Synovus Financial Q2 2024 Earnings Call Transcript

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Provided by Quartr
July 18, 2024

There are 18 speakers on the call.

Operator

Good morning, and welcome to the United Airlines Holdings Earnings Conference Call for the Q2 2024. My name is Brianna, and I will be your conference facilitator today. Following the initial remarks from management, we will open the line for questions. 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.

Operator

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, Christina Edwards, Managing Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, Brianna. Good morning, everyone, and welcome to United's Q2 2024 earnings conference call. Yesterday, we issued our earnings release, which is available on our website at ir.united.com. Information in yesterday's release and the remarks made during this conference call may contain forward looking statements. All forward looking statements are based upon information currently available to the company.

Speaker 1

A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release, Form 10 ks 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 earnings release.

Speaker 1

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 Nacella and Executive Vice President and Chief Financial Officer, Mike Luskinen. In addition, we have other members of the executive team on the line and available to assist in the Q and A. And now, I'd like to turn the call over to Scott.

Speaker 2

Thank you. Good morning and thank you, Christina. The United team produced another solid quarter. We did that while further sharpening our focus on improving our already strong safety culture over the last several months. Looking at a wide variety of metrics, our airline is safer than ever before with our culture rooted and constantly striving to make our airline safer for our employees and our customers.

Speaker 2

So we're continuing to work closely with the FAA and other partners to do exactly that. Additionally, thank you to our employees for delivering top tier operational performance amidst challenging weather, including Hurricane Barrel in Houston and getting our customers to their destinations safe and on time. While this is a quarter where industry capacity growth exceeded still solid demand, it was also a quarter that continued to show the industry developing along the lines that we've been anticipating for the past couple of years. The pressure other U. S.

Speaker 2

Airlines are experiencing today is due in large part to their unprofitable flying in many domestic markets. It was always inevitable that carriers would begin to cancel this unprofitable flying and you see that happening in earnest in the second half of August in the schedules. As a result, it appears that domestic industry capacity growth will moderate by roughly 5 points by the Q4 compared to where we were in the 2nd quarter, which should provide a constructive setup as we close out the year and a particularly beneficial backdrop heading into 2025. Since COVID began in early 2020, United has consistently been ahead of the curve on the big picture developments driving the industry. We're running the best operation in our history despite operating in the most difficult hubs in the world, Chicago, Newark and San Francisco, and despite having more exposure to the issues at Boeing than any airline in the world.

Speaker 2

Our people are proud of United and they have completely transformed the service and care for our customers. And we have the best commercial and revenue management teams in the world that are always on top of the demand environment making strategic and technical adjustments to drive revenue. And the proof is in the pudding. We've now led the industry in domestic PRASM growth 3 years in a row. That cannot happen by accident.

Speaker 2

United Next was a great strategy, but a great strategy only works with great execution and that has allowed us to structurally and permanently change our position within the industry. And while we are proud of our relative outperformance to the industry, we also know that our absolute results are all that really matter. They're solid right now, but I can already see the impact of the schedule changes are having on our advanced bookings and yield as we hit the mid August industry capacity inflection point. And we are absolutely committed to our no excuses philosophy and controlling what we can to hit our guidance. And so while the industry is developing as we expected and our relative results are outperforming as we expected, we are not going to rely just on industry changes outside of our immediate control.

Speaker 2

We're also taking steps in the short term to ensure that we meet our targets. That includes aggressive cost management and reducing domestic capacity 300 basis points in the 4th quarter. The industry rationalization that we expected is beginning to play out and we've reached the inflection point. The United Next plan continues to be the winning strategy for United and as a result we continue to be to expect to be within our full year 2024 EPS guidance range of $9 to $11 despite the tough industry environment around us. And with that, I'll hand it over to Brett.

Speaker 3

Thank you, Scott, and good morning. This quarter we continue to achieve record operational performance, delivering the best on time performance, completion factor and seat cancellation rate for a second quarter since the pandemic, while flying the most passengers in the quarter ever in our history, over 44,000,000. Looking across our network, Newark, our largest hub, broke several of its own records in 2Q with its April May on time departures being the best in company history. The FAA waiver allowing for better balance between the number of flights and what the runways, facilities and airspace had safely and efficiently handled at Newark has enabled us to reduce these results for our customers. Operational excellence was not limited to Newark.

Speaker 3

6 out of our 7 hubs departed more on time flights than our primary competitors. Improvements were made over the last year to adapt to a more challenging operating environment have shown meaningful benefits to our reliability, particularly during times of irregular operations. Our strong operation, underpinned by our safety culture, is translating into an even better customer experience and driving efficiency benefits to the bottom line. This would not have been possible without the commitment to operational excellence from our frontline employees. So thank you to all of them for their hard work.

Speaker 3

As I mentioned before, our strong operation is not only driving efficiency, but it is also positively impacting our customer experience. As a result, our NPS scores were the highest quarter highest second quarter results since the pandemic. We're investing in all aspects of our product, including the introduction of Telemark ice cream on board our aircraft. Additionally, the United app continues to be the most downloaded airline app with new features like seat preferences that automatically reseats customers when their preferred seat becomes available. This summer, we also started texting live radar maps to customers during weather delays, so they can stay informed about how inclement weather in one part of the country can impact their journey.

Speaker 3

Investment in our leading product and customer experience will remain a key priority to United and will continue to differentiate us as a premier global U. S. Carrier. Shifting gears to our employees, I'm pleased to share that after a brief pause in pilot and flight attendant hiring classes due to the Boeing delivery delays for the months of May June, we resumed these classes in July. Looking ahead, we have a busy end of summer in front of us.

