Executives
Tyler Reddien – Managing Director, IR
Glenn Tilton – Chairman, President & CEO
Kathryn Mikells – EVP & CFO
John Tague – EVP
Analysts
Hunter Keay – Stifel Nicolaus
Jamie Baker – JPMorgan
Gary Chase – Barclays Capital
Will Greene – Morgan Stanley
Kevin Christy – UBS Research
Dan McKenzie – Hudson [ph] Securities
Helane Becker – Jesup & Lamont
Bill Mastoris – Broadpoint Capital
Mary Jane Credeur – Bloomberg News
Julie Johnson – The Chicago Tribune
Jena Moreno – Houston Chronicle
UAL Corporation (UAUA) Q1 2010 Earnings Call Transcript April 27, 2010 2:00 PM ET
Operator
Good afternoon and welcome to UAL Corporation's earnings conference call for the first quarter of 2010. My name is Devon and I will be your conference facilitator today. Following the prepared remarks from UAL's management we will open the lines for questions from analysts.
At the end of the analyst Q&A at approximately 3:00 pm Eastern Time, we will take questions from the media. (Operator Instructions) This call is being recorded and is copyrighted. Please note that no portion of the call maybe recorded, transcribed, or rebroadcast without UAL's permission. Your participation implies consent to our recording of this call. If you do not agree with these terms simply drop-off the line.
I would now like to turn the presentation over to your host for today's call Tyler Reddien. Please go ahead, sir.
Tyler Reddien
Thank you, Devon. Welcome to UAL's first quarter 2010 earnings conference call. Our earnings release and separate investor update were issued this morning and are available on our website at www.united.com/ir. Let me point out that information in the press release and the remarks made during this conference call may contain forward-looking statements, which represent the company's current expectations or beliefs concerning future events and financial performance.
All forward-looking statements are based upon information currently available to the company. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our press release, Form 10-Q and other reports filed with the SEC for a more thorough description of these factors.
Also during the course of our call, we will be discussing several non-GAAP financial measures. For a reconciliation of these non-GAAP measures to GAAP measures, please refer to the tables at the end of our earnings release.
Unless otherwise noted, as we walk you through our numbers for the quarter we will be excluding impairment charges, certain other accounting charges, and fuel hedge, non-cash, net marked-to-market gains and losses. These items are detailed in the table in Note 4 at the end of our earnings release.
On Friday April 23rd, we issued an 8-K in which we disclosed that based on newly developed information and analysis, we now expect a larger number of mile issued under our frequent flyer program will expire.
We are therefore implementing a change in estimate for expired miles respectively for beginning in the first quarter of 2010. As we've been indicated in the past, we deferred significant portion of the revenue we receive from passenger ticket and sales of miles to third parties, and recognize this deferred revenue when the miles are redeemed.
As a result of this change in estimate of the number of miles expected to expire, we recognize approximately $64 million of passenger revenue for the quarter reducing the amount of frequent flyer revenue that we otherwise would have deferred the future period.
We expect that we will see a similar incremental impact in the remaining quarters of the revenue. By reducing the net revenue deferred in the future periods, we believe our results more closely aligned with those of our peers as we've historically deferred a higher percentage of the revenue we received compared to other U.S. global carriers.
And now I'd like to turn the call over to Glenn Tilton, UAL's Chairman, President and CEO.
Glenn Tilton
Thanks, Tyler, and good afternoon and welcome to everyone on the call. Joining me today in addition to Tyler and participating on the call are Kathryn Mikells, our Chief Financial Officer and John Tague, President of United Airlines. Peter McDonald is also with us and available for questions.
And what has been a traditionally weak quarter for United compared to our peers, we reported an operating profit for the first quarter our first since 2000. We narrowed our net loss by nearly $480 million over the first quarter of last year which reflects our work to drive systemic improvement delivering results across the country.
As we have consistently said, we are committed to developing margin leadership and with a key sense of urgency across the organization to do so. Our work-to-date puts us closer to that goal and then produces the best net margin of the five major U.S. carriers this quarter.
Our unit revenue growth was 11 point better than the industry average, and that did not simply happen. Our decisions on configuration, capacity, and revenue management as well as the great service our employees are delivering are generating return, enabling us to leverage in improving demand environment and produce results that are in short contrast to our peers.
Results that are evident in Asia where our unit revenues were up some 30 point, compared to the largest U.S. carrier they reported essentially flat results for the Pacific. We are encouraged to see early signs of recovery in business and premium demand in our own price and growing performance, which is industry leading.
As with our commitment to revenue improvement and capacity discipline, we also hold ourselves accountably united for controlling our cost. Our consolidated caption was up 4.8% year-over-year excluding fuel on a capacity reduction of about 3%, which is in line with the guidance we issued in January.
We were able to observe cost associated with February weather cancellations and it's our intention to mitigate the cost of April's disruptions and cost associated with our approved revenue. Therefore, and significantly we are not adjusting our full-year cost guidance for the year at this time.
We have improved our cash position closing the first quarter with $3.5 billion in unrestricted cash, up half a billion from the fourth quarter. We've raised an additional $7 million earlier this month from our Pacific route secured financing and today we have approximately $4.5 billion in unrestricted cash. That's about 27% of trailing 12 months revenue, one of the strongest liquidity positions among the network carriers. At the same time, we are actively managing our fuel price risk and have arguably one of the industry's strongest hedge books and you are all familiar with our very limited fixed obligations.
