Executives
Tyler Reddien – Managing Director, IR
Glenn Tilton – Chairman, President & CEO
Kathryn Mikells – EVP & CFO
John Tague – EVP
Doug McKeen – SVP, Labor Relations
Analysts
Dan McKenzie – Next Generation Equity Research
Gary Chase – Barclays Capital
Kevin Christy – UBS Research
Hunter Keay – Stifel Nicolaus
Bill Greene – Morgan Stanley
Michael Linenberg – Deutsche Bank
Glenn Engel – Merrill Lynch
Bob McAdoo – Avondale Partners
James Higgins – Soleil Securities
Helane Becker – Jesup & Lamont
Bill Mastoris – Broadpoint Gleacher
Mary Jane Credeur – Bloomberg News
Josh Freed – The Associated Press
UAL Corporation (UAUA) Q2 2010 Earnings Conference Call July 20, 2010 2:00 PM ET
Operator
Good afternoon and welcome to UAL Corporation's earnings conference call for the second quarter of 2010. My name is (Sean) 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.
Tyler Reddien
Thank you, Sean. Welcome to UAL's second 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 represents 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-K 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 the numbers for the quarter we will be excluding impairment charges, certain other accounting charges, merger related expenses and fuel hedge, non-cash, net mark-to-market gains and losses. These items are detailed in the table in Note 4 on page 12 at the end of our earnings release.
And now I'd like to turn the call over to Glenn Tilton, UAL's Chairman, President and CEO.
Glenn Tilton
Thank you, 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, John Tague, President of United Airlines, and Peter McDonald, our Chief Administrative Officer who is heading up our integration planning with Continental.
United, as we've often said we have a great sense of performance urgency across virtually every significant metric we continue to deliver solid results against our objectives, driving improvement in our revenue, cost, operational performance, customer service and very importantly, our profitability.
We reported a second quarter profit of $430 million, an increase of more than $750 million over last year and an amount equal to Delta's improvement. This is our largest second quarter profit since 1999 and reflects the positive momentum driven by systemic improvement across our company. Significantly these results move us closer to our stated goal of industry margin leadership. We led our peers in net margin in the first quarter and we expect to again be at or near the top of the five major US carriers this quarter.
At United we continued to differentiate our results versus our peers in financial performance and across our scoreboard. We expect our unit revenue growth of nearly 27% to also be industry leading, reflecting the decisions we've made regarding capacity, fleet configuration and the exceptional work of our revenue management team. As a result we are better able to leverage the encouraging increases that we are certainly seeing in travel demand to the company's benefits.
Nowhere are those results more evident today than in Asia where our unit revenue is up from 52% more than 15 points higher than our largest competitor in the Pacific. In Latin America, a smaller market for us, unit revenue is up from 56%. It's worth noting that these numbers represent a significant improvement over our performance in 2008 as well as last year.
We are also encouraged to see premium cabin bookings up more than 46% for the Pacific and nearly 38% for the Atlantic. As I've said we remained fully committed to capacity discipline and while some of our competitors have suggested increases in their forward guidance, we continued to believe that capacity constraint is essential for margin improvement and our guidance is effectively unchanged from October of last year. As we continue our work on revenue leadership we are equally mindful of the need to control our costs.
Our consolidated CASM excluding fuel and profit sharing was up from 1.9% year-over-year on a capacity increase of about 1%, which is about a point and a half better than the guidance we issued in June. We enjoy the industry's best cash position, closing the second quarter with $4.9 billion in unrestricted cash, up nearly $2 billion from the end of 2009 and in addition we have one of the industry's strongest fuel hedge books.
We are delivering strong operational performance despite significant challenges from the weather during the quarter. We continue to hold the top spot among the five largest US carriers for on-time performance year-to-date. Building on our number one position for 2009, our customer satisfaction scores are up significantly aided by the work we are doing to improve the cleanliness and the workability of our aircrafts.
Overall customer satisfaction is up 60% compared to our 2008 scores. John will discuss in some detail our people are doing a great job of delivering against the goals with the outlines for you on these calls. Very simply stated, at United we're doing the work that you should expect of us, showing increased momentum and executing against our plans to deliver on–time performance, margin leadership and competitive costs. As all of you know, since we last discussed quarterly results with you, we have announced our intent to merge with Continental, creating the world's leading airline.
Today we announced an agreement in principal on a transition and processed agreements with the pilots of both companies. We are encouraged by the collaborative dialogs that allowed us to reach this agreement early in the integration planning process. We're on track and making excellent progress towards the merger and it's closed, which Kathryn will discuss in more detail in a moment.
And with that I'll hand the call over to Kathryn, who will take us through the numbers in greater detail. Kathryn, over to you.
Kathryn Mikells
Thanks very much, Glenn and good afternoon everyone. We're pleased to announce today our first quarterly profit since 2007. As Glenn said, the actions that we've taken has positioned us to outperform as the economic recovery takes hold, and our performance year-to-date is a powerful proof point. While more will clearly be required to sustain adequate profitability over the long run, we're off to a good start enabled by the hard work of our 46,000 people across the company.