Speaker 3

The United team continues to innovate and adapt to a complex operating environment. While Andrew will describe some of the near term trends, it's clear that United has a bright future and we remain on track to deliver $9 to $11 in earnings per share this year. I'll now hand it over to Andrew.

Speaker 4

Thanks, Brett. United States reported total revenues in Q2 of $15,000,000,000 up 5.7 percent year over year. TRASM was down 2.4% on 8.3% more capacity year over year. We expect United's year over year unit revenues in Q2 to be the best of all our large peers. Domestic PRASM fell by 1.9% on 5.3% more capacity.

Speaker 4

As widely discussed, unprofitable industry capacity that exceeded still solid demand put pressure on domestic PRASM in 2Q. International PRASM fell by 3.6% on 12% more capacity year over year. Flights across the Atlantic had a small PRASM gain, while flights to Latin America and Asia continue to see declines year over year. Cargo yields have also stabilized at higher levels and forecasted, which is helping cushion some of the PRASM declines we have seen. MileagePlus had yet another strong quarter with revenues up 13%.

Speaker 4

Our 3 key revenue segments continue to gain ground. United gained ground in our key markets among frequent business road warrior travelers, which we continue to believe is due to our no change fee policy, our diverse set of products, our leading global network and our award winning MileagePlus program. Revenue from these Road Warriors was up 11% in the quarter, while total passenger revenue was up 5%. Consolidated premium revenues increased by 8.5% to 7,400,000,000 dollars Premium capacity was up 9.1%. Demand for United's premium capacity, including Economy Plus was strong in the quarter, outperforming non premium seats.

Speaker 4

Business load factor contribution in the Polaris cabin increased year over year by 2.6 points. Polaris and Premium Plus RASMs were up 1.4 points year over year. We also continue to see strong demand for our premium domestic first class product with sold load factors up 13 points versus 20 19 and 8 points versus 2023. Contracted business revenues were up 10% year over year. Basic economy revenues remained strong and were up 38% year over year.

Speaker 4

United plans to continue to increase the total number of seats we offer in a basic as we grow our mainline gauge. However, basic as a percent of sales will likely stay stable or decline as we continue to expand higher margin premium capacity faster. When United offers basic fares for sale at competitive rates, we believe customers will always choose United first over a ULCC or an LCC given the features of our product, which includes seat power and seat back entertainment along with the unmatched benefits of MileagePlus. Q2 revenue results for United and the industry did trail expectations. Looking back at the quarter now, it is increasingly clear that demand was in fact strong.

Speaker 4

It just could not keep up with the incremental industry domestic capacity added in 2024. Excess capacity in turn pressured yields. While July domestic industry capacity growth is published at similar levels to June, published capacity levels pivot in the second half of the quarter and beyond. Based on these schedules, we estimate that Q2 2024 industry scheduled domestic capacity increased by 6.6%. As we head into Q3, we expect July and the first half of August will look very much like June in Q2.

Speaker 4

We do see a step down in the second half of the quarter to 2.5% to 3% and for the overall quarter at about 4%. We also see the industry altering capacity on peak travel days more than usual later this summer. Peak day spill traffic is no longer filling up excess capacity on off peak days such as Tuesday, Wednesday Saturday as it did in 2023 for leisure focused lower margin airlines. We can also see from our internal data that Latin America unit revenue trends have stabilized in Q3 and PRASM declines will moderate significantly for the first time since 2Q 2023. But Latin America and Deep South unit revenues were strong in Q2 and look good going forward.

Speaker 4

In the Q3, we do expect Pacific PRASM to remain negative. We do not lap our 2023 expansion wave until the Q4. During the Q4, we'll also lap China's return and expect more normal unit revenues from China, which is currently a material headwind in the region. Growth rates for the Pacific will also moderate as we end year. We expect premium cabin RASMs in Q3 will once again outperform Coach at a level stronger than Q2 as we continue to see growth of Road Warrior customers and United and the continued popularity of the many elevated products that we offer.

Speaker 4

Mid August is clearly the pivot point we're expecting for some time as others race to adjust what we believe is unprofitable flying heading into the period of seasonally less leisure demand. Competitive capacity overlap on United and nonstop routes peaked in Q2, which will also help build better unit revenues for the second half 2024 for United. We believe it's clear in our internal advanced revenue data for August that the pivot will be beneficial to United. Advanced PRASMs for United currently booked 4 to 5 points better in the second half of the quarter than the first. Unfortunately, this expected pivot occurs only for about half of Q3.

Speaker 4

So the revenue quality, we will continue to be impacted for the time being. We're encouraged by the yield improvement we see booked in the second half of the quarter. As we look towards Q4, we estimate that industry domestic capacity will only be up about 1.5% to 2.5% based on what is currently offered for sale. On off peak days, capacity could be flat year over year. While our relative results indicate that United Next plant is working, we have decided to cut approximately 300 basis points of planned domestic capacity in the 4th quarter.

Speaker 4

While there are many macro issues outside of our control, the amount of capacity we offer is within it. This change will help us accelerate RASMs we see in the second half of Q3 into Q4 and beyond. As noted in our public schedules, we will be optimizing our

Speaker 5

be optimizing our capacity in

Speaker 4

Q4 by time of day and day of week similarly to what we did in Q1 of 2024, which was very successful and increasing our relative RASM results. With that, I'll say a great thanks to the United team for another strong quarter with industry leading financial and operational results. And I will hand it over to Mike to discuss our financial details.

