Good morning, and welcome to United Airlines Holdings Earnings Conference Call for the Second Quarter 2020. My name is Regina, and I will be your conference facilitator today. Following the initial remarks from management, we will open the lines for questions.
At that time, if you would like to ask a question, simply press star and the 1 on your telephone keypad. To withdraw your question, press star 1 again. In order to get to as many questions as possible, we kindly ask that you please limit yourself to 1 question and 1 follow-up.
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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, Managing Director of Investor Relations. Please go ahead.
Thank you, Regina. Good morning, everyone, and welcome to United's second quarter 2020 earnings conference call. Yesterday, we issued our earnings release, which is available on our website at ir.united.com.
Information in yesterday's release, the remarks made during this conference call may contain forward looking statements. Which represent the company's current expectations and 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. And historical operational metrics will exclude pre-pandemic years of 2020 to 2022.
Please to the related definitions and reconciliations of these non GAAP measures to the most directly comparable GAAP measures at the end of our earnings release. Joining us today to discuss our results and our outlook are our Chief Executive Officer, Scott Kirby President, Brett J. Hart executive vice president and chief commercial officer, Andrew Nocella executive vice president and chief financial officer, Mike Leskinen. We also have other members of the executive team on the line available for Q&A. And now I would like to turn the call over to Scott.
Thank you, Kristina, and good morning, everyone. I want to start by thanking the United team for staying focused on taking care of our customers and running a best in class airline and not letting the conflict in Iran distract from the consistent execution we have become accustomed to. 2026 is once again demonstrating the durability and strength of the United business model. Our focus on building brand loyalty is evident in our strong top line performance with second quarter revenues up 16%.
Recovering about half the increase in fuel price for the period. Significant increase in fuel in just past week is also proof that our strategy is resilient. At this time last week, I was planning to tell you that we had a good line of sight to growing earnings year over year based on what we expected our guidance to be at the time.
But fuel's gone up a lot in the last week, and we have decided to once again be a leader by changing our guidance policy on fuel. We feel we owe it to investors to update our practice and provide guidance to reflect the most current fuel prices. The fuel price spike this month is equal to $1.12 of EPS So if you will go back to where it was earlier this month, we expect to be above the high end of the guidance range.
Our multiples do not yet reflect it, we believe this industry has structurally changed. As demonstrated by the quickness of the fuel recovery for United but also at an industry level. Perhaps the most important structural change in the industry has been the significant inflation and harmonization in nonfuel costs like airport fees, labor, and maintenance.
Cost inflation is what is driving fares higher. The fare still remain 13% lower in real terms compared to prepandemic. In the quarters ahead, I expect yields to continue returning to reasonable pre-COVID levels that will ultimately allow the industry to earn its cost of capital.
The impact of structural changes are just now beginning to be felt. Demand remains robust as we expect both Q3 and Q4 RASM to grow faster than 12%, and yields for fourth quarter are currently booked about 14 points higher For 4Q than at the same point in time for Q3. Demand is strong, and the overall cost pressures continue forcing fares higher.
United has proven that our brand loyal strategy is working, and we are using today's environment to accelerate our investment in all of the customer experience from nose to tail. My conviction in building a brand loyal airline is stronger than ever, and I am encouraged by the consistent share gains we have seen across the board the corresponding financial results. The more brand loyalty we have, the stronger we expect our earnings will be during good times, and the more resilient our earnings will be during industry shocks events.
And I can already see and hear from customers that getting Starlink on all our aircraft is going to be a step function increase in our attractive to those customers. With that, I will hand it over to Brett.
Thank you, Scott, and good morning, everyone. Second quarter is always an important moment for United. As we accelerate into the busy summer travel season.
And our employees once again rose to the occasion. Across the operation, our teams delivered a safe, reliable experience for our customers with the care professionalism, and commitment. That show how good leads the way every day.
In the quarter, United carried 10 of our highest passenger days in company history. With the highest being over 640 thousand customers carried on June 18th. We had top tier on time departures for the sixth consecutive quarter, ranking second amongst our largest U. S. Competitors and representing our best on time departure rate in the second quarter since the pandemic.
We also had our lowest second quarter seat cancellation rate company history. Notably, we saw meaningful improvements at our Newark hub our busiest global gateway. For the month of June, Newark ranked No. 1 in on-time arrivals.
Delivered its best on time departure rate ever and its lowest seat cancellation rate since 2018. These results reflect the continued strength of our operation, and the work our teams are doing across the network to solve problems in real time. Adjust as conditions change, and deliver a safe, reliable experience for our customers.
And our customers noticed We had our highest second quarter net promoter score since the pandemic in the second quarter. Starlink is another example of how we are investing in a better customer experience and differentiating United. During the quarter, we accelerated the rollout of free Starlink Wi Fi and now expect to have close to 1 thousand Starlink-equipped aircraft by the end of this year.
Early customer feedback has been very strong. And Wi Fi satisfaction scores on Starlink equipped equipment are more than double the scores of other Wi Fi operating aircraft. On labor, we are pleased that our flight attendants ratified a new agreement in May.
This agreement is an important investment that is included in our outlook for the third quarter and full-year 2026. And we remain committed to reaching much deserved agreements across all work groups. United Next continues to be the right plan for the company.
We are building a united that is more reliable, more elevated, more global, and more customer focused. Strengthening the experience we deliver today and positioning us well for the future. We believe that our ability to remain nimble and proactively respond to evolving industry headwinds such as higher fuel, maximizes our earnings potential, improves how we have structurally changed for the better.
Thank you again to the entire United team for delivering for our customers and each other. With that, I will turn it over to Andrew to discuss the revenue environment.
Andrew Nocella
EVP, Chief Commercial Officer
Thanks, Brett. Overall, revenue performance was exceptional in the quarter, improved once again United's ability to quickly adjust to an ever changing environment. I think our outlook for the rest of 2026 validates our commercial plans are working well.
United's revenue accelerated across the board in Q2, with total operating revenue up 16% to $17.7 billion TRASM was up 12.1% year over year with load factors up slightly, which indicates strong demand for United's products. We observed minimal to no negative impact on demand from higher price points. Trend we see continuing.