Our net profit of $430 million represents an 8.3% net margin, an improvement of 16 margin points over the second quarter of last year. This translates into $1.95 earnings per diluted share, about $0.21 better than the street consensus of a $1.74. Year-to-date our net margin of 3.6% represents an improvement of over 15 points and we expect these results to lead our peers.
A profitable company creates rewards for all of our constituents, our people, our investors and the customers and the communities that we serve. Based on our year-to-date profits, we accrued $63 million in profit sharing in the quarter. This translates into nearly 5% of each employees considered earnings in the first half of the year and is in addition to the bonuses that we paid out for our on-time and customer satisfaction scores.
While we need to earn a full-year profit for the profit sharing programs to pay out, we feel pretty good right now about our trajectory for the second half of the year. This quarter's results were driven by our strong revenue recovery. Total revenues for the second quarter increased about 28% or over $1.1 billion. Consolidated passenger unit revenue increased by 27% year-over-year. Our total passenger traffic volume as measured by revenue passenger miles was up 3.9% compared to the year ago quarter. And combined with our modest 1.1% capacity growth drove a little over a two point increase in our load factor.
Cargo and other revenues for the quarter were $428 million, an improvement of 30% year-over-year. Cargo revenue increased 57% year-over-year as both volumes and yields increased, driven by continued strengthening in cargo demand worldwide. Moving to costs, operating expense increased by 11% or $455 million year-over-year, with about $300 million of that increase attributable to higher fuel expense.
The impact of settled fuel hedges was again significantly improved year-over-year. Our fuel expense reflects $17 million in losses on fuel hedge positions that settled in the quarter, including both premium expense and the impact of hedge ineffectiveness. This compares to settled hedge losses of $157 million in the second quarter of 2009, a year-over-year improvement of $140 million.
Average mainline jet fuel price for the quarter excluding hedges was $2.30 a gallon, up from $1.63 a gallon last year, an increase of more than 40%. Including hedge impacts our mainline jet fuel price for the quarter was $2.34, about a 20% increase from last year. Our mainline fuel expense was up $191 million year-over-year driven entirely by price increase as our consumption was affectively flat year-over-year.
Regional affiliate fuel expense was up $110 million with about $70 million due to fuel price increase and the remainder due to higher regional capacity year-over-year. Consolidated non-fuel expense in the second quarter was up $154 million or about 5.2%. Excluding profit sharing expense, our consolidated non-fuel unit cost increased by 1.9% year-over-year, about a point and a half better than our mid-June guidance.
As many of you are aware, most carriers were notified of a refund from the TSA for access infrastructure charges last in the quarter. Our refund reduced expenses by $17 million. We also booked an inventory reserve adjustment related to spare parts in the quarter that we had anticipated later in the year.
Turning to the balance sheet, we closed the quarter with an unrestricted cash balance of $4.9 billion, slightly above our guidance and one of the strongest liquidity positions in the industry. We generated positive operating cash flow of $874 million in the second quarter and about $800 million in positive free cash flow. Year-to-date we generated nearly $1.4 billion of operating cash flow and $1.2 billion in free cash flow.
We made scheduled debt and net capital lease payments of $135 million and invested $73 million in non aircraft capital. We closed the quarter with $11.8 billion in total debt including our balance sheet obligations and $6.9 billion in net debt. We've reduced net debt significantly with a $1.4 billion reduction from the same period last year and $3.9 billion reduction from when we excited bankruptcy in 2006.
Our performance across the board is exactly differently than we reported to you just a year ago. We're proud of the progress that we've made and the results we're reporting today. At the same time we know we have to continue to be discipline and to raise the bar to produce strong financial returns over the long-term.
And with that I'll turn it over to John.
John Tague
Thanks Kathy. We've laid out a performance agenda for United that was clear with measurable objectives that you could hold us accountable to. And this quarter further demonstrates our ability to consistently deliver and fulfill our commitments to you. We are generating industry leading results year-to-date at the same time, we are improving the overall health of the company across the scorecard.
We have maintained our number one position in on-time performance amongst our network peers on a year-to-date basis. Substantially improving our other operating metrics reducing our cancellation rate by 12% and our loss baggage rate by 20% year-over-year in the second quarter.
As Glenn mentioned our customer satisfaction scores are improving and are up 20% year-over-year in the second quarter. Domestic customer satisfaction scores have jumped nearly 40% year-over-year and 70% from the second quarter of 2008. A clear reflection that we are working as one company and our colleagues are really delivering for our customers.
We are achieving unmatched unit revenue growth, our consolidated unit revenue year-over-year increased 27% significantly outpacing each of our peers. Importantly, unit revenue grew 5% versus the second quarter of 2008. Ancillary revenue improvements contributed two points of this growth. Year-to-date, United is the only major US network carrier to generate positive unit revenue growth versus 2008.