Speaker 6

Thanks, Andrew, and thank you to the United team for all of their hard work this busy summer season. In the Q2, we delivered pre tax income of $1,800,000,000 Our earnings per share of $4.14 came in ahead of expectations driven by good cost performance. In the quarter, we continued our no excuses approach to managing the business to maximize profitability and to consistently deliver on our earnings guidance. The Q2 is another solid result despite some capacity headwinds to the industry. We have never been more confident that our United Next strategy is working.

Speaker 6

We've successfully differentiated our business and that will support sustainably higher profitability. Turning to costs in the quarter. Unit costs excluding fuel were up 2.1% year over year on 8.3% capacity growth versus the Q2 of last year. Our strong Q2 CASM ex performance was driven by 3 factors. First, over the year, our operations team has invested in technology and improved their processes to better recover from irregular operations.

Speaker 6

Our ability to recover faster leads to a more reliable operation and a more reliable operation is a more cost efficient operation. Notably, crew related disruption expenses such as premium pay and deadheading costs are much lower than we have seen during similar events in prior years. The full impact of these improvements drove approximately 1 point of CASM ex improvement in 2Q compared to our own expectations. 2nd, as yields softened throughout the quarter, we doubled down on expense management to ensure we hit our EPS guidance. As we've discussed before, we have a no excuses mentality with respect to hitting our EPS guidance and we will do what is necessary in the quarter to achieve that.

Speaker 6

These specific actions led to another 0.5 point of CASM ex improvement in the quarter versus our plan. Finally, approximately 0.5 point of CASM ex is associated with the timing of maintenance events, which were delayed and will likely be seen in the second half of 2024. As we look to the 3rd quarter, we expect industry capacity rationalization is beginning to take effect starting in mid August. Money losing flights across the industry are being cut rapidly, thus supporting our confidence in our trajectory for both the Q3 and the full year. Our own 3rd quarter system capacity plan moderates by approximately 3 points versus the Q2 on a year over year basis.

Speaker 6

While this is the correct action to take for United, this reduction in capacity, along with the impact from Hurricane Beryl in Houston puts pressure on CASM ex and makes the Q3 the high point for CASM ex for the year. Altogether, with the revenue backdrop that Andrew described, we expect our Q3 earnings per share to be in the $2.75 to $3.25 range. As for the full year, we continue to expect to fall within our original EPS range of $9 to $11 I realize that many of you will immediately point out that this implies a better than normal seasonal pattern for Q4 versus Q3 earnings per share. That's accurate and it's what we expect. It has nothing to do with seasonality and everything to do with a better balance between supply and demand in the Q4, which should lead to significantly higher yields and therefore improved profitability.

Speaker 6

Andrew already touched on this, but I'd like to reiterate it. We aren't hoping for moderating industry supply. It's already happened and you can see it in published schedules and with our own reductions. Despite the excess industry capacity, it's clear demand for the United product remains strong and we expect our revenue growth to outperform the industry. Coupled with disciplined cost management, we expect United and one other airline to represent the vast majority of industry profits in 2024.

Speaker 6

On the fleet, in the Q2, we took delivery of 4 Boeing MAX Aircraft and 5 Airbus A321neo aircraft. We expect 66 aircraft deliveries in 2024. And with the movement of certain PDPs related to deliveries in future years, we now expect total adjusted capital expenditures to be less than $6,500,000,000 for the year. In the quarter, we generated $1,900,000,000 of free cash flow, while also continuing to invest in the business with almost $1,000,000,000 in capital expenditures. Earlier this month, we took advantage of this position to improve our balance sheet by voluntarily prepaying the $1,800,000,000 outstanding balance of Mileage Plus term loan that had an interest rate near 11%.

Speaker 6

This reduction in high interest rate debt significantly reduces our interest burden.

Speaker 5

As of the end of

Speaker 6

the quarter, our adjusted net debt to EBITDAR was 2.6x. I'm encouraged by our strong performance in the Q2. Our team remains nimble as we've demonstrated our ability to adjust to an evolving environment. Thanks to the whole United team for their hard work. The United Next plan continues to run on all cylinders and our confidence has never been higher about the trajectory of our business.

Speaker 6

With that, I'll pass it over to Kristina to start the Q and A.

Speaker 1

Thanks, Mike. We will now take questions from the analyst to one question and if needed, one follow-up question. Brianna, please describe the procedure to ask a question.

Operator

Thank you. The question and answer session will be conducted electronically. The first question comes from Jamie Baker with JPMorgan. Please go ahead.

Speaker 7

Hey, good morning. Good morning, everybody. First one for Andrew. So like American is still in the early innings of backpedaling on some, not all, but some of the distribution and corporate contract revisions that they made last year. Curious what United is experiencing and what you're seeing and hearing, your conversations with corporate partners, how you expect commissions to trend over time, That sort of

Speaker 4

thing. Thanks, Jamie. Well, first I'd say, we don't believe there was a sudden material or significant windfall to United when American attempted to disintermediate travel agencies and force companies to book direct. I don't think there'll be a windfall as American flip flops again to this side. We maintain really long term partnerships with our agencies and corporate partners.

Speaker 4

And what we did during this time period is we made sure that we put in long term arrangements to gain long term market share and make the corporations and the travel agencies more sticky to United. We'll see if that actually occurs. But I think the benefits of that are actually to come more than they are currently in our current revenue outlook. So that was our perspective on it. And we think there's no sudden windfall to United as a result of their change.

Speaker 7

Okay, perfect. And then second and maybe this is best for Scott, but just looking now at industry revenue to GDP and I tend to use A4A figures just to remove forecast error. The recovery in this metric clearly stalled in the 4th quarter. It remains stalled in the Q1. So we're still below that pre COVID trend line.