Domestic passenger revenue was up 20.3% with PRASM up 12.2%. International PRASM was also up 12%. Pacific led the way with PRASM up 14%, Atlantic up 12.1%, and Latin up 10.7%.
Cargo revenues were also strong, up 22.6%, and loyalty revenue was up 11.3%. MileagePlus program changes have been very effective in building momentum in new cobrand accounts spend, engagement, and membership as expected. New co branded credit card accounts reached a record level for the second quarter, up 22% with Q2 card spend increasing 14%.
Mileage plus enrollments were up 9% outpacing capacity by 5 points. We saw the largest increase in membership in Chicago and in New York. Premium revenues were up 16.4% and premium PRASM up 11.6% in the quarter.
PRASM specific to the Polaris and premium plus cabins was up even more at 13.6% in the quarter. Main cabin RASMs were up 11.5% in the quarter This is the second quarter in a row where we have seen main cabin RASMs positive after years of below average performance at an industry level While main cabin RASMs turned the corner in 2026, our main cabin fares remain far behind inflation driven by all costs, not just fuel. We are now just seeing a necessary catch up in pricing.
In fact, to put these current fare levels in context, the average main cabin fare today is minimally up versus 2024 well short of inflation, which is up nearly 7%. Closed in business travel was exceptionally strong in Q2, contracted business revenues flown up an impressive 27% year over year and bookings up 30%. Led by technology, financial services, and professional services.
In Q2, United grew corporate share year over year in all of our hubs. These same positive business demand trends continued into early July, and we expect to expect to continue for the remainder of the year. We have adjusted our revenue management posture to save more seats for close in business demand.
We load factor contribution of business travel from all channels in the quarter was up about half a point year-over-year. Our outlook for the remainder of 2026 assumes demand strength from Q2 is consistent in Q3 and Q4. Looking ahead, the pricing environment remains strong across the entire network, with selling yields up mid to high teens year over year in recent weeks, setting up a strong double digit increase in year-over-year. 58% booked through q 3, and given current selling yields and strong demand, We do expect year over year RASM in Q3 and Q4 to exceed Q2.
Consolidated Q4 yield is currently tracking up a strong 19% year-over-year, while Q3 yield at the same point in the booking curve was up only 5%. United continues to gain local share in each of our 7 hubs. Passenger share in our hubs has increased 7 points from 2019.
By far the largest increase of any airline from their respective hubs. United's Q3 schedules are largely final, United's Q4 domestic schedules are not final and will be adjusted downward when finalized. We are not providing capacity guidance anymore, we will make a final determination on Q4 capacity as we get closer to the quarter where we can properly consider the latest fuel and demand trends.
United's efforts to decommoditize our revenue streams and create more consumer choice are accelerating as we head into 2027. New fleet and product initiatives position the business for RASM and margin gains in 2027 and beyond. And we are particularly excited to get Relax Row and the CRJ-450 out for sale.
We also have a very clear path to larger gauge in 2027 as well. Which we expect will be accretive to results and a tailwind to CASM-ex. We have renewed optimism that we will take delivery of our first MAX 10 in mid to late 2020.
The MAX 10 has more premium seats than the aircraft it replaces, along with the best in class CASM. We have absorbed an increase in gauge from 104 to 126 seats since we announced United Next we are still about 10 seats from our goal of 136 seats in North America. We can also now see the horizon on the horizon completion of key aircraft modification programs including fast and free Starlink Wi Fi, seatback entertainment, larger overhead bins, and our refresh onboard branding.
Our United Next plan will be largely done in 2027, but we have many new commercial and product initiatives coming. We will begin to rapidly spool up our flying on our new premium 21, the XLR and the Coastliner later this year and into 2027 anticipate a fleet of 100 premium configured 23 ones by the end of the At United, we are rewriting the definition of what a premium global airline looks like every day. By late 2020, we will provide a consistent and elevated experience for all customers in all cabins unmatched by anyone.
I wanted to say thanks to the entire United team for delivering these excellent results across the spectrum And with that, I will hand it over to Mike.
Michael Leskinen
VP, Corporate Development & IR
Thanks, Andrew. The second quarter provided yet another proof point of the strength and resilience of our business. Our United Next strategic plan.
We have decommoditized United Airlines by earning an ever growing proportion of brand loyal customers. Which in turn then allow us to generate durable financial results. Especially during tough environments for the broader industry.
Our strategy continues to deliver margins at the top end of the industry, a strengthening balance sheet, and an overall financial position that allows us to focus in the long term. Our confidence in our ability to deliver double digit pretax margins by 2027 and mid-teen pretax margins beyond that has never been higher. Delivered second quarter earnings per share of $1.99, at the high end of our guidance range of $1 to $2 and pretax margin of 4.8% despite a $2.3 billion year-over-year headwind from fuel.
Second quarter CASM Ex was up 6.1% year-over-year, which reflected pressure from labor deals and capacity reductions. All consistent with our expectations. We remain focused on driving greater efficiency without compromising the investments in our people, customers, and product.
That underpin our growing brand loyal customer base. In the quarter, we were able to recapture 50% of the increase in fuel expense and accounting for the sharp rise in fuel recently, we expect to recover 80% to 90% in the third quarter and full recovery by the fourth quarter. At today's prices, fuel remains almost $6 billion higher for the for the year compared to our outlook at the start of the year.
Our focus on efficiency has helped offset some of the fuel headwind, but our ability to drive higher yields has been critical helping cover the heightened cost of our operation. And as Andrew mentioned, United has not seen a measurable demand impact based on the higher fares. In fact, if you zoom out to consider price inflation for travel over the last 10 and 20 years, airfare stands out as a tremendous value.
Our customers increasingly desire a better travel experience. And we be we believe they will continue to pay reasonable prices for it. that is why we invest billions of dollars into our business. it is why our margins have been near the top of the industry, it is why we expect to continue to deliver strong top line revenue growth and mid teens margins in the years to come. Looking ahead, we expect third quarter earnings per share to be between $2.50 and $3.50.
Underpinned with an all in fuel price of approximately $3.69, based on Tuesday's curve. Given the recent run up in oil, we felt it prudent to adjust our outlook to reflect the current environment. For the full year, we are tightening our guidance range to the high end of our previous guide and expect earnings per share between $9 and $11 early July, fuel prices have increased 15% to 20%.