Consolidated domestic unit revenues were up 20% in the second quarter driven by a 19% improvement in yields as corporate bookings continued to recover. More importantly domestic unit revenues were up 5% from the second quarter of 2008. International unit revenue was up 43% versus 2Q of 2009 and is up 6% versus 2Q of 2008. We saw significant improvements in load factor and yields in the premium cabins, the paid load factor is up 15 points year-over-year in the second quarter.
As Glenn suggested, we are experiencing a substantial recovery in the Pacific with year-over-year unit revenue growth of 52%, led by 64% in China and importantly 46% year-over-year in Japan. In Latin America, unit revenues were up 56% primarily due to a 47% increase in yields.
In the Atlantic unit revenue increased 33% in the second quarter and was up 3% in the second quarter of '08. We have optimized our Atlantic network to drive profitability, redeploying capacity of the Middle East and down gauging service to London, Heathrow. These actions have really paid off with unit revenues up 44% in London and 40% in the Middle East.
We also added additional markets to the Atlantic this quarter. We introduced service from Chicago to Rome and Brussels, and our first service to the African continent flying from Washington Dallas to Accra. We also broadened our network further this quarter with the addition of two new members to the Star Alliance TAM in Brazil and Aegean in Greece.
Our alliance partners continued to be critical to our success, providing access to destinations that we do not directly serve, nor can we economically. Star carries 625 million passengers a year, nearly 250 more than SkyTeam and over 300 million more than Oneworld, the strength of Star and (inaudible) is to join venture agreement across the Atlantic and the proposed agreement across the Pacific provide a market leading platform.
Cargo revenues also posed a substantial year-over-year revenue improvements in the second quarter increasing 57%, paid volumes are up nearly 40% and yields were up nearly 27%. We also saw a continued improvement in pricing quarter-over-quarter where yields improved by a 11% versus the first quarter of 2010. We continued to grow ancillary revenues in the second quarter with revenues per passenger of over $14.50 up 10% from the second quarter last year driven primarily by higher bag fees and the continued successful growth of our economy class products.
We see continuing evidence of a strong revenue recovery as we look across our system for the third quarter. The numbers look very encouraging particularly in the July and August period. And always at this time visibility for the fourth quarter is relatively limited. With our focus on improving performance management we have achieved our first level objective. Now we are focused on maintaining that momentum and achieving our longer term goal of sustained and sufficient profitability.
While results are encouraging relative to competitors, more must be done to assure that we generate adequate full cycle profitability and to achieve a general industry return on invested capital that we have a long stated as our goal. That said we are focused on doing the works to put United in a best possible competitive position, to leverage the responsible capacity actions that we've led, improved cost effectiveness and the long awaited opportunity of consolidation along with the early success of unbundling.
Our results today tell the story. We have a continued willingness to lead and take responsible actions and calculated risk to reach our financial goals. Now back to you Kathryn.
Kathryn Mikells
Thanks John. Turning the guidance for the third quarter, we expect mainline capacity to be down 0.3% to up 0.7% year-over-year and consolidated capacity to be up 1.6 to 2.6%. Capacity constraints has been one of the cornerstones fuelling our performance and we've remained committed to it. You'll note that for the full-year 2010, we increased our capacity guidance slightly and expect mainline capacities to be down 1.4% to 2.4% year-over-year and consolidated capacity to be flat to up 1%.
This is up half a point from our prior guidance due to two factors. About a half of the increase is due to the addition of the capacity associated with our enhanced codeshare agreement with Aer Lingus providing service to Washington Dallas to Madrid which we didn't originally anticipate reporting on a consolidated basis. The other half of the increase is due to the elimination of scheduled paid visits through the rest of the year in anticipation of repainting the fleet in the new company livery once our merger with Continental is closed.
We understand we need to maintain supply disciplines through the business cycle and our guidance is consistent with that philosophy. For the third quarter we expect mainline unit cost excluding fuel and profit sharing to be up 3.8% to 4.8% and consolidated unit cost excluding fuel and profit sharing to be up 3.3 to 4.3% year-over-year.
We continue to see a similar cost pressure from revenue related cost, rents and landing fees and incentive compensation as we saw in the first half of the year. The increasingly favorable revenue environment is driving higher revenue related costs than we anticipated at the beginning of the year. As a result while we modestly beat our cost guidance for the first half of the year, we're maintaining our consolidated unit cost guidance for the full-year 2010 above 2% to 3%.
Turning to fuel, we continue to systematically hedge our fuel price risk with roughly 40% to 50% of our consumption hedge for the next 12 months. We have about 80% of expected consumption for the third quarter hedged at an average crude equivalent cap of $79 a barrel and about 75% of our expected consumption for the remainder of the year hedged with an average crude equivalent cap of $80 a barrel.
Based on July 16th closing forward pricelist, mainline jet fuel price is expected to be $2.40 a gallon for the third quarter. This price reflects taxes and the impacts of hedges that's settled in the quarter including hedge premiums on those positions. As we disclosed last quarter, the company has now adapted cash flow fuel hedge accounting and going forward the changes in market value of our designated hedge portfolio will be accounted for through the balanced sheet until these positions settle, rather than through the income statement as we did under our previous mark-to-market accounting.