Speaker 7

We've talked about this in the past and the possibility that post COVID increased consumer mobility could allow the metric to exceed the pre COVID average. I'm just wondering if you still think that's a possibility and whether this even shapes how you think about growth or perhaps it no longer factors into your thinking at all, which is fine. Just any thoughts on that topic? Thanks.

Speaker 2

Well, this will be a little geeky Economics 202.

Speaker 7

Bring it on.

Speaker 2

Yes. I think that absolutely the airline revenue to GDP ratio is going to trend back. I'm not sure where it will close, but it is going to trend back upwards. And I think if you went back and looked in history, what you'd find is every time capacity gets ahead of demand, this ratio declines. The reason that happens is because demand for air travel is inelastic.

Speaker 2

Like the very first project I worked on when I was an analyst at American Airlines was estimating demand elasticity. It is inelastic. Every bit of analysis you look at says that demand is inelastic. But when airlines get over their skis on capacity, they rush to get the load factors up and they lower prices and that lowers overall revenues. So it really is just as simple as this ratio goes down when supply exceeds demand.

Speaker 2

And so I'm not at all surprised to see that happen. I am incredibly encouraged to see the rapid response that is happening. We'll probably talk about it more as we go through the call today, but beginning mid August. I mean, I've been through these cycles with capacity many times in my career. This is the fastest response.

Speaker 2

It's also the biggest gap between the leading airlines and the other airlines, which I think is part of the reason the response is so fast. But the fastest response I've ever seen. So I expect that to close, I think but I think it's purely a function of capacity.

Speaker 7

Okay, that's great. Andrew and Scott, thanks so much. Cheers.

Operator

Our next question comes from Andrew Didora with Bank of America. Please go ahead.

Speaker 8

Hey, good morning, everyone. First question probably for Scott. Last night Alaska announced more premium seating. There are reports out there, JetBlue could do the same. Obviously, a lot of discussion on your premium strength on the call today, certainly a tailwind.

Speaker 8

Just how do you think some of this premium RASM growth can trend from here? Do you think some of it will be competed away? Or is the United product so unique that you feel like you can hold on to most of it here? Just would love your thoughts.

Speaker 4

I'll try to take that on. This is Andrew. I'll start off with 1st and it's really important. United is a premium business airline not because it's the latest fad, but because it's core to the hub system we operate from. Our hubs are in premium markets.

Speaker 4

Given the success of us and one other airline with a similar setup, it's no surprise that others are copying us with new cabins or expanded cabins as we've seen in the last few days. I think attempting to copy our segmentation plan when it's something that we've been implementing in earnest for more than 7 years will be a challenge for anyone that does not operate from business centric hubs. Our segmentation strategy is built on a complex set of products along with delivering excellent customer service. The ULCC business model in particular is built on simplicity, not complexity. So our belief is our lead in the premium front is generational and not short term.

Speaker 4

And we're not at all concerned about the changes of others. Maybe we're even a little bit flatter as they copy us.

Speaker 8

Got it. Very interesting. Thank you for that, Andrew. And just a quick question for Mike. Very nice cost execution in the quarter.

Speaker 8

Can Can you help me understand some of the near term cost levers that you're able to pull as you see those the revenues coming in a little bit softer than expected? Are these just kind of timing related or are these costs that kind of permanently come out? Thank you.

Speaker 6

It's a mixture. As I said and thanks for the question. As I said in the call, running a strong operation is the best thing we can do for cost efficiency in the near term and the operational team has done a great job. We have some opportunities within tech ops also in this quarter though. Some of those costs simply pushed to the right and were timing related.

Speaker 6

So you will see some pressure in 3Q. As we look longer term, some of the headwinds around CASM include labor deals that we're looking forward to finalize. We also expect to see some uplift in regional flying in the future. That will work against the gauge benefit that we expect over a 2 to 3 year timeframe and so that's another headwind. And look, as Andrew spoke about, our premium product is in great demand.

Speaker 6

And so we continue to make investments in our product, in our airports, in our catering, and those will add costs, but we expect to add even more revenue. So those are some of the headwinds. Now tailwinds, and we've been on this for several years, but we have an idiosyncratic tailwind of gauge that is like no one else in the industry. And we continue to see some real opportunity from that. As we spoke about last quarter, we've now level loaded our skyline for aircraft.

Speaker 6

That's going to create a more stable growth pattern, which will allow us to hire more efficiently and make sure that every asset is staffed appropriately, allowing for more efficient growth. And then longer term, I do expect to have a more efficient maintenance operation. So a little bit of the puts and takes.

Speaker 2

I'm going to actually pile on and give kudos to Mike, Jonathan Ireland and Toby, because much of what you see in this is a real structural changes. I mean, Mike talked about the benefit that we've gotten from irregular operations. That team, the 3 of them combined with a lot of support from Jason Birnbaum, our Chief Information Officer, who's sitting in here with technology are really identifying the places where there's opportunity to pull permanent cost out. To me like there's other places that it's happening, but the irregular operations expense improvement is one of the biggest proof points. And we just have a great team that is doing those kinds of things.

Speaker 2

We didn't build that into the budget at the start of the year. We didn't realize how successful it would be. They're doing a lot of other work like that. And I think we should have a really solid process and team for cost. And so while it's great to hit that in these quarters, that's something that is an example that is permanent and we'll always spend less on our operations than we did in the past.

Speaker 2

And I think there's a lot more of that to come.

Speaker 8

That's great. Thanks so much.

Operator

Our next question comes from Connor Cunningham with Melius Research. Please go ahead.