Operationally, our strong performance continues. Building on our number one position for 2009, we again took the top spot among the five largest U.S. carriers for the first quarter based on preliminary results. Our people in the operations are executing against a well developed plan to deliver consistent performance and manage load factors that continue to be high and weather that challenged our hopes.
Our people across the company, in every department and in every division are doing great work reflected in the momentum we've established and the results we've announced today. In the first quarter, we also strengthened both our network and our fleet. We filed an application with the U.S. Department of Transportation to fly from San Francisco to Tokyo's Haneda airport, an opportunity made available under the open skies with Japan, which will offer customers the opportunity to connect both flights in the U.S. and through our long time partner All Nippon Airways to point behind their downtown Tokyo hub.
We also launched our new Dallas Madrid service with our partner Aer Lingus made possible by the U.S. EU open skies agreement an example of another creative way that we can profitably extend our network reach to meet our customers travel demands.
We also finalized our aircraft orders with both Boeing and Airbus and expect to begin delivery of the new aircraft in 2016. As all of us know very well, this industry frequently confronts every challenge manageable and sometimes such as volcanic ash clouds, those that are not perhaps imaginable.
The industry must manage for the unexpected. We will continue to make the right decisions and do the right work to return United to profitability from ongoing capacity restraint to controlling our cost to growing ancillary revenue. We will focus on delivering customers, choices that they value and that they are willing to pay for.
In the last several weeks, much has been written in the press about potential industry consolidation. And at this time, we are thoughtfully considering our options in that regard. Our position to advocating consolidation is one of the transformational changes necessary to move our industry into a position of sustained profitability is well known.
We will not comment any further on this subject and less than until we have something to announce to all of you. With that I will hand the program over to Kathryn Mikells who will take us through the numbers in further detail. Kathryn, over to you.
Kathryn Mikells
Thanks, Glenn, and good afternoon everyone. As we discussed with you over the past six months, we've made the right decision to position us to outperform as the recovery takes hold. And as our current results demonstrate, we are well on our way to margin leadership. We clearly have more work to do to reach sustained profitability.
That said we are very pleased with our teams effort both here and on the frontline to deliver improvement in all of our key performance metric. For the first quarter of 2010, we earned an operating profit of $58 million, our first operating profit in the first quarter in 10 years and then improvement of $427 million over the first quarter of last year.
We narrowed our net loss for the quarter by $479 million to $92 million, which translates into a quarterly net loss of $0.55 per share slightly better than the street consensus of
$0.62 per share. Our net margin of negative 2.2% let our peers and represented a 13 point improvement year-over-year and what is traditionally one of our weaker quarters.
Total revenues for the first quarter increased by about 15% or $550 million. At the same time, operating expense increased by only 3% or $123 million of which $84 million was the result of rising fuel cost. We saw sequential improvement in revenue trends throughout the first quarter.
Consolidated passenger unit revenue increased by 19% year-over-year and by 6% compared to the first quarter of 2008. As the improving capacity our capacity actions and reduced loyalty-related revenue deferral drove substantial improvement in both yield and load factor.
Our total passenger traffic volume as measured by revenue passenger mile was up 2.6% compared to the year ago quarter, and combined with our 3.3% capacity reduction drove a 4.7% increase in load factor.
Load factors improved across all entities, but we are particularly strong in the Pacific where we gained 11 percentage points year-over-year. Cargo and other revenue for the quarter was $375 million, an improvement of about 13% year-over-year as continued strong signs of recovery in both cargo volume and yield, raised cargo revenues by nearly 27%.
Ancillary revenues for passengers were up 4.5% year-over-year as we maintain our momentum on merchandizing and on bundling; it is more than offset reduction in third party maintenance work. Moving on to cost; as I mentioned a moment ago, operating expense increased by only 3% or $123 million year-over-year including $84 million of fuel expense and $39 million of non-fuel expense.
The impact of our settled fuel hedges was again significantly improved year-over-year. Our fuel expense reflects $15 million in losses on fuel hedge positions that settled in the first quarter of 2010, compared to settled hedge losses of $242 million in the first quarter of 2009, a year-over-year improvement of $227 million.
Average mainline jet fuel price for the quarter was $2.23 a gallon up from $2.11 a gallon last year, an increase of about 6%. The impact of our mainline capacity reduction offset this fuel pricing increases and our mainline fuel expense was about flat year-over-year.
Consolidated non-fuel expense in the first quarter was up $39 million to about 1.3%. our consolidated non-fuel unit cost increased by about 4.8% year-over-year within our January guidance range on capacity that was a little bit lower than the range that we provided in January.
As we indicated when we issued our initial guidance at the beginning of the year, we are experiencing inflationary headwinds that are increasing our cost. This revenue-related cost, rents and landing fees and incentive compensation driving our year-over-year increase.
For the quarter, revenue-related cost accounted for about 1.5 points of our increase. With rents and landing fees and incentive compensation accounting for about an additional two point. In addition, foreign exchange rates drove more than a half a point of additional cost pressure in the quarter as the dollar weaken versus most major currencies compared to the first quarter of 2009.
Turning to the balance sheet, we close the quarter with an unrestricted cash balance of a little more than $3.5 billion slightly above our guidance. Last week, we received roughly $700 million from the Pacific Group financing that we completed in January.
As of today we have approximately $4.5 billion on unrestricted cash or about 27% of trailing 12 months revenue, one of the strongest liquidity positions among the U.S. global carrier. We generated positive operating cash flow of $482 million in the first quarter and $389 million in positive free cash flow.
