're committed to embracing this opportunity to make the best airline in the world even better for our customers and employees. Now to our Q1 earnings. We delivered a strong first quarter and it's clear the United’s Next plan continues to put our airline on a bright path. Notably, we saw meaningful year-over-year margin improvement in the first quarter, and if the Boeing MAX 9 hadn't been grounded, we would've been profitable for the quarter. Our United Next plan continued to demonstrate resilience and challenging industry conditions as we faced further significant aircraft delivery delays.
These delays are driving temporarily higher costs this year but we've been able to find ways to offset most of those headwinds. On demand, we see continued positive momentum and bookings across all customer segments from the most price sensitive customers to domestic road warriors and up to the premium global customer. Our cost management and clear demand for the United product continue to support our confidence in the United Next strategy in full year 2024 EPS of $9 to $11. In conclusion, I'm proud of the United team for delivering top tier operational and financial results. Thank you for all the work you do that makes us the airline that customers choose to fly. And with that, I'll hand it over to Brett.
Brett Hart: Thank you, Scott, and good morning. I'd like to thank our employees for their hard work this quarter as we navigated through the grounding of the Boeing MAX 9 fleet. We recovered well and got our customers to their destinations with limited disruption. As Scott mentioned, together with the FAA, we have begun an in-depth review of our processes and procedures. These reviews are being taken very seriously and we will see this as an opportunity to further strengthen our commitment to safety. As we work through this safety review with the FAA, certain certifications will be delayed. As a result of this, we expect a small number of aircraft scheduled for delivery in the second quarter to be delayed. We expect this to have a minimal impact to our 2024 capacity plans.
I am confident that we will be able to successfully look back on this review process, resulting in an even better airline for our customers, employees and shareholders. On the employee front, we reached a tentative agreement with the IBT for a four year extension to their existing contract. We expect to hear if it is ratified by their membership in the next few days. Taking a look at our operation. In the first quarter, we delivered top-tier service to our customers. We had our second best on-time departure performance in the first quarter in our history excluding pandemic years. This resulted in being second in the industry in on-time departures for the seventh month in a row. Additionally, our widebody operation had the company's best on-time performance since the pandemic.
We accomplished all of this while having the price seat factor for any first quarter in our history. This is a great testament to the hard work of our team. In addition to strong operational performance, we also continue to make customer enhancements that have driven up our Net Promoter Scores. Some of these include continuing to retrofit our existing mainline fleet with signature interiors that feature larger overhead bins, in-flight entertainment and every seat back and Bluetooth connectivity. Signature interior aircraft were 9 points higher an on-time NPS compared to the rest of the narrow-body fleet. And we are on track for 50% of our North America fleet that have signature interiors by the end of the year. We were the first US airline to offer MileagePlus pooling, allowing customers to share and use miles with their friends and families.
We've also partnered with the TSA to launch TSA PreCheck Touchless ID at O'Hare and LAX, which uses biometrics to enable customers to pass through the TSA line faster and without having to pull out their ID. Running a reliable operation and enhancing the customer experience continues to differentiate United. These encouraging operational results and improved Net Promoter Scores combined with our focus on safety by creating strong momentum for the rest of 2024. I will now turn it over to Andrew to talk about the revenue environment.
Andrew Nocella: Thanks, Brett. United's revenue and financial performance will be top tier in Q1. And as Scott and Brett mentioned, we also had strong operational results. Without the ground into the MAX 9, we clearly would have produced a profit in the quarter. Looking back at 2023, we did have a great year, particularly in Q2 and Q3. However, United's relative financial performance in Q1 of 2023 did not meet our expectations. Improving United's absolute and relative Q1 margin is something we're very focused on to achieve our long term financial targets. Q1 has always been our most challenged quarter financially. Post pandemic Q1 seasonality worsened due to decreases in corporate business. For the first quarter of 2024, we took the lessons from 2023 and carefully refined our commercial plan with encouraging results.
A few of our domestic capacity changes in Q1 included Florida capacity increased 20% with financial results well above our system average. Las Vegas capacity increased 7%, again, with strong financial results. Margins on off-peak early AM and late PM flights improved by 12 points year-over-year and margins on off-peak days improved by 11 points, driven by United changes and industry changes. In making these changes to how we deploy capacity in Q1, we sacrificed about 1 point of narrowbody utilization year-over-year. But in exchange, we offered a schedule that was more attractive to passengers with better departure and arrival times and more profitable for United, lower utilization also enhanced our reliability. We believe our Q1 2024 results set United up for producing profitable first quarters in the upcoming years and show our agility on adjusting our plan to meet new challenges.