And our guidance reflects that pressure. However, if fuel prices return to prior levels, we expect to be above the high end of both ranges. Additionally, given oil volatility, we expect crack spreads to remain elevated for the remainder of the year.
In a year where the industry is experiencing a multibillion dollar shock from oil, this would be a fantastic outcome that demonstrates United's ability to absorb and manage through times of uncertainty and meaningful financial pressure. On cost specifically, our plan volume adjusted, has remained consistent with our expectations at the start of the year. The pressure on our unit cost in the first half of year solely driven by our closing capacity adjustments, and will remain a headwind to unit cost for the remainder of the year.
We have consistently demonstrated that we will adjust capacity when necessary rather than operate flying that does not make economic sense. These actions reflect our focus on maximizing long term profits and cash flow. With this in mind, in 2027, we plan to retire at least 80 aircraft.
As we continue to renew and up gauge our fleet. A step up from the last few years. Turning to the balance sheet.
As the quarter began, the industry faced significant risk and uncertainty driven by the hostilities with Iran and the closure of the Strait of Hormuz. Given that heightened volatility, we proactively secured additional funding to build extra liquidity to manage through a scenario where oil remained higher for longer. We raised capital through a series of private bank transactions that raised $3.7 billion of new debt that is attractively priced at a fixed rate equivalent in the low-5% range.
Pricing well inside of our most expensive existing debt. Once oil prices stabilize, our intent is to use this newly raised debt to prepay more expensive debt and to purchase aircraft with cash. Our ability to raise this quantum of debt at these terms further demonstrates United's improved financial position.
And progress towards investment grade. Since the beginning of the second quarter, we have prepaid approximately $1 billion of higher-cost legacy aircraft debt and PSP debt. Will continue to closely monitor the situation in The Middle East but in interim, this capital provides us plenty of flexibility.
We ended the quarter with $19.6 billion of available liquidity. We remain focused on achieving investment grade credit rating metrics and remain optimistic for our prospects later this year. To wrap up, demand for the United product is as strong as ever.
Our customers continue to demonstrate a preference for the value our products provide. This supports our relative financial performance, and reinforces our confidence in the durable durability of our strategy and our ability to deliver mid teens margins in the future. I will turn it to Kristina to kick off the Q and A.
Thanks, Mike. We will now take questions from the analyst community. Please limit yourself to 1 question and if needed, 1 brief and related follow-up question.
Regina, please describe the procedure to ask a question.
Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please press star, then the 1 on your telephone keypad.
Please hold for a moment while we assemble our queue. Our first question will come from the line of Catherine O'Brien with Goldman Sachs. Please go ahead.
Hey. Good morning, team. Thanks so much for the time.
I know I know we are not gonna get an actual RASM guide, but Andrew, I just had a couple of questions, all related, on the fact that 3Q RASM should accelerate into 3Q versus 2Q. Can you just help us think what that looks like for each of your reason regions RASM? System RASM comp, that is fairly comparable to 2Q, but domestic has a tougher comp, and then and then the 3 international regions have easier comps.
And I guess just anything we should also be aware of on other revenue or cargo as we make our assumptions on RASM acceleration. Just trying to get a sense of the puts and takes. Thanks.
Andrew Nocella
EVP, Chief Commercial Officer
Sure. Good morning. You know, when we look across the system, as I said in my script, you know, we see strength, just about everywhere.
You know, in Q2, I think, you know, we are particularly proud of our performance across the board, but really in the Atlantic and if you look at those numbers year-over-2, even more proud. Like, we have we have got it really dialed in on those entities. And we see continued strength in both of those entities in Q3.
Internationally, Latin America, year over year will be the standout in Q3 considering it definitely has an easy comp with the number for Latin in Q3 for PRASM growth year over year will be off the charts Cargo had a really strong quarter. Most of the gains in cargo were yield related, not volume related, and I expect that to continue into Q3 as well. So I think a really good outlook.
The only place I can find that has, you know, lower yields than I would otherwise expect it is Hawaii. But other than that, I think the system is firing on all cylinders. We have done, you know, really good job.
Our capacity planning group of putting capacity where it needs to be, and I think that shows up in our results And The outlook for Q3 and what we have told you about the outlook for Q4.
Our next question will come from the line of Andrew Didora with Bank of America. Please go ahead.
First question, Mike, I see 26 CapEx came down a little bit, I know, on some delivery. Changes. As we think about modeling your free cash flow the next few years, what year do you see as sort of peak CapEx when do you begin to see it bend down a bit more significantly?
Michael Leskinen
VP, Corporate Development & IR
Hey, Andrew. Thanks very much for the question. We are focused on free cash flow, uniquely focused on free cash flow.
We have talked about a 50% conversion rate for the next few years, heading to 75% as we exit the decade. The CapEx is gonna vary based on our results. We are determined to get to double digit margins, as I said in my script, mid teens margins longer term.
As we get there faster, we may allow CapEx to be a little bit higher. As we get there more slowly, we will manage CapEx appropriately. But what I what we are committed to is those free conversion figures.
Okay. Understood. And then just as a quick follow-up here, investment grade, obviously, a big goal of yours this year.
When you couple that with that path to double digit margins, of that the CapEx comments you just had, You know, do you think about target leverage and future capital return potential as that kind of CapEx maybe decelerates from the peak? Thanks.
Michael Leskinen
VP, Corporate Development & IR
We have had significant consultations with the rating agencies I expect and we plan for net debt to be below 2 turns. I think if you normalized our earnings this year, for fuel, we would already be there. As we look into 2027, we will absolutely, trend below 2 turns.
And in addition to the actual metrics, what we have proven through this fuel crisis is the is the resiliency of this business. And we think that at least for the airlines that have a brand loyal strategy, we have proven a resilience that would earn us a higher rating of for the for the industry and the business itself. So you put those to put those meaningful factors together, and I think we are know, the market is already recognizing us with investment grade type terms, and I think the rating is right on the precipice.
Our next question will come from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.