Speaker 9

Hi, everyone. Thank you. I think that many of us can buy into the idea that capacity is going to be rationalized near term, but the fear over the longer term is that someone is going to start to cheat again. So what's United's plan if the capacity reductions are just short term? And clearly, your margin structure has slipped, you're playing from an area of strength, but just curious on how you're going to approach a competitor set that's always looking to add supply at some point?

Speaker 9

Thank you.

Speaker 4

Well, let me start off with my views. I mean, the unprofitable capacity is just not sustainable. And we see the changes occurring as Scott and Asad said. But as you think about this question, you normally look at the pretax margins and liquidity and margins, but we do the same. However, I think even more insightful is looking at the network health of our competitors and how that is different today than it's ever been in the past to answer your question about will the capacity come back.

Speaker 4

Our estimate is margins for the worst core pilot fly in for the 5 least profitable domestic centric airlines is negative 25% to 35% today. We estimate that the severely unprofitable capacity is almost 10% of domestic ASMs. In the past, the magnitude of the worst line in my view has never been this bad and from the lower margin airlines and the lower margin airlines never had such an overall gap to the higher margin airlines like United. I don't think one low margin airline failing or shrinking dramatically in any way will change the magnitude of the losses of the worst flying. And the other thing that's really occurred that's very interesting is the growth flying by these carriers is also extremely unprofitable.

Speaker 4

Just the business plans in some cases have largely run their course and there's just no new opportunities available today. And so that setup is just really different and provides us with a backstop that we think that permanent change is on its way exactly when it occurs over the next quarter or 2 or 3, it's hard to say. But it does feel like when you look at these facts and the magnitude of the worst quartile profitability that this is a very different environment and the capacity hopefully will be slow to come back. But it's only time will tell.

Speaker 9

That's actually super helpful. Thank you, Andrew. And then realize it's early, but you're making adjustments to the Q4 and the implications for 2025 could be significant. I know again realize you're not trying to give 25 capacity plans, but the United Next plan called for like 4% to 6% annual growth. Has that thought process changed given what's happening in the current environment today?

Speaker 9

Thank you.

Speaker 4

You're right. We're not going to give capacity guidance. What we are going to say is we're going to continue with some of the fundamentals of United Next, which improve improving connectivity was really, really important and we'll continue to do that as we go forward. The other thing to bear in mind is one of the key ingredients to United Next was the large narrow body gauge and fleet size. And as of today, we're 110 aircraft short on that.

Speaker 4

We kept smaller aircraft around to compensate for that. But the A321 at United today is operating with 8 margin points above that of the rest of the narrow body fleet. And we're really bullish as we get to the right fleet mix, one that all of our competitors already have in their business plans. We are going to continue to push the margins in the right direction. I think if you ask anybody in the commercial team, they realize the importance of getting to a double digit margin soon, and we're all rowing the boat in the same direction to achieve that.

Speaker 9

Great. Thank you.

Operator

Our next question comes from Michael Linenberg with Deutsche Bank. Please go ahead.

Speaker 10

Hey, good morning. I know we have focused a lot on domestic capacity and it does feel pretty good as we move through the year. I guess one question on domestic. The 3 point reduction that you talk about in the Q4, what's kind of the base or already loaded in the schedule or is that on

Speaker 4

the come? Well, we're not going to give guidance for Q4 at this point. We haven't finalized our Q4 schedules, but we'll leave

Speaker 11

it at that.

Speaker 10

Okay. That's helpful. And then Andrew since I have you on flipping over to international, I'm sure you've seen the headlines recently from Lufthansa, even Qatar Airways making a deal about too much capacity, although at times it seems like pot calling the kettle black here. But what are you seeing internationally as from I guess competitively as things move over time? And I do realize that some of the great coming out of the European carriers is an influx of capacity from Asian carriers to Europe.

Speaker 10

But maybe what are you seeing in some of your other major traffic lanes? Is that a potential issue as we move from 2024 to 2025? Thank

Speaker 4

you. Sure. It's a good question. And obviously the Asia European dynamic that I think a lot of airlines have cited now is not really one that's all that relevant to United Airlines. So I don't think that negativity translates through to where we are.

Speaker 4

But what I would say is and we've been saying this for a while, but we do see a pivot. First, in the Pacific, last Q4, we were up 83% year over year in capacity as we more or less have gotten the Pacific back to pre pandemic levels. And this year, we're going to be up high single digits. So we're obviously bullish about that transition. And then Latin America, South America has already pivoted to positive and we expect close in Latin America to pivot as well and do dramatically better.

Speaker 4

And then the last point is we have said over and over again, we were taking a pause here on the Atlantic. Clearly, others did not choose to do so. And our results across the Atlantic, I think, are shining a star of our plan. It worked. And so we are really happy with the Atlantic.

Speaker 4

The Atlantic continues to look good going forward with extremely solid profitability. And so overall, I think international is fundamentally different than it was pre pandemic and our results show that.

Speaker 10

Great. Thank you.

Operator

Our next question comes from Scott Group with Wolfe Research. Please go ahead.

Speaker 12

Hey, thanks. Good morning. Mike, just want to clarify a couple of things. You had a comment about the implied 4th quarter guidance. Just want to make sure you feel like we should be tracking towards the midpoint of the full year guide.

Speaker 12

And then there was a comment in the release that says that you guys expect to have leading unit revenue performance among peers in the second half of the quarter. I know Delta talked about domestic RASM inflecting back positive in September. So I just want to make sure we're all on the same page and you think that you'll be positive on RASM exiting the quarter?

Speaker 6

Well, thanks for the question, Scott. And I'll let Andrew talk about September PRASM. I will say that at this point in the year, dollars 2 range on earnings per share, dollars 9 to $11 that's a range that in a more normal environment, I would have liked to narrow. You would expect to have more certainty now than we had back in January when we initially said it. But while we see this incredible inflection upon us in the industry, the precise timing and magnitude is difficult to call.