Excluding the funding and repayment impact from closing of our two recent WPC refinancing early in the first quarter. We made scheduled debt and net capital lease payment of $173 million. We spent $51 million in non-aircraft capital and funded $42 million in advanced deposits against our wide body aircraft order.
We closed the quarter with $12 billion in total debt including off balance sheet obligation and $7.8 billion in net debt including the Pacific Group financing. Despite the significant liquidity, we raised in response to the high fuel environment o 2008 and the recessionary environment of 2009. Our net debt is down nearly 30% since we exited from bankruptcy in 2006.
We've made significant progress across the company generating industry leading unit revenue growth and operating performance, and what was a very challenging quarter. While we still have more work to do, we are pleased with the improvements that we've made that have put us solidly on the path to profitability.
And with that I'll turn it over to John.
John Tague
Thanks, Kathy. Two years ago, we laid out for you the performance agenda those around bringing our company to industry leadership with a fear sense of urgency. Whether measuring in on time performance, revenue management or margin improvement, we are clearly delivering against that agenda.
Operationally, as Glenn noted we are number one in on time performance again for the first quarter and in fact March was the fifth consecutive month that we led the industry in this metric. Our cost control over the last few years leads the industry and we are continuing that discipline today maintaining our cost guidance for the full-year.
Our customer satisfaction scores are improving quarter-after-quarter and in fact April domestic customer satisfaction scores are the best ever recorded in the United. Whether measured on a year-over-year, year over two years or a premium related to the industry, we are delivering unmatched revenue results. During the quarter, our consolidated unit revenue year-over-year was up 19% significantly outpacing each of our peers and it was in fact 11 points better than the industry.
Most importantly our year over two improvements was up 6%, and we were the only major network carrier to grow unit revenues versus 2008. We outperformed in geographic entity even before the impact of the deferred revenue adjusted that Tyler mentioned earlier.
As Glenn noticed this is not solely a reflection of demand returning. It is also a design outcome reflective of the work and the actions we had taken, and I want to thank the people who are responsible for delivering this industry leading results.
Internationally we've seen impressive increases in the unit revenues across all entity. In total international unit revenue was up nearly 30%. One of the key areas driving the strong growth was improvement in both load factor and yield in our premium cabins as corporate travel begins to return.
The paid load factor in our international premium cabins was up 16 points year-over-year with yields up nearly 20% driving in international premium cabin unit revenue improvement up over 40%. The strong performance was aided by our new first and fully life-flat business configuration that we recently completed on our entire 747 and 767 international wide body fleet.
In the first quarter of this year we began reconfiguring the 777 Aircraft which will include not only our award winning and first and business class product but also a significant investment in the coach cabin which will now include on-demand audio and video as well as in-feed power for our customers.
In the Pacific we saw the biggest increase in unit revenue with the year-over-year improvement of over 30%, and our two largest competitors reported results that were either flat or negative. Our Pacific performance was driven by a double digit increase and the load factor along with the 13% improvement in yields.
We saw strong results and mainly in China where unit revenue improved almost 50% year-over-year. Last year we took significant capacity actions in China, reducing our service out of Washington DC along with down-gauging other flights to China.
These actions are now serving as well as traffic is beginning to recover in China. Recognizing that our competitors networks are more concentrated in Japan, I wanted to shed some light on our performance there as it more directly comparable.
United's unit revenue in the first quarter Japan improved by 20%, Australia achieved similar improvements. In the Atlantic we saw unit revenue increase of just over 25% on a six point increase in load factor and a 17% increase in yield.
We have made strategic adjustments to our network in Europe including down-gauging our service to London utilizing 767. This lead to a 40% unit revenue increase year-over-year Heathrow.
We have also made substantially changes to expand the breadth of our Atlantic network. In the last year we have launched services from Dallas to Moscow and Geneva, while also introducing Chicago-Brussels service and last week we added service to Bahrainis from Dallas.
Next month we will begin service from Chicago to Rome and in June we will begin service from Dallas to Accra. Domestically our consolidated unit revenue performance was up 14% driven by a load factor increasing of two points and a yield improvement of 11% as capacity fell by 1%.
In addition to passenger revenues cargo revenues also closed to a healthy year-over-year revenue improvements in the first quarter. These improvements are primarily the rest of a volume rebound coupled with better industry capacity discipline in the cargo market as well. The volume rebound is worldwide though Europe is improving at a slower rate than the rest of our system.
In the first quarter our freight volumes are up 45% year-over-year and 38% overall for cargo. We're beginning to see pricing firm up in most areas of the world and we have implemented rate actions in both March and April and virtually all the major geographies we serve. We are also delivering industry leading ancillary revenue per passenger of over $14 and we have committed to continue to take smart risk changing the revenue model in ways that we believe will be necessary to generate profits on a sustain basis.
All of this puts us in a position to be responsibly optimistic about the future. As we look ahead we expect to see further improvements in revenue, in fact for the month of April we are expecting a passenger unit revenue increase of 23% to 25% year-over-year.
Similar to our peers our second quarter results will be impacted by the shutdown of European aerospace during the volcanic ash event. I want to thank our employees who worked together as one team leading to a successful restart of our entire transatlantic operation and the smooth re-accommodation of our customers as well.
Their efforts or maybe even more impressive given that the volcano was perceived by some of the most severe winter weather we have seen and their dedication, hard work and effectiveness is truly appreciated.