Maybe just to start it off, can you talk about StarLink? You have now installed it on 450 aircraft out of your 1 thousand-aircraft fleet. And that is expected by year end or nearly most of your fleet.
How do you think about monetizing the addition of Starlink and the advantage versus your peers? And I guess, how do you think about new product more broadly? You mentioned MAX 10 finally coming into the fleet.
At the end of 2020 7. And the XLRs.
Well, thanks, Sheila. We have been doing a lot in the past 5, 6 years to really invest in the customer experience and know, we look at the disaggregate data market share data of every single 1 of our hubs, like, just incredible growth from the local customers. And it is been the right strategy.
And I think Starlink is probably gonna be the biggest of everything that we have done. And the feedback I get from customers is just unbelievable. Good when they get on flight.
We are doing everything we possibly can, including taking aircraft out of service to, you know, as fast as Starlink can produce the antennas for us. Gonna get them on the airplane. And I think it particularly for you know, many of the premium customers, but all customers are from premium customers that really want to be able to be make sure they are connected with high speed.
It is going to lead to big share gains for us. We are excited about it. Proud of it, and it is just the next step forward for us at United But we can already tell it is gonna be big.
Brett.
And just on the new product introductions with the max 10 coming in, how do you think about that more broadly?
Andrew Nocella
EVP, Chief Commercial Officer
Well, it is we have been waiting a really long time for the max 10, and, hopefully, that wait is coming to an end. We have our first implementation going down the line for, I think, a July delivery of next year. So we are anxious to see that.
You know, with the max 10, you will see us stop taking delivery of max 9 shortly thereafter. The max 10 will be superior in every way, a little larger and far less cost on incremental side, so the marginal CASM is very low. Applying the bigger aircraft.
And that goes towards our know, CASM-ex goal. I think it is gonna be a really great aircraft making sure we have efficient growth into the future. Across the board, you know, products look great on these aircraft.
However, the XLR and Coastliner, which are the 21 neo platform, are arriving this year. They have a lot of premium seats onboard those aircraft, and you will see us deploy them rapidly as we go into 2027, which will increase our premium seating faster than our main cabin seating for a bit. And we are really excited about that.
These aircraft will have Starlink onboard. They will fly our most premier routes within The United States and, of course, to smaller destinations in Europe, and Latin America. And I think we will be a game changer.
We have about a 100 of these coming before the end of the decade. Far more than any of our primary competitors. So we are really leaning into the premium narrow body.
We think it is gonna be a structural advantage for United, and we are excited about that. Then last, the elevated 789. We have this fly in, the CVS suite that is performing unbelievably well.
And we are excited to or rapidly at least size of the elevated 789 fleet in 2027. You know, we will not an infinite number of aircraft with that many premium seats that they are really large complement onboard, but we will have enough to fly key routes in Asia and to London Heathrow where that plane makes appropriate sense. And our customers and the NPS scores show that they really love the amenities onboard the aircraft.
So that all adds up to a lot of different product features and there is more to come. And we will let you know what those are at the appropriate point in time.
Our next question will come from the line of Connor Cunningham with Melius Research. Please go ahead.
Mike, it seems like we are going to face peak cost pressures in 3Q this year. I know it is early and you are still investing heavily in the product and the experience. But it just seems like you have the biggest opportunity on costs.
Come next year. So maybe you could just talk about the puts and takes there and just you know, why should not we already be penciling in United leading on costs in 2027? Thanks.
Michael Leskinen
VP, Corporate Development & IR
Thanks, Connor. And to answer the question simply, I think you should. As we roll into 2027, we remain committed and expect the CASM Ex in the 2% to 3% range, core CASM Ex That includes some investment, continued investment in the consumer.
I also think you are you are thinking about the pacing of CASM-ex in 2026 correctly. I expect Q3 will be peak. And, everything is working to plan.
Doing a great job of managing core CASM-ex. We are investing in the customer. And the gauge growth that reaccelerates in 2027 gonna get us right back on that 2% to 3% core CASM-ex path.
Okay. Brett. And then you guys have obviously done a very good job of managing the business this year.
And your conviction level around, you know, double digit pretax margins next year only seems to get a bit stronger. But, like, if I still think about the opportunity set, in front of you, you know, you have Starlink unlocking, NPS scores. the ad business, and so on. You know, gauge, premium, merchandising.
It just you have a ton of stuff, and a lot of that ramps actually past 27. So if you could just talk a little bit about how you view the long term margin profile of the business. And it just seems like we are at a much different place than we have been ever before.
So Yeah. Well, thanks, Connor.
I am afraid to answer that because you said it all so well. I do not wanna screw it up. But here is what I think the margin path is for United. it is just consistent with what I said in the past.
I think we are on a trajectory to get to, you know, low double digit margins with no structural changes in the Just everything that you just talked about the path that we are on, gets us to low double digit margins. And by the way, you know, somebody may ask you later, but we are gonna exit 2026 at a revenue run rate, you know, here in the second half. That would just on its own, imply double digit margins for next year, which I also expect.
But we will get to low double digit margins, you know, with no other kind of structural changes in the industry. I do, however, think that and I think getting to mid double mid teens margins requires or is likely to require some more structural changes in the industry. And I do think that is gonna happen to me.
It does not happen immediately. It takes time. But economic gravity always wins.
And the reality is this year, you know, 4 of the 8 publicly traded commercial airlines are probably gonna lose money. They have an awful lot of flying that loses money. You know?
An individual route basis. And 1 way or another, that gets resolved over time. I am not gonna try to predict when.
I am not gonna predict exactly what had happened, but I think that probably drives us into the mid teens margin drain. So on our own, even if none of that happens, we are on a pretty straightforward path, I think, to low double digit margins. And you get to add several points onto that as structural changes happen in the industry.
Our next question will come from the line of Jamie Baker with JPMorgan. Please go ahead.
Hey, good morning, everybody. Scott, on fuel. You know, 1 concern we all hear quite often, particularly in light of elevated fourth-quarter schedules, is that when fuel prices ultimately recede, capacity will come back on, and know, hurt RASM.
You may recall that back in 2016, I actually criticized you. Well, I mean, not you. Personally, but we think that is okay.