Overtime this will eliminate non cash mark-to-market gains or losses and thereby reduce the volatility in our GAAP results. The transition will take another three quarters as we continue to recognize the non cash impact of our hedge positions that existed at March 31st in our GAAP earnings and we have about $36 million of positive mark-to-market remaining that will be reversed over the next three quarters.
You can find additional information about our hedge positions and our detailed price outlook as well as well as other guidance in our investor updates that we issued this morning. As this quarter clearly demonstrates, we've built a solid performance platform that we expect will only get stronger as we move forward with our plan merger with Continental.
Merger planning work is well underway. Pete McDonald is leading the integration management office work for United and Lori Gobillot is leading the effort for Continental. And we're pleased with the progress that the teams are making. We've established about 30 functional integration teams standing every aspect of the business and they're meeting regularly to plan for a smooth integration.
Each team is comprised of representatives from both companies, driving a very collaborative process as we determine the operating processes and the product offerings of the new company. The focus of every team is to build an integration plan that will allow us for quick implementations, post close, ensuring that we have a seamless transition for our people and our customers as well as early synergy capture as we bring the two companies together.
On the regulatory front, the review process with regulatory authorities is proceeding well and we're on track to close the merger on the original timeline in the fourth quarter of this year. We're actively engaged with the Department of Justice officials and we've provided responses to a number of their request for information.
We're also proceeding with the regulatory process and foreign jurisdictions. Canada has issued a no action letter indicating that they don't intent to perform a review of the merger at this time and we've completed all required filings with the European Union and in other foreign jurisdictions.
We've filed our S-4 on June 25th and are awaiting comments from the SEC. Once the S-4 is finalized we'll give notice as of the date of the shareholders meeting to approve the deal. We're on track to hold those meetings later this fall. We're pleased with the progress on our merger and we're very encouraged by the improved results being delivered by everyone across the company.
And with that I'll turn it back to you, Glenn.
Glenn Tilton
Thanks Kathy. United reported a very strong quarter today. A direct result of rigorous work across the company. As John and the majority of our people focused on building on these results and running a better airline, Kathryn and Pete with small dedicated team are leading the integration planning with Continental. And as Kathy has outlined that it's also progressing very well.
All of this work creates positive momentum. It will take into our plan merger with Continental Airlines later this year. In closing as this management team has consistently sit, our goal is to achieve sustained and sufficient profitability to deliver margins that are commensurate with other industries across the business cycle. Our proposed merger with Continental is an important step forward and we'll continue to pursue every opportunity at our disposal to achieve our state of objective.
Our current results show us that we are clearly on the right track. With that (Sean), we are ready to open the call to questions.
Question-and-Answer Session
Operator
Thank you. First, we'll take questions from the analyst community, then we'll take questions from the media. The question-and-answer session will be conducted electronically. (Operator Instructions). Please hold for a moment while we assemble our queue.
Our first question comes from Dan McKenzie with Next Generation.
Dan McKenzie – Next Generation Equity Research
Yes, hi good morning guys.
Glenn Tilton
Hi Dan.
Dan McKenzie – Next Generation Equity Research
I guess, this first question if for John and it relates to China's GDP growth, if it's closer to 7% versus 10%, what did I tell about where industry capacity needs to be on the ratio of looking ahead and then just related to that, and I'm hoping you can talk a little bit about capacity, flexibility within the Trans-Atlantic JV just given what's going on in Europe?
John Tague
Well relative to Asia, we've been pretty modest in our capacity plans with Asia. As you saw we dropped the Dallas to China service over the winter. So we've been very constrained in terms of that and that's certainly leveraging some of our results currently. We don't see anything on the horizon given the performance we have and the level of still frankly that we're achieving that gives us pause. I think you are appropriate to be sort of contextually concerned about what may or may not be going on in Europe looking forward. But we're not seeing any pressure on our results in the near term. As we always will, we'll keep an eye up for that and we have the opportunity within the JV to adjust capacity accordingly. And we have not seen anything in the dataset, in the facts that would lead us to believe that we need to do that now.
Kathryn Mikells
And Dan and this Kathryn, with respect to the Pacific, I think our capacity constraint and discipline clearly showed through in terms of the differential and our result relative to our largest US peer. If you look at our year-over-year increase in terms of passenger unit revenue compared to our largest US peer, we were literally 15 points ahead of them for the quarter and if you look a little further to that, our capacity was relatively flat and that was clearly in contract with what was going on with our largest peer.
So as we mentioned in our prepared remarks, clearly capacity discipline has been a cornerstone of our significantly improved financial results and we understand that we've got to manage capacity very wisely over the business cycle.
John Tague
Yes and to Kathy's point, I rough estimate our fourth quarter capacity plan for the Pacific is still off 2007 levels by about 15 points.