In terms of impact we cancelled about 325 flights to Europe and as a result we expect capacity for the month of April to be 2.6 lower than we originally anticipated. We also expect this to have a revenue impact of $30 million to $35 million which is already in included in outlook for April. While the revenue environment is improving we remain committed to capacity discipline.
As we have said before we firmly believe that the only way the industry can fully recover and meet its financial target is through capacity discipline. Capacity simply must be at a level that allows for competitive pricing. We have and will continue to be transparent about the performance commitment we make to you our shareholders. While also been clear about our accountability to achieve these commitments and to do with a great sense of urgency.
It will be a mistake to come to conclusion that given the level of improvement United has accomplished over the last few years, that what remains to be achieved is small in comparison.
So, the contrary the view of this management team is there is much more work to do and much more potential to be realized. Said, simply the company that does the best work wins. More and more we are that company and more and more we realize just how much is left to be done.
Our relentless pursuit of United's full potential was not simply borne of necessity but rather of the opportunities that are available to us. Now back to Kathryn Mikells.
Kathryn Mikells
Thanks, John. Moving on to guidance for the second quarter we expect Mainline capacity to be down 1.4% to 2.4% year-over-year and consolidated capacity to be up 0.3% to 1.3%n including the impact of the recent disruption of service across the North Atlantic.
For the full year 2010 as John mentioned we are reaffirming our prior capacity guidance and continue to expect Mainline capacity to be down 1.1% to 2.1% year-over-year and consolidated capacity to be down 0.5% to up 0.5% percent.
For the second quarter we expect mainline unit cost excluding fuel and profit sharing to be up 5% to 6% and consolidated unit cost excluding fuel and profit sharing to be up 3.8% to 4.8% year-over-year. We continue to see similar cost pressure from revenue related cost, rents and landing fees and incentive compensation as we saw in the first quarter as well as the impact of reduced capacity due to the schedule disruption in Europe.
For the full year 2010, we are reaffirming our prior guidance for unit cost excluding fuel and profit sharing to be 2% to 3% on both the Mainline and consolidated basis. We are sticking to our guidance despite continued cost pressure from the improving revenue environment and irregular operations driven by storm activity in the first quarter and the impact of the recent volcanic activity in the North Atlantic.
We continued to be pleased with our cost control performance and our success in mitigating the impacts of these events. Turning to fuel we continue to systematically hedge our fuel price risk. We have about 72% of expected consumption for the second quarter hedge at an average crude equivalent cap of $76 a barrel and we have about 54% of our expected consumption for the remainder of the year hedge with an average crude equivalent cap of $79 a barrel.
Our conservative hedge book consist of about 50% cost and 50% swap primarily in heating oil providing solid hedge coverage in the event of rising fuel prices while allowing for about 75% downside participation for the remainder of the year if fuel prices fall. At the end of the quarter our book was about a $175 million in the money.
Based on April 22, closing forward prices mainline jet fuel prices are expected to be $2.29 per gallon for the second quarter. This price reflects taxes and the impact of hedges that settle in the quarter including hedge premiums on those positions.
Effective April 1st, 2010 the company adapted cash flow fuel hedge accounting. This changes like that one Tyler mentioned earlier as it also better aligns with accounting policies of our peers. Going forward the effective changes and market value of our designated hedge portfolio will be accounted for through the balance sheet until this position settle rather than through the income statement under our previous mark to mark accounting.
Overtime this will eliminate the non-cash mark to market gains or losses and their by reduce the volatility in our GAAP results. The transitional will take about a year as we will continue to recognize the non-cash impact of our hedge positions that existed at March 31 in our GAAP earning reversing the $70 million positive mark to market over the next four quarters net of premium.
We will continue to provide our fuel price guidance on both an economic and GAAP basis until the non-cash mark to market has rolled off at which time these two numbers will converge. You can find additional information about our hedge positions, our detailed fuel price outlook and other guidance in the investor update that we issued this morning.
In closing we are encouraged by the improved results being delivered by everyone across the company. We are well in our way to profitability and margin leadership. The solid performance platform that we have created opens up more actions to the company.
As Glenn mentioned we are actively considering how we might participate in industry consolidation. Well I know that recent media coverage has spurred even greater interest in the topic, I trust that you will understand we cannot comment on that.
And with that Devon we are ready to open up the call for question.
Question-and-Answer Session
Operator
First of all, we'll take questions from the analyst community and then we will take questions from the media. The question-and-answer session will be conducted electronically. (Operator Instructions)
And the first question comes from Hunter Keay from Stifel Nicolaus.
Hunter Keay – Stifel Nicolaus
Thanks very much I appreciate it. I know you guys are not going to talk about consolidation specifically but if you don't mind I would like to discuss at a high level, is there anything that we should know about that would make it undesirable for your guys to actually acquire a competitor like wage snapbacks and a labor agreement or any other sort of change in control clauses?
Kathryn Mikells
Hunter, this is Kathryn. We are not going to specifically comment on that. Ultimately the kinds of things that you are talking about would have to be evaluated at both companies and so it doesn't make sense for us to comment on that.
Hunter Keay – Stifel Nicolaus
I am just going to give you another shot and if you can't comment that's fine but,
Glenn Tilton
Say something nice about the quarter or maybe then—
Hunter Keay – Stifel Nicolaus
Great quarter guys. Congratulations. But it was a very good quarter but I do want to just comment on this on another angel if you can entertain the question. We all know you are obviously a major advocate of M&A, in our opinion your stock is significantly undervalued fairly to other airline using any metric particularly once really at a cash flow. I mean should we considering that any kind of consolidation desire would result in selling the company fair below what many in the market believe is probably fair value. I mean you mentioned the sense of urgency three times in your prepared remarks that looking at your balance sheet the revenue acceleration, would you think just holding all things equal, would you think it's difficult to justify selling right here at current levels given the evaluation or the other stuff.