Turning to our overall revenue performance in the first quarter. Revenue increased 9.7% on 9.1% more capacity. Consolidated TRASM was up 0.6% and PRASM was up 1%. Domestic PRASM increased 6.1%, which we expect to be industry leading year-over-year while international PRASM was down 4.2%. Domestic revenue results were also well above our expectations on strong demand and did help offset lower RASM year-over-year from global flying and Latin America. United's domestic RASM gains since 2019 lead the industry even with United having the largest increase in aircraft gauge of any US airline. United's domestic network has been starved of gauge historically. I think our domestic RASM results in Q1 yet again showed that not all industry capacity is created equally, considering the marginal RASM performance of growth ASMs at other airlines versus United.
Cargo revenue decreased 1.8% year-over-year and we're hopeful that this is the last year-over-year decline we'll see in the near term. MileagePlus had another strong quarter with revenue up 15%. United's premier frequent flyer new members are more engaged than ever by flying and using one of our co-brand credit cards. Managed corporate travel in Q1 was up 14% year-over-year. Yields for managed travel will be faster than non-managed travel due to stronger close-in pricing and refined discounting guidelines. The strength of the business traffic rebound is a nice development for an airline like United. Latin American PRASM was down 12.7%. Weakness was felt in near Latin America markets for the most part versus South America. We are pleased with our capacity growth across Pacific where capacity was up 66% and PRASM was down 12.9%.
However, we do plan to make capacity adjustments to a small number of underperforming routes later this year. Q1 performance for United's Atlantic line was up with strong PRASM 11% up. We saw a material rebound in London where Polaris revenues were up 8% on 11% less capacity. We saw weakness to Germany offset by strengths in Southern Europe and Africa where we increased capacity. United's efforts to build our brand in premium product choices while reducing customer friction is having a noticeable positive impact on our results as we gain share across the network for leisure and business travelers. For our road warrior or frequent flyer business customers, United elimination of change fees, the functionality of our app to manage their entire travel experience, improvements to MileagePlus and the steady increase in United Club facilities has resulted in improving share.
However, we cannot understate the importance of the elimination of change fees, which is a game changer for how people feel about United. United's focus on premium products has matched well with increased consumer demand for our premium seat choices. We believe this focus has diversified and made our revenues less cyclical in the long run. Premium passenger revenue mix improved 1.9 points versus Q1 2023 and 3 points versus Q1 2019. In other words, we're seeing near-term acceleration. Premium revenues were up 14% year-over-year on 10% more capacity and we estimate that United's premium revenue streams lead the industry. While our largest focus is on growing premium revenues, we also believe our rollout of Basic Economy is a critical competitive tool and important to attracting customers of all types in our core geography.
Basic Economy sales trends in Q1 were up 35% year-over-year. Basic has clearly changed our competitive stance versus the ULCCs. Larger narrowbody jets are also increasing United’s gates faster with more premium seats than any other US airline. We are absorbing this gauge increase well, which can be easily measured in our continued domestic RASM growth relative to others. We continue to plan for further gauge growth between 2025 and 2027 with our expanded MAX 9 and A321 fleet. Other product innovations are planned with the goal of increasing choice for customers, expanding premium revenue streams and segmenting demand. United’s gauge growth will also create further cost convergence. More importantly, gauge growth provides consumers a wide range of premium seat choices that they want and that we have proven we can monetize.
For Q2, we continue to see strong domestic and Atlantic demand with positive RASM results tempered by the Pacific where we expect a negative result year-over-year. We also expect Latin America will have a materially negative PRASM result year-over-year in the quarter. As we think about the second half of 2024, we do like the macro setup, particularly for domestic capacity where we think we can continue RASM growth above industry average. We are focused on building connectivity in our core non-coastal hubs in 2024 with both new mainline jets and with enhanced RJ capabilities. With that, I want to congratulate the entire United team on a job well done and turn over the call to Mike to discuss our financial results and updated fleet plan. Mike?