Dan McKenzie – Next Generation Equity Research
Okay. Thanks for that color. Then I guess, from my follow-up question given comments about margin leadership and returns commensurate with other industries. I wonder if you can just elaborate a little bit more about what hurdle rate United is using for purposes of internal planning and just related to that, what you really perceive as kind of the bigger impediments to achieving that on a sustained basis.
Kathryn Mikells
Sure. If you look at I'll call it operating margin as well proximity. We think we need to get pretty close to 10% before we're really earning a reasonable return and we clearly have to produce that over the course of the year and over the course of the cycle. So when we look to plans for what the financial results that we need to produce, we certainly have that in mind, clearly over the last couple of years, we've been focused on simply getting to profitability and that was a pretty significant hurdle for the industry.
Now that we're there, we're clearly focused on not just maintaining profitability but increasing it from here.
Glenn Tilton
Hi Dan, it's Glenn. So we should be asking you that question given your role on the Department of Transportation advisory council to enhance the competitiveness of the industry.
Dan McKenzie – Next Generation Equity Research
Yes, well 10% would be a fantastic result if you could accomplish that over the course of the entire cycle.
Glenn Tilton
But Dan, the things – getting aside, the things that we're discussing in that form are (inaudible). We've said today United is an innovated company that is pursuing new streams of revenue that the industry historically has shied away from and its creating some political consternation in some quarters. So we're okay with that, we're willing to engage to pay to establish a level of profitability. It is sustainable such that the industry is both viable and competitive relative to international peers going forward.
We think that the table is being set by the secretary in appropriate table for the discussions. All of the decisions that John and Kathryn have spoken to with respect to capacity constraints we think are advisable, and for an industry that is historical shown (precious little). We continued to press the case relative to the benefits of consolidation which only a short while ago Dan proceed to be a reached too far and have proven now to be otherwise.
And so with the billion dollars to a billion dollars more synergy capture available for the company as we progress to the integration and planning, clearly the benefits there are clear. But we continue to switch beyond [ph] board internally with respect to other means by which we can improve our overall financial performance whether on the revenue or the cost side and I think it's an appropriate thing for the company to be doing as we enter the integration planning phase with Continental.
Dan McKenzie – Next Generation Equity Research
Well very good. I appreciate that and I am on the same page with you with respect to the panel and great quarter.
Glenn Tilton
Thank you, Dan.
Operator
Our next question comes from Gary Chase with Barclays.
Gary Chase – Barclays Capital
Hi good afternoon everybody. Just a quick formality for Kathryn, you mentioned that you (inaudible) I forgot the exact terminology used but should we assume from your comments that you're now in compliance with the second request, I know you wanted to be there by early July?
Kathryn Mikells
We're well on our way to being there, we've produced over two million pages of documents to-date and so we're well on our way to getting there working very closely with them.
Gary Chase – Barclays Capital
Okay. Do you have any (inaudible), is there a timeline for that and are you going to – is there going to be a release that you issued, so we're aware that you've at least made that step?
Kathryn Mikells
We're not anticipating doing that.
Gary Chase – Barclays Capital
Okay. And then the question I guess for John is I was interested in a comment that you guys put in your release in the prepared Q&A where you talked about ancillary revenue and bag fees being a little bit of a drag on RASM. And I was just curious if anything important has changed there as the new fees went into effect, and I understand the mathematical point that you were making there but I would note your RASM and revenue grew pretty substantially in the first quarter as well where it was the exact opposite, it was a contributor of almost a point, not a negative entry. So any color on whether or not there is just a little bit of resistance as those fees have gone up, that would be great.
John Tague
No, no, I think we're still enjoying very positive results including post the reason increases that you suggest. We merely want to be transparent of that component as we reported differently than some other carriers sometimes it's helpful, sometimes it isn't but it continues to be positive. I will point out that on our system at least only about 40% of our total bags worldwide are actually being assessed to fee.
So I think when we talk about scaling some of the work that we've already done, there continues to be the desire and the need for additional change in the revenue model. If we're going to achieve the kind of financial objectives that Glenn and Dan discussed earlier on the call. But we're very encouraged by what we're experiencing there currently.
Gary Chase – Barclays Capital
And on a per passenger basis you gave I think you said something like $14.50, can you tell us what that was in Q1, so we can just get a sense of how that's scaling at the new fees on into effect.
John Tague
Let me have somebody look through that, we'll rather get it back to you in a moment or follow-up with you.
Kathryn Mikells
Yes, I think it was just a little shy at 14.
John Tague
Right around 14, like I said.
Gary Chase – Barclays Capital
Okay, thank you.
Operator
Our next question comes from Kevin Christy with UBS. Please go ahead with your question.
Kevin Christy – UBS Research
Good afternoon. I wanted to ask – I think one of the things that's out there and investors are looking at aside from the capacity which I think you addressed nicely, perhaps better than one of your larger peers. But on the revenue streams, your numbers in an absolute sense are fantastic and you're beating your peers, but the comparisons are going to get tougher and it's going to be, the question is just what's a good number for Q3, or what's a normal number for Q3? Can you talk about that and how you're progressing against that, you say you're very encouraging in particularly in for July and August but RASM up 15% would be very encouraging in most environments but probably not big good outcome relative where you are today?