Glenn Tilton
So, Hunter at a very high hypothetical level?
Hunter Keay – Stifel Nicolaus
Yes.
Glenn Tilton
What I would tell you is the quality of the work that the three of us is spoken to this morning would not be any different from the quality of the work that we would bring to the issue of consolidation and the contemplation that I think Kathryn and I have both said we are undertaking.
Hunter Keay – Stifel Nicolaus
Okay very good, I appreciate that guy's thank you.
Operator
Our next question comes from the line of Jamie Baker from JPMorgan.
Jamie Baker – JPMorgan
Hey. Good afternoon everybody.
Glenn Tilton
Hi Jamie.
Jamie Baker – JPMorgan
And I won't start off by asking is that all you got because we too are impressed for the quarter. Question though picking up where Hunter left off, I want to ask in a way that we remain in the hypothetical Glenn and hope that you can answer? Could you describe what some of the key criteria are in potentially choosing whether to merge and basically just trying to understand whether you personally believe that value is best created by for example by combining overlapping networks versus end to end whether the majority of valve you needs to accrue to your shareholders or not where you think in congregation with it might be most significant.
Just asking in the hypothetical doesn't even have to involve United just sort of semantically how do you think about these issues?
Glenn Tilton
Hey Jamie, in the one of your colleague's -- not too long ago in the pieces that you were all putting out on the issue in a conceptual context without actually addressing combinations of any two particular companies, suggested that given the risk associated with consolidation that are perhaps even more problematic in this industry is as many of you mentioned to me when I joined the industry.
So, that there are dis-synergies as well as synergies to be considered by any management team and any Board. As far it has to be aligned across the full spectrum of consideration for any two companies that are considering going down this road together and in that regard Jamie it's not different from any other industry. The fact is however that in this industry there are perhaps some unique considerations to this industry, the management teams and the Boards need to consider.
For most of all of that there are solutions and those solutions in my view are created by the value that can be described to any particular dealer, any combination of two companies and at the end of the day what we are talking to one other about, where there to be a combination is net synergies, net of complexity, net of dis-synergy net of breakage, net of whole suite of other things that you guys are very well familiar with and that's a philosophical conceptual to the radical level Jamie.
Jamie Baker – JPMorgan
Okay and I appreciate that answer and a quick follow-up just on the subject to alliance. You have shared did public state that your are obviously aware that the United deal appears off the table but they added today that a strengthened alliance is of course a possibility, might I ask you if you believe that United is already, are you already squeezing all the potential value out of U.S. Airways participation within star?
Glenn Tilton
I think in all probability Jamie there is more value to be extracted from every single alliance relationship that we have, every single one of them.
Jamie Baker – JPMorgan
Care to expand on that?
Glenn Tilton
I think that they are relatively immature constructs with ATI across the Atlantic and the Pacific now. We are just embarking on some of the opportunities that we know will be available to us. So, I will go back to John said a moment ago, the better work you do the more potential you uncover, the more work you do with the partner the more two partners come together to realize they can do things together they didn't previously imagined.
Jamie Baker – JPMorgan
Thanks for the thoughtful answers. Glenn, I appreciate it.
Glenn Tilton
My pleasure.
Operator
Our next question comes from Gary Chase from Barclays Capital.
Gary Chase – Barclays Capital
Good afternoon everybody.
Glenn Tilton
Good afternoon.
Gary Chase – Barclays Capital
Just some minor changed tactics and ask you something that you can hopefully literally answer not just in the hypothetical.
Glenn Tilton
It will be good.
Gary Chase – Barclays Capital
Wanted to talk a little bit with John, can you walk us through, you sad what the storm impact was beyond capacity relative to what you had scheduled? How does the quarter look I mean you we thought you were going to be flattish in April, does that sound I mean they are going to be down two to three and then how does that progress through the quarter, feels like June is going to be up one to two.
John Tague
I am going to pull out for you right now.
Gary Chase – Barclays Capital
And maybe while you are pulling out related to I am wondering the revenue performance and the interesting thing for April would certainly point to some acceleration in the revenue trend measured against just about any metric I think. I am wondering if there is an incremental contribution that's coming from fees that maybe we don't understand maybe some parts of the revenue stream that maybe other carriers might consider to be non-passenger revenue.
John Tague
So, we have typically provided transparency around that, it's becoming a much smaller issue as time goes on. So, I can't recall what's the differential is but I think it's close to maybe a point at this stage and that's simply because we are maturing in terms of the year-over-year comp. So, I don't think it's appreciably affecting how we compare to other carriers. In terms of the capacity guidance for the second quarter as you know we released 0.3% to 1.3% those are up figures. You are correct in sort of viewing June as being relatively flat in that guidance.
Gary Chase – Barclays Capital
June was flat?
John Tague
We're looking at June been relatively flat.
Gary Chase – Barclays Capital
Okay, I will follow up with you offline and then I guess the other question will just be for Kathryn on the cost side, I mean you add what I think was a really defining year in 2009 where you took a lot of cost out of the structure, looks like that's carrying well across 2010.
Curious for your thoughts on the sustainability of where you are and if there are any major pieces of what you accomplish that, where you feel material pressure and I am obviously not preferring to anything revenue related.