Yeah. Knew you could take it. We felt American under your leadership did just that and, you know, used fuel cost savings at that time.
You know, as a way to sorta hammer some of your competitors, particularly discounters, So that is the basis of my question. Do you think the industry has evolved to the point that this is less of a risk or is this something that you know, analysts and investors should still fret about? Thanks.
So let me start with why prices have gone up. it is not fuel price. Fuel price was you know, accelerated a little. it is not fuel price, and it is not capacity. It is what I said in my script probably the biggest structural change that is happened in the industry.
Coming out of COVID is cost inflation and cost harmonization. And the harmonization is really important. And what has happened is airport fees you know, have gone up, you know, something like 60% since COVID.
Labor costs have estimated dramatically. Maintenance is off the charts in terms of escalation. And those are all costs that every single airline pays the same.
And that has driven that is why 4 of 8 airlines are gonna lose money this year. it is it is why 1 airline went out of business. This year. That is the underlying driver of price increases.
And even with fares up this year, you know, I said earlier this morning, they are in my script. Airfares are down still 13% in real terms. Compared to where they were in 2019.
And that is just basic economic In any industry has to pass along the price increase So I look at kind of where prices are right now. I would say 10% of the price increase, you know, 10% of price here in the second quarter was less capacity growth. The second, third quarter. 90% of it is the structural change that happened with cost increases.
There was another fare increase this week. As airfares as fuel started to go back up, and there were no fare decreases when fuel went down. And so if you are an investor, what is different this time in 2016 is the cost harmonization across the industry. it is a dramatic structural difference.
And so I think it is fair to be arguing about what the 10% is gonna be. By the way, I think capacity for the fourth quarter is likely to come down. that is what happens every quarter. Likely to come down.
But even if it does not, know, you are really talking about 10% of the fare increase. that is sort of at risk. And the 90% is probably not done yet because all those costs have not yet been recovered. This is about a structural change in the cost side of the business, which is forcing a structural change the pricing and revenue side of the business.
Excellent. Thanks for the color. And then for Mike, you know, on this capital raise in the quarter, you know, how does this play into management's overall conservative conservatism excuse me, and, you know, Mary, in my view, is that you did not you did not need to be this proactive.
You have tight unsecured access. You have got access to the EETCs. I get I guess we are just wondering why you would prefund all this CapEx when other options seem to exist?
Michael Leskinen
VP, Corporate Development & IR
Jamie, thanks for the question. And, look, we just we have a track record, and we are gonna maintain that of being proactive. We are we are right on the precipice of investment grade. that is gonna unlock a lot of options for us.
And this was a very cost effective And the net cost, as we invest the proceeds in money markets, is very low. And so this was a very cost effective way of adding some extra insurance in a way that, that will bring down overall cost of carry as we prepay the more expensive debt. So it was it was truly a no regrets move, and I am really proud of the treasury team for the execution.
Our next question will come from the line of Thomas Fitzgerald with TD Cowen. Please go ahead.
Hi, everyone. Thanks so much for the time. For me on loyalty.
Just 1, would you just update us on your latest thinking about the timeline on that contract renegotiation? I know that is 1 of the longer term upside drivers for you guys. And then just my follow-up is you know, I know you redid the credit card program in back in May just to further incentive incentivize and then align with the credit card holders.
I am wondering how what their learnings from that is been, and if that is been having the intended result. Thanks for the time.
Andrew Nocella
EVP, Chief Commercial Officer
Sure. In terms of duration, you know, it will say, I think it is out there on the Internet somewhere, but we are in the in the sunset phase of the current contract and but we have not started to reengage with our bank partner Chase at this point. But, you know, soon, we will we will do so.
But I think I think we are I can describe it as the sunset phase. In terms of the program changes, look. I, you know, I gave a bunch of stats on my opening remarks, and we are really happy with the changes we did.
Some of them were new and unique, for the industry. But I think it had the desired effect. You know, I think credit card space is most interesting and complicated and also full of a lot of upside for United Airlines as we grow and take advantage of these opportunities as we grow our business core of our business.
It allows us to grow the credit card business even more. So we are we are super excited about it. I think the numbers are all moving in the right direction.
You know, just to point out, we did have a out of period onetime adjustment in loyalty other revenue in the quarter. That made our number look a little bit lower than it otherwise would be. It showed just under 8 when without that onetime adjustment, it would have been over 13.
So if looking at those numbers and thinking that the revenue slowed a bit in the quarter, they did not. We expect strong numbers in Q3 as well. So I think we are really set up well.
I could not be prouder of the changes. That was a year and a half of research, and then this investigation and technology changes. They are all implemented.
They were implemented flawlessly, and are doing really well. I will also point out we implemented a lot of changes on united.com and how we sell tickets. How we sell nested fares.
All those changes were really critical. To our evolving and more complex product mix. They were also implemented flawlessly.
The technology worked perfectly, and I am really proud of the team for delivering all that. I think the nested sell in is also delivering exactly what I wanted it to deliver in the very early stages here.
Our next question will come from the line of Ravi Shanker with Morgan Stanley. Please go ahead.
Brett. Thanks, morning, everyone. Scott, it is interesting that you tied the industry wide fare increases to overall cost inflation rather than fuel And you said there was another round of increase this month.
Despite fuel not hitting a new high watermark. Adding that a demonstration of that. So as investors or analysts, what do we think is the new benchmark for when United could raise pricing going forward in the coming years Is it a certain number of points of CASM inflation Is it specific cost catalyst like a new labor contract?
Or trying to get a sense of how many kind of what are the opportunity for pricing, you know, ex fuel benchmark for the industry going forward?
Well, I am not gonna answer a question on pricing. But I think the way to think about pricing, what is what is happened this year is sort of cleaning up the core basic pricing environment. that is the 90% that I talked about relative to capacity. You know, there are no more $9 fares from Houston to Central America or $4 tickets from Los Angeles to Cabo and some of the crazy stuff that just does not exist anymore.
I think it is ever gonna exist again. And so the core basic fair structure is in a much more reasonable place today, and it and it continues to, you know, go up. As it as it has this week.