John Tague
Yes as you know we don't provide clarity on a forward-looking basis. We do however disclose it on a monthly basis. So we're not far of disclosing the July number and I think that will obviously provide a lot of help to everybody as to where we are directionally. We've always focused on the year over to obviously that becomes less relevant as we move forward. So I think we've experienced solid year over to growth but as you point out from, on an absolute place, well that's terrific and it may be a very strong competitively we still got a push for more in terms of peak of the cycle optimization and really establishing more financial performance headroom from a revenue model before we face the next down cycle.
And that's why we are so committed to the concepts of unbundling ancillary revenues, capacity discipline, those types of things because they're going to have to continue to change and improve our performance at the rate that they have going forward as we face the inevitable next down cycle. But I think you'll be pleased with the July number when we released it. I don't want to create any level of perceived concerned around isolating July and August.
I spent 26 years worrying about the fall in this business and then soon I'll spend my 27th year worrying about the winter. So as you know in September and October much of our revenue performance is based upon the actual within month looking activity and the quality of it. And we don't have terribly good visibility around that right now and that's not different this year than it ever has been.
Kevin Christy – UBS Research
But the trends in those type of bookments have been very strong, right? The (inaudible) thing.
John Tague
Yes corporate contracts, premium travel, those types of things that are normally the sources of strong performances are currently performing very well.
Kevin Christy – UBS Research
Okay. Thank you.
Operator
Our next question comes from Hunter Keay with Stifel Nicolaus.
Hunter Keay – Stifel Nicolaus
Thanks very much. I appreciate it. John, I want to follow-up on a comment you made earlier, I think you talked about a pretty high degree of Asian spill which is pretty impressive considering obviously the yield growth. So you're still spilling Asian traffic as a bit of rapid pace. So we maybe implied that there could be even more yield upside in the coming months? Are you going to try and reduce that spill or how should maybe interpret that?
John Tague
I never imagined that we'd have a 53%, we never had an improvement, and I never imagined anyone would ask me if there was more, either one of those things. So no, I think Asia continues to perform well and we're very encouraged by it. Look, United has always had a very good structure to Asia. The San Francisco hub is very, very helpful to us. The western most point, so and we've done business in China for a very, very long time as well as the substantial alliance strength of Star enjoys in the Pacific.
So there are a lot of things underlying our core performance as well as our improvement in Asia and we expect our performance to continue to be extremely competitive versus peers.
Hunter Keay – Stifel Nicolaus
Okay, that's great. Thanks for the color. And I guess, I don't know who – this is maybe better question for John or Glenn I'm not sure, but if you guys could spend a minute talking about the scope clause and the contract with this merger, your scope clause is at least as it pertains to regional lifts look a lot different than (inaudible), I think Continental is you guys obviously growing really aggressively in a regional side, give me a sort of a high level without getting into details here. How do you guys were strategically view, (inaudible) but how do you strategically view a pro forma Continental United post merged airline dealing with scope and sort of how you take about the regional lift fitting into the network?
Kathryn Mikells
Sure.
Glenn Tilton
Absolutely, John and I are going to push it over to Kathryn.
Hunter Keay – Stifel Nicolaus
Perfect. Thank you guys.
Kathryn Mikells
I think the two management themes are clearly aligned in this area. In advance of us announcing our mergers, Continental had offered to their pilots the Delta contract plus a dollar and a clearly part of what they were offering was seeing to get scope release as it related to regional adjustment and (inaudible) compared to what they operate with today.
Clearly we have a fair amount of flexibility and that is serving our network very well which is helping us to generate the kinds of profits that we're talking to you about today which is as we mentioned on the call is, what we have to do for all of our constituents. So I think the two management teams are very aligned on this issue and that was very clear even in advance of us announcing our merger, ultimately we've got to negotiate a new collective contract with our pilots and I think as Glenn mentioned in our prepared remarks we are off to a good start in terms of having negotiated a transition agreement with them already so that we can now take our time and attention and focus it on that single cost of our winning [ph] agreement.
Glenn Tilton
Yes, Hunter Doug McKeen is with us and can speak to any questions you might have relative to the transition agreement that Kathryn is absolutely right. Very timely, less than a day in which we announced results, that we clearly find it's encouraging as we do leave to be able to simultaneously announce the results. So its significantly work between the two teams, the Continental's and ours to arrive at joint transition agreement which we think is as I fit in my comments publicly about it shows really the value of good collaborative work.
Hunter Keay – Stifel Nicolaus
Great, I appreciate it guys. Thank you.
Kathryn Mikells
Thank you.
Operator
Our next question comes from Bill Greene of Morgan Stanley.
Bill Greene – Morgan Stanley
Yes, just a quick question, sure follow-ups on some of the revenue stuff. John, I'm curious what inning you think we are in ancillary revenue game [ph] for United stand on obviously post merger, you may be able to do things differently as a combined company but so where do you think you are now in that?