Kathryn Mikells
Thanks, I appreciate that. Look when we look at our cost and where we are seeing pressure, where we are seeing pressure is pretty consistent overall with where the industry tends to see pressure and in areas like rents and landing fees. Obviously if you look at the course of 2010 and the way our capacity spreads across the year our expectation is for a little better performance in the second half relative to the first half where we will see a little bit more capacity relative to the first half, beyond that what I would say is it isn't as if we are facing a lot of low hanging fruit nor were we facing really low hanging fruit in 2010.
This is much more a complete change in the practice of how we manage the company with regard to cost and our expectation with regard to this been a book of work that is continuously in play and underway by everyone across the company.
So, I would not point to unnecessarily any low hanging fruit but I would certainly suggest to you that the expectation of our management team across the Board and every single person at this company is we have got a continued to plug our way at this because it is necessary to our competitive and long-term success.
Gary Chase – Barclays Capital
Thanks everybody.
Kathryn Mikells
Thank you.
Glenn Tilton
Thank you.
Operator
Our next question comes from Will Greene from Morgan Stanley.
Glenn Tilton
Hi, Bill
Will Greene – Morgan Stanley
Hey. Good afternoon, I wanted to touch upon labor costs if we are giving that your section six negotiations or the number of your units I know you offered I think just to give the flight attendants a very similar contract to that which Continental has, do you have sense for what the impact would be if they agreed to that offer in terms of the labor cost differential? I think Continental pays quite a bit more than you currently pay your flight attendants.
Kathryn Mikells
I will that from a little different angle because I have a little slightly different number kind of offhand available to me, many times the contracts in terms of labor cost comes between ourselves in American and so I actually looked at it the first quarter to say what if United had Americans contract? What would that drive and how would our results change relative to and that was worth about a 1.5 margin point. So, I think that gives you sort of a rough order of magnitude estimate and that's obviously kind of across the board all labor group. We are in as you know negotiations with all of our labor groups now certainly with a desire to reach a conclusion with them as soon as possible but in a way that works for us and obviously works for them.
Will Greene – Morgan Stanley
Yes as I think about it one of the things that I am often told about your labor contracts is there are productivity opportunities. So, that 1.5 points on margin that you mentioned, is there a weight offset that or that includes an assumption of our productivity?
Kathryn Mikells
So, that again is just looking at one of our competitors and saying what if we had something that looked more similar to that, certainly as we enter these negotiations and progress these negotiations with our unions.
A big part of that conversation is about our clear willingness to pay our people more but our need for improved productivity and I would add on to that, our need to address medical and dental costs as well.
Will Greene – Morgan Stanley
Okay. And then, just one question on your fleet. You've got a pretty big wide body order on the books now but it's pretty far into the future. So obviously is a volatile industry. So how much flexibility would you have to cancel that order at any point between now and then or downsize or upsize or what kind of flexibility do you have to change it?
Kathryn Mikells
We have a fair amount of flexibility with regard to deferral rights. We clearly have plenty of flexibility to upsize the order if we desire to upsize the order. We don't have necessarily the flexibility to simply quote unquote cancel the order, nor would we actually consider that to be advantageous to us.
We work long and hard to get an order put in place that we saw was still very competitive and that worked very well for the company and right now we feel very good about the timing of those aircrafts. They're great replacement aircraft for us. We have as you know several years before those deliveries will start to come and that really gives us the time that we need to further strengthen our balance sheet.
Will Greene – Morgan Stanley
And are you still on track for a narrow body order by year end?
Kathryn Mikells
That's certainly where we're still at today, on track for that.
Glenn Tilton
I think it's a point to remember that this was justified on a replacement basis and it also offers a substantial opportunity to down gauge relative to the existing fleet. So there is some real strength in the logic to this, both in good times and bad times.
Will Greene – Morgan Stanley
Okay, thank you.
Operator
Our next question comes from Kevin Christy from UBS Research.
Kevin Christy – UBS Research
Hey guys, real nice revenue quarter, wanted to talk to you about your regional costs. You're growing the regional capacity around 11% for the year but unit costs there are down 1.5%. Is that the same cost issues as you're expecting on the main line with it being revenue related being the primary driver there or how should we think about that?
Kathryn Mikells
Yeah, a little bit of a change in stage length and mix going on.
Kevin Christy – UBS Research
Okay.
Glenn Tilton
It generates higher utilization obviously as well.
Kevin Christy – UBS Research
2011 hedge book, do you have a meaningful amount of hedges in 2011?
Kathryn Mikells
We're just beginning to hedge into the first quarter in 2011 and we have about 15% of the first quarter hedged.
Kevin Christy – UBS Research
And maybe you could just talk about the performance in different hubs. I think you talked about the regions pretty well. How about from a hub perspective?
Glenn Tilton
In terms of a domestic perspective the hubs are actually relatively balanced and in a fairly tight range. If you're allocating capacity directly, that's obviously the outcome you're looking for. So we're very pleased with the way the domestic operation is recovering and that recovery is throughout the system. International as you can see, with numbers like these, you've got to have very good international numbers in all the hubs.
We're particularly pleased with our continuing development of Dallas and the access to what I would characterize as breath markets that it brings to us. So we're pretty happy overall with just the performance and I think the results are evident, not just capacity discipline on a systematic level but also capacity allocation was in that system and I think its seems to be doing a very good job with that.
Kevin Christy – UBS Research
Thank you.
Operator
Next online, we have Dan McKenzie from Hudson [ph] Securities.