The capacity side of the equation is really yield management. You know, how often you, you know, sell the lowest fare versus higher fares in the market, and that is sort of the 100 ratio that I think exists. But I think really the way for investors to think about this is to think about that 9 to 10 ratio and the cost structure inflation and the harmonies that mean everyone's costs have gone up.
On those things that are outside of our control. it is 90% of the driver.
Our next question will come from the line of Scott Group with Wolfe Research. Please go ahead.
Hey. Thanks. Good morning.
Just 2 quick things. The comment booked yields 14% higher for Q4. Like, any way to help us think, like, what that actually means for our models?
Like, is the implication RASM accelerates further Q3 to Q4? I just do not know how, like, how to, like, actually what to do with that comment. And then Mike, you said retiring 80 aircraft next year Is it how much capacity is that?
Any, like, preliminary, early directional thoughts about capacity growth next year? Thank you.
Andrew Nocella
EVP, Chief Commercial Officer
Well, I will I will start. Look. You know, we kinda we do not give RASM guidance, but I did give a lot of hints and that Q3 and Q4 would be a good above Q2.
So we obviously think we are in a in a really good year over year RASM setup for the remainder of the year. In terms of that particular comment, I think it is a reflection that you know, the incredibly low fares, as Scott pointed out, from LA to Cabo of 4 or $14. I think $14 is the accurate number, Scott.
Are no longer out there. So leisure yields far out the booking curve are, you know, actually seeing the highest year over year change because of their incredibly low base and their reset during this current situation. So that is why that number seems so high.
So I think we have given you the appropriate revenue guidance I think it is a really good revenue outlook, and I will leave it at that and hand it over to Mike for the second Thanks, Andrew.
Michael Leskinen
VP, Corporate Development & IR
And Scott, thanks for the question. Look, we have seen an acceleration in production for the OEMs. So we do expect to see more new narrow bodies, and see a few new additional wide body aircraft delivered next year. The aircraft we are retiring are older, less fuel efficient.
They have older cabins. And so this you know, refresh of the fleet is gonna be an important driver to help drive a CASM tailwind to get us to that 2 to 3% range that I spoke about. So we are excited about it.
Of the aircraft, frankly, would have been retired sooner. If, if there had not have been so many OEM delays.
Our next question will come from the line of John Godyn with Citigroup. Please go ahead.
Scott, you mentioned structural change a few times on the call. I think there is broad recognition that carriers like United are leading the charge in that. But that is obviously not the case for all the carriers.
So the pushback we sometimes hear is that the industry structure is only as good as the least rational carrier, and the least rational carrier can be pretty irrational I am just curious how you address that. May maybe you could just kinda reflect on that. And how you see that playing out from here.
Obviously, you are making the right move but you are not in control of what other irrational moves others make.
Okay. I will try. there is there is 2 structural changes. I have talked about the first 1 I have talked about, is gonna be the focus to answer your question is cost harmonization.
And that the short answer on that is it is not about doing something rational or irrational. Like, when your costs go up, like, you either make your revenue go up or you get fired and the next person makes your revenue go up, or you go out of business. And so that is, like that is not about, like, people making dumb decisions about where they fly and stuff.
Like, they just do not have a choice. And that is the sort of 90% on They do have a choice on the 10%, and sometimes they make bad decisions there. But, again, it is like, it is the 10%.
Of pricing, I think, that matters for. And that is the most important structural change for anyone trying to model the industry. You know, looking out for the rest of this year, 27 to 28. there is a second point which is I think, the second most important structural change that is happened is that the emergence of BrandonLoyal Airlines.
And there is 2 of us It took it you know, it took us a decade to get there, a decade of investment. You know, we look at our market share. You know?
You can take a place. I am not trying to pick on them, but it is true in every 1 of our hubs at a place like Chicago, where, you know, in 2016, we had a 4 point deficit with local customers to our biggest competitor here. And we now have something like a 16-point premium.
It grew again in the latest data even with all the capacity that is been added. You know, we just brand loyalty wins. That does give us a level of not a 100% that gives immunity to what happens from a competitive perspective, but it gives us know, a lot of resistance to it, much less exposed to what happens from a competitive perspective.
Because the competitive capacity stuff impacts the commodity portion of the business, has much smaller impact on the brand-loyal part of the business. And so those 2 trends the cost harmonization, is, I think, incredibly important. And then for United specifically, you know, the emerge you know, the brand loyalty, is a second structural trend. that is permanent.
It I already said structural and irreversible.
Our next question will come from the line of Linenberg with Deutsche Bank. Please go ahead.
Yes. Hey, good morning, everyone here. I just we saw that flight caps were extended in Chicago, I think, week ago through now the fall of 2020.
How does it impact profitability? I know on 1 hand, could argue there is less consumer choice. On the other though, it allows you to run maybe just a more reliable hub and helps connectivity.
And then as a related follow-up, I saw, you know, recent caps being imposed in San Francisco. what is behind that? And is that a permanent change to the San Francisco know, operation? And does that have an impact as well?
Thanks for taking my question.
Andrew Nocella
EVP, Chief Commercial Officer
Hey, Mike. it is Andrew. I will I will start off. But, you know, so in Chicago, the FAA recently put out an order that extends the caps for a year.
You know, I quite frankly, I do not know what is gonna happen in 12 months where that is gonna change. Because the construction projects that O'Hare extend out almost indefinitely and so we will see. But, you know, our current plan given these gaps, is to fly 650 flights per day, which is what we are approved to fly.
Almost indefinitely. And so that does change the dynamics of the hub. We will seek to up gauge it in the years to come to facilitate growth.
And, like, I think these changes are gonna any way, hurt our profitability. So it is what it is. I think we are, a little bit disappointed, but, we now have certainty I think, as to what it is gonna look like for an extended period of time, and we will strive to gain as much market share, put as many large aircraft in here and expand through creative measures, and we will do so.
We have done it in the past in New York. And we will do it in Chicago if that is the new reality.
Think I will pass it over to Toby to briefly describe what is happening in San Francisco. Toby? Alright.
So real quickly, the FAA has changed the approach into San Francisco, which lowered the rates. We have worked hand in hand with them. To try to come up with a new approach, which will get the landing rates up again.