John Tague
Well I think it's a proven component of the revenue model in the US. So when you look at the degree of change we've undertaken, I think generally while there has been some friction obviously we have to pretty much declare it a (inaudible) success. It is working. I don't think we're very far along frankly and that might be surprising that people given where we are in terms of ancillary revenue generation. We've promised our board a billion dollars probably four or five years ago in ancillary revenue. I think there is a billion dollars in bags and we've only hit 400 of that.
So I think that this is the model of the future. I think there is tremendous upside going forward. And I think there is a lot of optional value added opportunities for our customers as well. So I'm not a baseball fan but Glenn tells me that equates to the third innings.
Bill Greene – Morgan Stanley
I'm just curious so that you mentioned a billion, where does the other 600 million come from?
John Tague
Now as I said you were only charging for 40% of our bags. Now we continue to raise per transaction rate but we also have slowly expanded applicability of bag fees. So I think when you look forward over the world over a multiple year period, it's my own view that over time you'll see bag fees probably become more or less ubiquitous but that's one man's opinion.
Bill Greene – Morgan Stanley
And I guess essentially what you're saying is this is sort of net of any negative impact on the customer behavior as they sort of adjust to these fees, because clearly there will be an adjustment on behavior?
John Tague
I think there has been a variety of use as to whether this is simply a fare increase and therefore a typically elasticity applies. I would argue that it's not a one for one in that regard. And at the end of the day, the industry has to be prepared to fly a level of capacity that allows with the compensatory revenue stream. Now the pass in which we may take to get there will vary, it could be unbundling, it could be other things, but the issue is we have to size the business around the customer base that's prepared to give us a general industry return on capital.
Glenn Tilton
I think it goes back to Dan McKenzie's original question.
Bill Greene – Morgan Stanley
Okay. Just one follow-up, just on CASM. You've had a period of sort of low CASM ex fuel inflation for some time now, but even by the comments and some of the guidance you're – it seems like that could be coming to end, does this suggest that I guess the period of structural costs declines is now over and we'll be going into a period of higher cost inflation?
Kathryn Mikells
When you look at the guidance that we've provided for the full-year and think it's pretty reflective of continued good cost control and that's absolutely what you should expect from us and what we intend to deliver.
Bill Greene – Morgan Stanley
But I think it's safe to say you had a period of structural removal right, we're getting out of 737s etcetera. I suspect there is lot of that left but maybe that's not.
John Tague
That structural removal came with a lot of reduced capacity too. So that didn't make our task that much easier.
Kathryn Mikells
Clearly as we've talked about previously on the call, to kind of take two approaches in terms of ongoing cost control. One is just daily locking and tackling, it is starting our planning processes earlier than we have ever started them before so that affectively we are continuously managing to our forward outlook. And it is also pushing against some of the structural points in the industry, right, commissions being a good example of that. So for us this is really a multiyear book of work that we are working with all of the officers and all of the leadership across the company and we feel very good about the results that we've delivered and we assure you it is not easy but we absolutely have every intention to continue to deliver very good cost control.
Bill Greene – Morgan Stanley
All right. Thanks for the time.
Operator
Our next question comes from Michael Linenberg with Deutsche Bank.
John Tague
Hi Michael.
Michael Linenberg – Deutsche Bank
Hi good afternoon everyone. Two questions here, I guess to start off Glenn we see the transition process agreement with the pilots, with the Continental United pilots. What does that really mean, what does that entail, I mean for example will that allow you and Continental and say (inaudible) maybe fully take advantage of what is afforded under the antitrust immunized [ph] Trans-Atlantic JV, I mean if you can just give us some additional color anything.
Glenn Tilton
I said we had Doug McKeen with us Michael and I'll give Doug the opportunity to speak some of the specifics relative to the agreement.
Michael Linenberg – Deutsche Bank
Okay, great.
Doug McKeen
As it relates to your direct question, really what happens is the collective agreements stay in place. And so there is really no modifications as it relates to what happens. The integrity of this agreement is really a structure that facilitates negotiating the new agreement facilitates implementation of a single seniority list and ultimately facilitates getting to a single collective agreement. And that's really how you think about it.
Kathryn Mikells
And then you had just mentioned as that held enable sort of our Atlantic joint venture. The issue that Continental had in our Atlantic joint venture was their inability to revenue share with another US carrier under their pilot scope agreement.
Michael Linenberg – Deutsche Bank
That's right.
Kathryn Mikells
When we closed the merger transactions, we become one carrier and so that point is muted [ph].
Michael Linenberg – Deutsche Bank
Okay, great. That's actually a very good thing. And then my second question is to John, when John gave us some of the year-over-year increases in premium both across the Atlantic and the Pacific, sort of numbers in plus 40% range, John. How does that, I know that's up from the low point in '09. How does that compare to '08, '07, I mean where are we on the premium cabin, I mean we've had an easy compare. How far along are we really in the recovery here?
John Tague
Well we've got a lot of variables going on as we begun to address the size of the cabin too.