Dan McKenzie – Hudson Securities
Thanks. Yes. Hey, Kathryn, it looks like United is poised to generate close to $2 billion in cash flow from operations this year? Just reverting back to your first quarter cash flow from ops and I'm wondering if you can help us understand how much of this might be used to continue building your liquidity versus capital expenditures or the pay off of more debt?
Kathryn Mikells
Sure, I'll talk just overall in terms of our cash flow performance. We had roughly about $500 million in cash flow in the quarter, cash flow from operations. If you just try to translate that into exactly how much of that cash we'll be able to put in the bank, that's roughly about $250 million. We had mentioned earlier that the closing of the financing of our double ECC generated about $250 million in the quarter as well. So if I try and think about that just in terms of cash flow thrown off from the business or less capital expenditures, less regularly scheduled debt payments we put about $250 million in the bank. Overall as we look forward to the year, historically we are a pretty strong first and second quarter cash flow generating company just because of the seasonal pattern that we have.
Dan McKenzie – Hudson Securities
Okay, understood. And I guess for my follow-up questions, it ties back to Bills question but what kind of fleet flexibility does United have and I guess more specifically, I appreciate, you probably like the fleet plan as it is over the one or two years but what I'm getting at is how many RJ's as well as mainline jets could United park say over the next two years without incurring expense?
Kathryn Mikells
That isn't a number that we would typically respond to. When we've talked about fleet flexibility previously, we're really mindful in terms of the way we finance our fleet to ensure that in any given year, we have a number of aircraft that are coming off operating leases and coming out of financing so that if we actually needed to make a change as the result of a significant change in the environment, we would be in a very good position to do so. I think if you look over the course over the last couple of years, we've very well demonstrated our ability to do that and we will continue to have that flexibility but we're not going to give specific guidance around that and clearly in terms of the environment that we're seeing today and the result that we just shared with you today, the revenue performance that we're seeing is very good and we're continuing to pick up momentum. So while we're always watching the demand environment, certainly everything that we're seeing today is continuing to move in a positive direction.
Glenn Tilton
Another thing I think that's worth noting and my perception is unlike some of our competitors. Our utilization on both the express fleet and the mainline fleet is running at or close to all time highs. So we can clearly economically moderate that utilization as a first lever.
Dan McKenzie – Hudson Securities
Okay, understood. That will do it for me. Appreciate it. Thanks.
Kathryn Mikells
Thank you.
Operator
Our next question comes from Helane Becker from Jesup Lamont.
Helane Becker – Jesup & Lamont
Thank you very much. Just two quick questions, one Kathryn, did you say what net debt in the quarter was or when will you be filing your Q's so that we can get that?
Kathryn Mikells
Yes, so net debt was about $7.7 billion. That's reflecting, also reflecting the Japanese route authority transaction where we just received the cash in the last week. The debt would have been put on our books earlier than that.
Helane Becker – Jesup & Lamont
Okay, and then my other question is, can you say, what the impact last year from H1N1 virus was because as I recall, the impact was greater in the Pacific than it was kind of in other markets and you guys were more exposed to that than the peer groups. So how much of your improvement in the second quarter is related to – is come due to that? Can you just spec that number out for us?
Glenn Tilton
I can't do that Helane but look, there was some impact in the Pacific but as you will recall, the biggest impacts were in Mexico and that's not a terribly big market for United. So I don't think there's an appreciable change here year-over-year. When you look at the variables around how we're managing the networking and down gauging capacity, I think you'd find that to the extent there is an effect that it is quite, quite small.
Helane Becker – Jesup & Lamont
Okay.
Kathryn Mikells
And you'll recall Helane that effect really didn't
Helane Becker – Jesup & Lamont
Okay, great. Thank you very much. That's it.
Operator
Next in line we have Bill Mastoris from Broadpoint Capital.
Bill Mastoris – Broadpoint Capital
Thank you. Kathy, 27% of LTM revenues just in terms of a liquidity position is the highest I can ever remember for United at any point. I'm just wondering what is kind of the new run rate metric or maybe even a range where you feel comfortable. I assume it's not going to be 27% but something a little bit lower than that and so maybe you could provide some perspective on that point forward.
Kathryn Mikells
Yes, so I'm not actually a big believer in trailing 12 month revenue on a percentage of trailing 12 months revenue as being a great indicator for what is quote unquote adequate liquidity to run the business. I only quote the number because it seems like a benchmark that folks use predominantly externally.
The way we actually look at adequate liquidity is like looking forward and looking forward both at the environment and looking forward at what kind of obligations do we see on the horizon. Certainly for us in the near term, as we look out to next year, we have some convertible securities that we have purposely ensured that we have a lot of flexibility in terms of managing them and that's one of things that we were considering as we bolstered our liquidity position.
But I don't actually think there is a perfect answer to say, hey based on 12 months passed revenue, what's the right liquidity amount for you to hold. I think it's really on basis of what are you seeing in the environment, what do you see when you look forward at obligations of the company and as a result what do you view as adequate liquidity. Now clearly given the volatility that the industry has seen over the last couple of years, I think folks are generally going to be a little bit more conservative than they have been in the past and I think you've seen us do that.
Bill Mastoris – Broadpoint Capital
Okay, can I safely assume that any excess liquidity that you might perceive just in terms of forward obligations and maybe anticipated future free cash flow are all going to be applied towards debt reduction? I think you hinted at that in the future but is that a safe assumption going forward?
Kathryn Mikells
It is a safe assumption that we clearly have a goal to strengthen our balance sheet and that we are going to use a fair amount of our excess cash flow to do so.