I am not so 100% sure yet that we can get back a 100% where we were before, but you should see an improvement in lending rates in San Francisco over the next 2 to 3 weeks. there is also been a runway construction this summer. So that is a big driver. Yeah.
And that will that is the end. Cannot be finished in October. Yeah.
Yeah. And it is also part of that, Mike. The last thing I will add is that the at same time, the government extended the order in New York So we are under similar levels of caps in Newark for another year.
And, again, you know, my expectation is that is likely to continue They are you know, we are simply out of runway space in many of these key airports. And it is why our long term plan is to focus on gauge growth, which our fleet plan sets up really nicely.
Our next question will from the line of Brandon Oglenski with Barclays. Please go ahead.
And Andrew, maybe this is a good follow-up to that conversation there on the fleet plan. And maybe this 1 for Mike as well. Just like how do you leverage the newer and the older aircraft in the fleet?
And I appreciate the increased disclosure today of 80 retirements. Even then, it looks like you are gonna have, you know, mix of old and new. So are you looking to maybe leverage certain portions of the fleet at peak periods and maybe on non peak periods?
If you could speak to both those, I would appreciate it.
Andrew Nocella
EVP, Chief Commercial Officer
Well, you know, I think we are spending a lot of time understanding how much relative increase in capacity we offer in peak times. We have talked about this on other calls, And I, you know, I have been disappointed by our relative third quarter, for example, earnings and RASMs. And we worked really hard this third quarter to make that a more durable quarter than it normally has. Obviously, the price of fuel kinda hides some of the progress we have made.
But overall, you know, I think we are less excited about pushing the airline super hard in any particular week or quarter that happens to be a period of increased demand, because the you know, we are worried about the increased cost of a 30 day peak or succeeding peak. As we run those cost structures throughout all 12 months of the year. Do not make as much sense anymore as they used to.
So we are we are taking a look at that. So overall, hope hopefully, that gives you a little bit of color on the way we are thinking about it. I think we are gonna be really careful on how we pick the airline in any give peak period.
Michael Leskinen
VP, Corporate Development & IR
But, Brandon, I think it is a really insightful question, so thank you for it. I think a barbell approach when it comes to fleet makes a ton of sense. Having a modern, larger gauge, fuel efficient fleet for trunk routes, and for a core of the fleet, makes ton of sense.
And we have got great pricing, great financing, It maximizes not only profits, but it maximizes return on invested capital. To have some of these a larger amount of these younger, more fuel efficient aircraft without a doubt. But as we think about modulating capacity, in the short and medium term based on based on the economics, You know, we talk about we are gonna match demand to supply.
Having some older aircraft that have a lower capital cost that we can use to peak and or to we can we can sit down cost if the demand environment does not justify. Makes a ton of sense. And so that is exactly how we are managing the fleet.
We are make sure as we think about the aircraft we are ordering and we are taking delivery of that we always have an element of that barbell approach so that we can be remain nimble in many environments.
Our next question will come from the line of Duane Pfennigwerth with Evercore ISI. Please go ahead.
Hey. Good morning. Thank you.
Good call and good outlook. I wanted to dive a little bit deeper on the corporate travel recovery. I think that 27 or 28 on percent growth number you put out, I do not know if you can get, this granular, but I assume you talk about contracted business travel, that skews more towards larger corporate accounts, larger enterprises.
Do you have any insight into the growth in small and medium sized businesses, which I assume were probably impacted more significantly by tariffs last year And then just along those lines, staying on the corporate theme, just geographically, any standout hubs or markets where the corporate growth rates are tracking higher?
Andrew Nocella
EVP, Chief Commercial Officer
Sure, Duane. I will I will start off. Look.
It was a standout quarter to say the least. And, you know, I will go back in time. Just after the pandemic, we found our large corporates actually trail in the smaller corporates.
By a pretty significant amount. And I think you are correct in the last few quarters, the large corporates have accelerated well, you know, above the smaller corporates, but not by a lot. They are they are just above.
And I think if you look at it over a long period of time, they are just the largest large corporates are just kinda catching up with the small and probably even having got close to up yet. I have not looked at that particular number. But that I do agree the large corporate were a little bit more robust this time around than the smaller ones.
But, really, I you know, I think a standout quarter. It looks to continue into this quarter. it is a higher percentage of our load factor, which is nice to see. Although to give you an idea, it is still 5 points of our load factor lower than it used to be pre COVID.
So it incorporates travel continues to accelerate and closes that gap, with, you know, basically an 80% yield premium versus leisure that is a significant amount of upside in the plan. We are not assuming that, but the half a point of load factor growth we saw was great. it is also great you know, I was looking at across The Atlantic in Polaris, to see our load factor up, and our load factor up was in business premium, and our load factor was up in leisure premium at the same exact time. That is just the trifecta.
I guess I need a third 1 to make it a trifecta, but it was it is really great. And so if we can continue to drive premium leisure growth as we drive corporate growth, wow. that is that is a lot of upside, and it is 1 of the reasons I think we are bullish for late this year and into 2027. So, hopefully, that answers the question.
Our next question comes from the line of David Vernon with Bernstein. Please go ahead.
Hey, guys, and good morning. Thanks for taking the question. So Andrew, you mentioned earlier that your sort of you were very satisfied with the way that the nested selling strategy was kinda working out within the premium cabins.
I think that is related maybe to load factor, but can you give us some color around you know, what exactly that is giving to you in terms of buy ups or better utilization and where you are sort of in the process of kind of implementing that fair strategy across the markets that you serve?
Andrew Nocella
EVP, Chief Commercial Officer
Sure. We, you know, we rolled it out a few months ago. Again, it was a lot of research consumer testing, and then technology changes to make that happen.
Fundamentally, it provides, you know, consumers more choice. They get to pick the aspects of the journey they find the most value in. So we think it a win for consumers Right now, it is early days, and I you know, if I go back to you know, the start of basic economy, I think we learned a lot over a period of years on how to best merchandise things and refine those very effectively over time.
And so I would say we are in the very early innings of this. The buy up rate to the standard premium Polaris ticket is actually not gonna give you the number, but the number is high. In fact, it is higher than I expected by a lot.
And so we have a lot a lot of work to do to get things tweaked and optimize things. But, again, early innings, really happy with it. And more to come as we offer more products and our technology is evolves to best sell these products.