Speaker 6

And so as we look out to the Q3 Q4, current trends based on current yields, based on the current published capacity will put us at the low end of the 9 in the lower half of the $9 to $11 for the full year. But there are a ton of reasons to expect further reductions of unprofitable flying to push us higher. And so we very deliberately and had significant discussions internally, but very deliberately left the range wide. And we will we are committing to hit something in that range. And you can all read the tea leaves as the data develops to decide where you want to make your own estimate.

Speaker 6

We're committing to the range.

Speaker 4

I'll just I'll confirm the point. We do think that September PRASM for domestic will flip positive at this point based on the 4 to 5 point improvement we're seeing so far, we think that's going to hold. We also just July will be the worst quarter of the year probably sorry, July will be the worst month of the year.

Speaker 12

Helpful. And then I don't know if you have any early thoughts on CapEx for next year, less than 6,500,000,000 this year? Any thoughts on directionally higher, lower or similar for next year?

Speaker 6

I think very little change from our prior guidance. We're targeting that 100 narrow bodies per year as we re baseline the skyline and nothing that we see right now would cause me to change that today.

Speaker 12

Thank you guys. Appreciate the time.

Operator

Our next question comes from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Speaker 13

Hey, thanks. Good morning. Just on corporate, I think the last time we were together, you talked about improvement in the March quarter and basically holding serve in 2Q. I wonder if you could remind us your view on how recovered it is, both on a volume and on a revenue basis, and your thoughts on potential improvement from here. Basically what's baked into the guidance in terms of incremental improvement on corporate?

Speaker 4

The most important thing is it's a slow but steady improvement. I don't think we see a rapid change occurring anytime soon. It's recovered roughly to 100%. Obviously, that's far behind where it would otherwise be on a typical GDP relationship. And the load factor contribution of corporate is down more than a few points relative to 2019.

Speaker 4

So it is a much smaller percentage on the airplane. But as we look, for example, in Polaris this last few months, we found the Polaris business load factor to be up a point and the leisure premium leisure demand was down a point as we slowly transition back to corporate. But it's going to take a while, but it is happening.

Speaker 13

Thanks. And then maybe one for Mike. Can you just remind us what the next opportunities might be to pay down high coupon debt? Obviously, you took down loyalty debt, high coupon loyalty debt as soon as it was prepayable. What are the next 2 to 3 opportunities on that front?

Speaker 13

Thank you.

Speaker 6

Thanks for the question, Duane. As I mentioned in my prepared remarks, we're now at 2.6 times trailing 12 months net debt to EBITDAR. Back in 2019, we were at 2.5 times. So we're already at pre pandemic levels of leverage. We've got a tremendous amount of cash on the balance sheet, feel really good about the balance sheet for those reasons.

Speaker 6

We are also funding all of the organic growth to drive United Next. We are investing in our airplanes. We are investing in our people. Those two buckets are the first two priorities and calls on cash. The 3rd call on cash is investor returns.

Speaker 6

And given where our balance sheet is and given the level of organic growth that we are funding, we now have a lot of flexibility to start to consider investor returns and to start to look at some further deleveraging. And so we'll see I see a mix of that going forward. Specifically to your question, really there are no instruments that are prepayable right now that are of such high coupon like the 11% debt we just prepaid, there are no near term opportunities of that magnitude to prepay any more debt. Thanks, Duane.

Speaker 13

Very clear. Thank you.

Operator

Our next question comes from Sheila Kahyaoglu with Jefferies. Please go ahead.

Speaker 14

Thank you. Good morning, guys. Andrew, maybe this one's for you or Scott. I believe you made a comment that the spread of the unit revenue performance is going to widen between the premium mix and the economy cabin. So, slightly different than the comment on premium your competitor made.

Speaker 14

So I think your premium revenues were actually down on a PRASM basis. So I wonder how much of that is premium softening or is that more revenue management actions you guys are taking to help the economy cabin?

Speaker 4

Sure. I'll give you the distinction. The premium cabin RASM was up. The premium RASM contribution was down and that's of the definition of whether it includes Economy Plus or not. Economy Plus is obviously part of the main cabin and Economy Plus was infiltrated by the yield weakness of the main cabin.

Speaker 4

And so we did see that issue and it resulted in the number that you just saw. But if you look at just the PRASM contribution of Polaris and Premium Plus and Domestic First Class, you would find that was up low single digits year over year.

Speaker 14

Okay, got it. Apologies for that. And then maybe if we could talk about following up on I think Mike's question about Atlantic and regional capacity around the world. On Atlantic, how do you think that trends over the next 4 quarters? Do we have the same sort of oversupply issue?

Speaker 14

You don't seem to see that. And is that just given the fleet dynamics with wide bodies and the premium cabin there? Can you maybe elaborate on

Speaker 4

that? Look, I think the Atlantic, well, if you go back to last year, particularly June of last year, had one of the most unbelievable quarters we've ever seen, an unbelievable month in June. And we're actually doing a little bit better year over year. And so we're really proud of that. And we again think we made the right capacity allocation choices to create that outcome better than our competitors did quite frankly.

Speaker 4

What I would say is capacity to Southern Europe, which is up 31% year over year this summer, has pushed the limits of demand to Southern Europe. And it's just a fact. But the overall combination for United, including our Southern European performance, I think, has been pretty darn good given the comp from last year. And we are very careful on our scheduled plan for this year. And that careful nature continues all the way through the end of the year with our published schedule.

Speaker 4

So we feel good about the setup that the Atlantic will continue to look pretty good going forward.