Bill Mastoris – Broadpoint Capital
Okay, thank you.
Operator
Thank you, ladies and gentlemen. This concludes the analyst and investor portion of our call today. Before we take questions from the media I would now like to turn the call back to Mr. Tilton for closing comments.
Glenn Tilton
Thanks, Devon, and thanks to all of you for joining us on the call this afternoon and for your very good both hypothetical and non hypothetical questions. At United we do have a keen sense of urgency. We're making significant improvements all across the company and in many instances our answers to your questions spoke to those improvements.
Our revenue improvement is very strong. We are generating just as Kathryn said a moment ago competitive cash flows from operations. We've controlled our costs and we're going to continue to do so and we're going to find new ways to do so. We are, as John said, the top network carrier and on-time performance in the business is continuing to provide us with opportunities to do even better.
We're expanding our network even as we reduce our capacity, serving more destinations today than we did two years ago and as one of the questions posed, we continue to explore creative partnerships and alliances to extend our reach even further. The United team is aligned on the goals that we've shared with you. Our people are executing against a solid plan and we're well positioned to succeed and continue on the path toward sustained profitability.
So with that operator, we'll open up the call to questions from the media. Thanks.
Operator
We will now take calls from the media. (Operator Instructions) And our first question comes from Mary Jane Credeur from Bloomberg News.
Mary Jane Credeur – Bloomberg News
Hi, folks. I've got another hypothetical for you.
Glenn Tilton
Mary Jane, are you sitting here in this room with us?
Mary Jane Credeur – Bloomberg News
No sir. What makes consolidation so pressing and desirable right now and do you think others in the industry feel it's as urgent right now as you do?
Glenn Tilton
I don't know Mary Jane that anyone that I've ever said or anyone here has said that it's pressing and urgent now. What I said in answer to the hypothetical question was, this is an industry where the stars have to be aligned and when they're aligned, management teams and boards meet and make a determination as to whether or not to take advantage of opportunities as they're presented or as I said hypothetically not.
Mary Jane Credeur – Bloomberg News
And do you think that others in the industry are on the page and feel the same way?
Glenn Tilton
Haven't a clue.
Mary Jane Credeur – Bloomberg News
Okay, and follow-up question. Are you worried that U.S. Airways might consider leaving Star and how do you plan to keep them satisfied so that they don't look around?
Glenn Tilton
Not worried about that and I'll quote Doug Parker, when Continental joined Star in New York, I remember somebody begged the question to Doug and he said anything that's good for Star is good for U.S. Airways.
Mary Jane Credeur – Bloomberg News
Thank you very much.
Glenn Tilton
You bet. Thank you.
Operator
Our next question comes from Julie Johnson from The Chicago Tribune.
Julie Johnson – The Chicago Tribune
Hi guys. Great quarter. I've got a non hypothetical question. I'm wondering Kathryn where unencumbered assets stand at this point? The 10-K indicated you'd be down to about $200 million by April and I'm just wondering, given that this is an industry where you expect the unexpected, what's the contingency plan if airlines head into another extremely volatile situation where cash is drained.
Kathryn Mikells
So I'm going to start to respond to that question by saying the way in which we manage the business actually seeks to protect us from the situation that you just mentioned. So be it capacity discipline, be it ensuring that we have a good fuel hedge book, ensuring on a go forward basis that we have flexibility with regard to our fleet, looking at the various actions that we have and continue to take in terms of merchandizing and generating ancillary revenue streams are all meant to bring us back to profitability and sustain profitability.
If I then go to turn to, not to mention our now sitting on $4.5 billion in unrestricted cash. If I then go to turn to, so what flexibility do you have beyond that, the number that you mentioned in terms of unencumbered assets relatively current? I think I previously mentioned that with regard to our large credit facility.
It is over collateralized by about $300 million and we have the flexibility to take collateral out of that facility and do something with it if we so chose and then I would point to over time, we clearly manage our financing so that we have aircraft financing that will off over the course of time which both gives us on the one hand fleet flexibility and it also gives us in the future, assets that will become unencumbered and other assets that will become I'll call it under encumbered and could be refinanced if need be. We are very comfortable today with our liquidity position.
Julie Johnson – The Chicago Tribune
Okay, great thank you.
Operator
(Operator Instructions) And next in line we have Jena Moreno from Houston Chronicle.
Jena Moreno – Houston Chronicle
Hi. I'm wondering if Chicago has offered United any other incentives…
Kathryn Mikells
Can you speak up a little bit?
Jena Moreno – Houston Chronicle
Yes. Has Chicago offered or the state of Illinois offered United any other incentives to stay in Chicago?
Kathryn Mikells
We have incentives associated with the move that we're making from our Elk Grove facility to the Willis Tower here in the city. We're very pleased with the arrangement that we were able to make, both with the city and with the landlord there very much looking forward to that move beginning later this year.
Jena Moreno – Houston Chronicle
So you didn't move….
Glenn Tilton
Jena. We can't hear you Jena.
Jena Moreno – Houston Chronicle
Sorry, I don't know what's wrong with my phone. If you did not make that move to the Willis Tower, would you have some replacement centers?
Kathryn Mikells
We have absolutely every intention of making that move.
Jena Moreno – Houston Chronicle
All right, thank you.
Kathryn Mikells
You're welcome.
Glenn Tilton
Thank you.
Operator
And thank you, ladies and gentlemen. This concludes our call today. You may disconnect your lines at this time.
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