So you know, we are really far down this segmentation path. But there is a lot more path ahead of us is what I would tell you.
Our next question will come from the line of Savanthi Syth with Raymond James. Please go ahead.
I was just wondering if you could just follow-up on a earlier question on kind of capacity growth. I wonder if you could provide a kind of medium term color on how you are thinking about it in terms of domestic versus international given, you know, what you are planning on retiring and what you are seeing coming in?
Andrew Nocella
EVP, Chief Commercial Officer
Sure. I will start. Others may wanna chime in.
I think the domestic market is far more mature in my opinion. And so the growth rates need to reflect that. Ultimately, with GDP.
The international market is different. I think it is been more lucrative for United. I quite frankly, our hubs are optimal locations for international growth.
And the relationship to, you know, GDP for the international blind, it seems to be different than domestic. So that is a long way of saying that I expect our international growth rate in the coming years to be above our domestic growth rate.
that is helpful. And just if I might follow-up on that, just you know, seat capacity was up 4% in February. How do you expect that to trend over, like, in the next 12 to 18 months as you are kinda adding all these premium products and getting kinda larger gauge aircraft with the higher mix of premium.
Andrew Nocella
EVP, Chief Commercial Officer
Yeah. So the premium capacity will clearly grow faster than the main cabin capacity. I am not gonna give the numbers today, but that is fundamentally what our fleet plan and what the premium a 23 ones that are coming online. that is that is gonna happen. it is by design.
We are happy with that and pleased with that. However, that does not mean that we are gonna step away from basic economy. Does not mean we are gonna step away from the main cabin.
You know, there is a life cycle of the customer. We need to start with the customers that sit in the back the aircraft and pay lower fares. So, ultimately, someday, they can sit in the front of the aircraft and pay higher fares.
We do not we know we know the full life cycle of the customer, and we are not gonna forget that everybody matters on the airplane, and we are gonna give an elevated experience to everybody on the aircraft. And I think we have a lot of proof points to we are actually executing on that.
Our next question will come from the line of Christian Wetherbee with Wells Fargo. Please go ahead.
Yes. Hey, thanks. Good morning.
Just leaving the call, just keep it 1. I guess you guys talk about capacity in the fourth quarter, I think, in the thinking about adjusting it relative to cost inputs, fuel, potentially other things, there a way to sensitize that? I mean, how what are the sort of levels that you are looking at that give you a view on how you think about capacity in the fourth quarter?
Any help you can give us around benchmarks would be great. Thank you.
Andrew Nocella
EVP, Chief Commercial Officer
I will start. Look, as we were I think, at the JPMorgan conference and the price of oil had spiked, we made some aggressive changes to Q3, and you can actually see them in our sell in file. We think that was the right thing to do.
And we would do it again if necessary. We would not change anything As we think about Q4, we think about the same exact framework I will say just for a little bit of color, you know, the reason our schedules are loaded the way they are currently in Q4 is we have been waiting on the FAA to issue the orders for New York and Chicago which just came out. So they will allow us to adjust our capacity now sometime next week and then and a few weeks after that as we get everything firmly in place for Q4.
So for all of you waiting to see what our Q4 capacity will be, will not have to wait all that much longer.
Michael Leskinen
VP, Corporate Development & IR
Christian, I do wanna pile on Andrew's statements just philosophically. We at United, are driving towards margins in cash flow generation. And we are gonna match supply with demand, whether that is Q4, 2027, or beyond.
Built a good track record of that. You have seen when we have grown. Rapidly.
We have done it in a way that is that does not dilute TRASM.
And we will now move on to the media portion of the call. You would like to ask a question, please press star, then the 1 on your telephone keypad. We kindly ask that you please limit yourself to 1 question.
Please hold for a moment while we assemble our queue. Our first question will come from the line of Allison Sider with Wall Street Journal. Please go ahead.
Hi. Thanks so much. I was wondering if you could talk a little bit about LAX, just sort of what the state of competition is there You know, does it feel like it is becoming more of a battleground, or is this of just the way it is always been?
Just sort curious how you see that playing out.
Andrew Nocella
EVP, Chief Commercial Officer
Sure, Ali. You know, LAX is interesting. So of our 7 hubs.
We are firmly committed to it. We are growing it. It has been a battleground, but so is New York, so is Chicago, so is San Francisco.
Like, I feel we are in a incredibly competitive industry. The dynamics of in LA are clearly at least 4 large US carriers, with similar shares. I expect that to be true a year from now. 5 years from now, and 10 years from now.
Like, you know, it is a very competitive marketplace, and we are we are in it to win it as well. But I expect it will be competitive for the foreseeable future.
Our next question will come from the line of Leslie Josephs with CNBC. Please go ahead.
Hi. Good morning. I am wondering if you have any count on how many customers have defected, I guess, from other airlines and are now loyal United Flyers?
And then just broadly on your growth, The U. S. Is a pretty mature market. And just wondering if you had a few thoughts on that. Thanks.
Andrew Nocella
EVP, Chief Commercial Officer
Look. We look at the market shares not every day, but quite often. And you know, I, you know, I spend more time looking at RASMs than market shares, to be honest.
But that being said, we track the market shares We look at it quarterly from the government data that is issued. We are gaining in all our hubs in the Bay Area. For example, in Q1, we are up 3.4 points year over year.
That was the best performing share gain for United. But we gained in all of our hubs. We have done that consistently year after year.
And I think it is simply we are offering a product that our customers love and more and more people love it every day. So, I think we are really happy with that. And then I will you know, I said it a few minutes ago.
I think the domestic market is far more mature than the international market. The appetite for American consumers to travel overseas seems really high to me, whether it is Southern Europe or Asia or anywhere else around the world. I think the desire to explore is growing.
And it is 1 of the reasons we are excited more about international growth in the coming years than domestic. But that is that is kinda where I think we are.
I will now turn the call back over to Christian Edwards for closing remarks. Thanks, everyone. We appreciate your time today.
Best of luck everyone navigating the rest of earning season. Safe travels, and please contact Investor and Media Relations if you have any further questions. We will speak to you next quarter.
Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.
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