Speaker 14

Great. Thank you.

Operator

Our next question comes from Brandon Oglenski with Barclays. Please go ahead.

Speaker 11

Hey, good morning and thanks for taking my questions. Mike, just a point of clarification here. I think maybe last quarter or 2 quarters ago, you said beyond 2024 CapEx should be in the $7,000,000,000 to $9,000,000,000 range. Is that with that anticipation of 100 narrow body aircraft deliveries baked in?

Speaker 6

That's precisely correct.

Speaker 11

Okay. And I guess maybe for my follow-up for Scott or for Mike. I mean, I really appreciate the no excuses mentality here. I think the Street likes you're just EPS guidance and focusing on bottom line results. But I think you both would agree that you're below your next targets on margins right now and you are below profitability of last year too.

Speaker 11

And I think part of the challenge for investors here because your multiple is quite low and I think you both would agree on that as well. Your CapEx outlook here is roughly matching your operating cash flow and I realize if you hit higher margins that you could offset some of that. But I think what investors are saying is, hey, why can't we see a more balanced capital allocation strategy, maybe a little bit less CapEx. And I think maybe investors are a little bit frustrated that with the Boeing delivery delays, the MAX-ten issues, you guys didn't back off capital spending a little bit more. So can you put that in context for folks and why taking so many aircraft in the future should be relatively beneficial?

Speaker 6

Thanks, Brandon. Really appreciate the question and 100% understand where you're coming from. I care very deeply about creating shareholder value and free cash flow, driving free cash flow to shareholders over time, it's critical to driving our multiple higher. We get that. But our United Next strategy is working.

Speaker 6

Our confidence that based on the relative margins, the divergence between the haves and the haves nots, it's never been wider. So all of the evidence, it's not about being in a tunnel and wondering what that light in front of you is. That light in front of us is very bright and it's a sunny day. We don't know exactly how much longer the tunnel is, but we're coming out the other side in a very strong competitive position with a premium product that can't be copied and emulated by competitors with moats around our business that are going to drive higher margins. And so as those margins increase, we're going to have higher free cash flow and you're going to see those returns to our shareholders.

Speaker 6

I'd ask for a little bit more patience as we drive through, but all evidence is that the strategy is working and therefore you're not going to see us pull back.

Speaker 11

Thanks, Mike.

Operator

Our next question comes from Savi Syth with Raymond James. Please go ahead.

Speaker 15

Hey, good morning, everyone. Just on the Pacific comments made earlier, I realize that Pacific is not going to back to where it was in 2019, but the mix there is different, notably like China is a lot lower. Are there any kind of meaningful implications on that mix change? And just how are you thinking about is there an opportunity for China to be much stronger than this? Or do you think this is kind of the new normal?

Speaker 4

So I think it's the new normal. Demand for China is down dramatically than where it was in 2019. And it's also difficult to fly there because of the lack of Russian overflight ability. So those two combinations just make this the new normal. And so we've adjusted Pacific.

Speaker 4

We're back to pre pandemic capacity. We've reallocated the capacity, I think, in a more profitable way. Pacific is generating the solid margin. Obviously, the negative RASMs, particularly driven by China as China has fallen back to normal revenue performance, caused year over year numbers for the Pacific to look a little funny. We again lap that later this year and we'll be definitely I think beyond that after Q4.

Speaker 15

Very helpful. Thank you, Andrew. And maybe if I can ask just on the domestic market, like last year, there were a lot of kind of domestic players hurting

Speaker 5

and maybe an overcapacity situation, but United

Speaker 15

didn't really experience it. I'm Is that just a composition of the capacity? Is that just the composition of the capacity? Is it kind of passage behavior? Is it pricing behavior?

Speaker 15

Just why is it why are you seeing the pain a little bit more today than and not necessarily in the second half of last year?

Speaker 4

Well, I think it's all of the above, all those issues you just said. We've worked very hard to insulate ourselves from the changes, sometimes not very sound changes that are being made in the industry. And I think we did a great job of insuring ourselves against that, but it's not a 100% insurance plan. And in this particular quarter, the capacity growth was just so significant that it pressured yield in a way that it didn't in, for example, just in Q1. And our schedule changes in Q1, if you look at our RASM change domestically in Q1 along with the Atlantic, our schedule changes were incredibly effective, particularly during the off peak period and maybe less effective in a peak period as Q2.

Speaker 4

And that's one of the reasons I think we're excited to see how Q4 turns out because not only we've taken the same recipe book for Q1 and put it into Q4, which again had RASM changes that I don't think anybody in the industry expected out of United. But this time, the industry itself is, I think, even remarkably more different in Q4 of this year than it was in Q1, and how it's reacted and how it's changed. And again, it's changing because that's flying has extremely negative margins by many of our competitors. So that's a long answer to your, I think, very simple question.

Speaker 15

No, it was a very sufficient asset. Thank you.

Operator

Our next question comes from Ravi Shanker with Morgan Stanley. Please go

Speaker 5

ahead. Thanks. Good morning, everyone. Just a couple of follow ups here. I know you said you didn't want to commit to your own 4Q capacity plans, but do you have a sense of how much industry capacity still needs to come out for the Q4 to get that demand and supply in balance, especially kind of that would help push your guidance up to the top half of the range?

Speaker 4

I can't I don't know for sure. What I would tell you is our expectation is Q4 domestic capacity to be up approximately 2%, a little above or a little below is kind of our expectation.

Speaker 5

Understood. That's helpful. And maybe the second one. I think it's pretty clear that investors are looking forward to your Investor Day as a pretty significant catalyst for the stock, especially kind of for long term earnings and kind of the updated next targets. Do you have a sense of when the timing of that would be and kind of when we'll hear more about that?