Mike Leskinen: Thanks, Andrew. And thank you to the United team for the tremendous effort as we work through the grounding of the Boeing MAX 9 fleet and entered the peak spring break travel season. In the first quarter, we produced pretax loss of $79 million, a $187 million improvement over the first quarter of last year. Our loss per share of $0.15 was better than our guidance and well ahead of consensus expectations, driven by both strong revenue results and disciplined expense management. The grounding of the Boeing MAX 9 fleet negatively impacted our earnings by more than $200 million and without it, we would have had a profitable quarter. We also generated $1.5 billion in free cash flow and our adjusted net debt to EBITDAR of 2.7 times is back to pre-pandemic levels.
These are strong results in what is our seasonally weakest quarter and they provide another proof point that our United. Next plan is working. Before I turn to the outlook, I'd like to address the changes we made with Boeing and Airbus, to optimize the delivery skyline. Boeing's repeated delivery delays had created an impractical bow wave of aircraft deliveries that both United to address, and we have. In 2024, we now expect to take delivery of 61 narrowbody aircraft and five widebody aircraft. This compares to our contractual deliveries of 183 narrowbody aircraft at year-end and the 101 aircraft we were planning for at the start of the year. Due to these fleet changes, we now expect full year 2024 total capital expenditures to be approximately $6.5 billion, down from $9 billion at the start of the year.
We've also made changes to level out our fleet plan for 2025 through 2027. This modified fleet plan allows us to execute on our long-term goals while also smoothing out the pace of deliveries and our annual CapEx spend. We've converted a near term portion of our MAX 10 deliveries scheduled through 2027 into MAX 9s. Additionally, we have signed letters of intent to lease 35 new Airbus A321neos with CFM engines scheduled for delivery in 2026 and 2027. With these changes, we now anticipate taking delivery of approximately 100 narrowbody aircraft on average each year during this three-year period. This delivery schedule provides fleet renewal, steady growth and addresses the bow wave of aircraft delivery delays that had been building. These changes bring our total adjusted capital expenditures in 2025 through 2027 to the $7 billion to $9 billion range in each of those years.
Balancing our United Next growth plan and managing the business towards positive free cash flow remain top priorities. And with the rebalanced skyline, we are targeting positive and growing free cash flow over the next three years. While we will provide an updated long-term earnings target later this year, we are confident we are on a path to higher earnings, better margins and materially stronger free cash conversion. Now turning to costs. Unit costs trended as expected during the quarter and were up 4.7% year-over-year on 9.1% capacity growth. As I mentioned, it was challenging to re-optimize our expenses with the uncertainty created by the MAX grounding and continued delays to our aircraft deliveries. While our underlying costs are consistent with our forecast at the beginning of the year, it's important to understand that the continued reduction in capacity from delivery delays will continue to temporarily pressure our CASM-ex for all of 2024.
As we entered the year we built a business plan for a larger airline, and deliveries have fallen more than 40 aircraft short of our expectations. We continue to incur most of the expenses as we hired for that capacity despite flying fewer ASMs and it is driving almost a point of CASM-ex pressure. We are working diligently to reduce these costs as much as possible and our higher completion factor has helped offset some of it. For the second quarter, we expect CASM-ex to be similar on a year-over-year basis versus the first quarter. Given our expectation for costs and our current outlook for revenue and fuel, we expect second quarter earnings per share to be between $3.75 and $4.25. We have great momentum. Our United Next plan is working and the future for United and our industry has never looked brighter.
Our margins are already near the top of the industry and we still have significant and unique network and gauge opportunities in front of us. United has never been in a stronger competitive position. We have developed a wide variety of products that are compelling to a wide variety of customers. And as a result, they are increasingly choosing to fly United. I remain excited about our future and believe we're firmly on track to deliver $9 to $11 in earnings per share this year. With that, I'll pass it over to Kristina to start the Q&A.
Kristina Edwards: Thanks, Mike. We will now take questions from the analyst community. Please limit yourself to one question and if needed, one follow-up question. Krista, please describe the procedure to ask a question.
Operator: [Operator Instructions] Your first question comes from the line of Andrew Didora from Bank of America.
Andrew Didora: I guess first one is for Mike or Scott. I guess, with your new CapEx forecast that I'm sure are not yet set in stone given there are a lot of moving parts here. It certainly implies much more consistent free cash flow generation over the next few years. How are you thinking about maybe deploying that capital, where do you see the best fit for that going forward?
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