Speaker 6

Hey, Ravi. Thanks for the question. We don't have a date scheduled yet. We're working on it. We are still targeting later this year, and we'll be back if and when we schedule and finalize that date.

Speaker 5

Great. Thank you.

Operator

Our next question comes from Tom Fitzgerald with TD Cowen. Please go ahead.

Speaker 16

Hi, everyone. Thanks for the time. I was wondering if you could talk a little bit about Connected Media and what the feedback from customers have been, what the feedback from brands has been and, just the timeline for that business to ramp?

Speaker 2

Before Andrew answers the question, I'll use this Tom since you've replaced her to say, yes, big fuse to fill in Helane. I wish her the best. I'm jealous of all her travels. She tells me she's going to Greenland. I don't know if she's listening to maybe she's already in Greenland, but I can't get the conference call there.

Speaker 2

And I hope she'll still continue to send me book recommendations. Andrew?

Speaker 4

Great. On Connected Media, first, I think it's important that from a commercial perspective, we are always trying to innovate and come up with new things to drive earnings. And there's a lot of things on our book here that we haven't even begun to discuss. The Connected Media is one that we have announced. We expect a significant ramp up next year and we will discuss it in a lot more detail at the Investor Day, but it's going to be innovative, it's going to be really meaningful and really impactful for United Airlines going forward.

Speaker 16

Okay. Thanks very much. Excited to hear more. And then just a quick one. Is there any noise around lapping the Tel Aviv flying into Q4 this year that we think about in our models?

Speaker 16

Thanks very much again.

Speaker 4

I don't think so. I mean Tel Aviv, when we pulled it out was obviously about percent of United Airlines. I think that number surprised everybody. And obviously, it is lucrative flying for United, just to say the least. And so its loss was significant.

Speaker 4

I think we've worked on reestablishing in service safely for our colleagues and we're flying it double daily today and we intend to continue to expand in Tel Aviv and get back to our normal schedule. But we don't think resume in Tel Aviv is going to be a drag on RASM, if that's the heart of your question.

Operator

Our first question comes from Mary Schlangenstein with Bloomberg News. Please go ahead.

Speaker 17

Thank you. Scott, you've been pretty vocal about your views on the U. S. C. And the low margin airlines in the industry.

Speaker 17

But I'm wondering given the comment earlier about the fact that they seem to be complicating their models now when their model is originally built on simplicity. Do you see that as being sort of an extra step that they're taking that may further speed their demise or whatever their eventual future is?

Speaker 4

Barry, it's Andrew. Let me try to take it and Scott will correct me where I'm wrong. I think like when you first of all, you have to understand that the world has changed fundamentally. With no change fees and basic economy, things are just not as they were pre pandemic. And I think this core fact is often ignored in how people kind of set up the answer to what's going on today.

Speaker 4

But I'll give you a rundown of what I think the playbook is and Scott can kind of add to it. First, when you face this type of problem, airlines generally push to grow out of the problem, but that usually doesn't work. And this happened in the previous quarters. And I can recall this back when I worked for Continental Airlines in the late 1990s, quite frankly, in regards to something we called Cal Light at the time. I was just a junior analyst.

Speaker 4

I remember it very well. The second step is network churn where you think, well, we picked the wrong markets and we can fix that. But the next set of markets are usually worse than these markets you're flying today. Then the next change is business model changes, right? We noticed Airline X is doing something different from us, let's match.

Speaker 4

That's really hard and slow. I think the next step is that everybody thinks, well, let's go premium. But that's a generational adjustment that just does not occur over a few quarters. And then the next one is, let's push capacity on good days and months, but cut hard on off peak. And that's really hard to do because it's an inefficient use of assets.

Speaker 4

And then the next one is close in schedule changes because you're really concerned about your P and L and what's going on. And I think we see a lot of close in schedule changes today from many of our competitors. And then the last part is you just shrink. And so I think these business models are simplistic and they'll be very difficult to make complex without adding a lot of cost. So hopefully that helps answer the question.

Speaker 4

Scott, anything to add to that?

Speaker 2

The play is almost over.

Speaker 4

There you go.

Operator

Our next question comes from Claire Bushey with Financial Times. Please go ahead.

Speaker 15

Hello. This is a question for Scott.

Speaker 14

How worried are you that delays by manufacturers in delivering new, more fuel efficient jets is hampering the industry's progress on cutting emissions as carriers are forced to fly older planes for longer?

Speaker 2

I don't think that's really the issue. I think the only way to decarbonize aviation, it really is sustainable aviation fuel. And the ability to get more efficient airplanes is nice, but that's sort of measured in the 1%, 2% kind of improvement across the industry. Really getting a sustainable and viable SaaS industry is how you get to ultimately 100%, which is our goal to get to 100% green. And that's why United is leading around the world.

Speaker 2

Our United Aviation Fund, we're investing. This is an industry that's still being built. It's in the nascent phases today. It's in the investment. It's in the R and D.

Speaker 2

It's in the research. We understand the chemistry. We understand the technology, but we're now in the point where we got to commercialize that. And so I think that keeping our eye on that ball is critical to decarbonizing what is an otherwise really hard to decarbonize industry.

Speaker 15

Thank you.

Operator

I will now turn the call back over to Christina Edwards for closing remarks.

Speaker 1

Thanks, Brianna, and thanks for everyone joining the call today. Please contact Investor and Media Relations if you have any further questions. Hope everyone has a great summer and look forward to talking to you next quarter.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.

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Earnings Conference Call
Synovus Financial Q2 2024
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