Michael Linenberg – Deutsche Bank
Okay.
John Tague
So we're still down year over to, yes we're still seeing down year over two but.
Michael Linenberg – Deutsche Bank
Okay.
John Tague
Certainly a component piece of that, that's not capacity adjusted, that's absolute decline premium cabin bookings we have removed some capacity as well.
Michael Linenberg – Deutsche Bank
Okay, good. So it sounds like there is still more to go. All right, good. Great quarter guys.
Thank you.
Glenn Tilton
Thank you, Michael.
Kathryn Mikells
Thank you.
Operator
Our next question comes from Glenn Engel with Merrill Lynch. Please go ahead.
Glenn Engel – Merrill Lynch
Couple of questions please and good afternoon.
John Tague
Good afternoon.
Glenn Engel – Merrill Lynch
First question, you forecast your non ops [ph] to be 170 to 180 as compared to 160, 170 in the second quarter. If you're building cash why would that number be worse?
Kathryn Mikells
Simply we're not actually earning very much interest income on the cash that we're building and on a year, we're incurring incremental expense associated with some of the transactions that we've recently closed. So we closed those transactions at a higher interest rates than affectively some of the debt that we're paying off and so we're seeing a little bit of an increase in interest expense.
Glenn Engel – Merrill Lynch
So can go over the currency impact of second quarter and third, that with the dollar being much stronger versus the Euro that impacted both on traffic and on the yields?
Kathryn Mikells
In the second quarter internationally foreign exchange impact added a point and half to our year-over-year unit revenue increase. On the expense side, it really didn't have much of any impacts because on the expense side, what we saw affectively in terms of foreign exchange in London where we have kind of a bigger operation offset some of the other impacts on the expense side. So it really didn't have much of an impact on the expense side.
John Tague
And that point to have was on the internationals.
Kathryn Mikells
That's right.
Glenn Engel – Merrill Lynch
So I assume on the Asian side rather than the Europe side that you got the plus.
John Tague
That's correct.
Kathryn Mikells
Yes.
Glenn Engel – Merrill Lynch
And for the third quarter, would you – what would you expect the impact to be?
Kathryn Mikells
Yes we're not guiding to foreign exchange yet to the third quarter.
Glenn Engel – Merrill Lynch
Is it any reason weakest [ph] than in the second quarter? For factors would be.
Kathryn Mikells
It's too early in the quarter for us to know (inaudible).
Glenn Engel – Merrill Lynch
And what are you seeing in terms of traffic flows with especially in Europe with the currency being having changed?
John Tague
We haven't seen a big shift towards the sale, that we would characterize as material.
Glenn Engel – Merrill Lynch
Okay. Thank you.
John Tague
Thank you.
Operator
Our next question comes from Bob McAdoo with Avondale Partners.
Glenn Tilton
Hi Bob, how are you?
Bob McAdoo – Avondale Partners
My question has all been answered, thanks.
Glenn Tilton
Thanks Bob.
Operator
Our next question comes from James Higgins with Soleil Securities.
James Higgins – Soleil Securities
Hi, good afternoon everyone.
John Tague
Hi James.
James Higgins – Soleil Securities
Hi maybe my perception but it seems like all fair sales [ph] are coming a little bit earlier this year. Can you comment on how they look relative to previous years in terms of...
Kathryn Mikells
Can you do us a favor and can you speak up a little bit, we're having a hard time hearing your question?
James Higgins – Soleil Securities
The question was that it's my perception that's all fare sales [ph] are coming a little bit earlier than usual and I wondered if you could comment on how they looked previous to sales you used to see.
John Tague
I would say is I don't think they were materially earlier and they certainly are not unexpected.
James Higgins – Soleil Securities
Okay.
John Tague
I characterize that as an annual event.
James Higgins – Soleil Securities
All right, okay. Thank you very much.
Kathryn Mikells
Thank you.
John Tague
Thanks James.
Operator
Our next question comes from Helane Becker with Jesup & Lamont [ph].
Helane Becker – Jesup & Lamont
Thank you very much. Hi guys. I just (inaudible) ladies, I just have two questions, one is with respect to the Continental merger, are any of the airports in which you operate pushing back or are they all support of some of the things that you guys want to do and two, John you didn't really speak about revenue domestically, could you just talk to what you're seeing in Denver as an example versus what you're seeing in Chicago and San Francisco and some of your other domestic operations, thank you.
John Tague
So well and all the [ph] airports are all very supportive and hopeful that transaction will be accretive to them as well as to other constituent groups.
Kathryn Mikells
And Helane for the last couple of years, we've been working across all of our airports to co-locate as the result of Continental moving from SkyTeam into Star and that work is well underway. So the airports we're very supportive and working with us to accomplish that and we'll continue that good work.
Helane Becker – Jesup & Lamont
Okay.
John Tague
And like I said the domestic PRASM year-over-year was up 20 points on a consolidated basis and looking at that I don't think there is really any outliners they're all within say three to four points of each other depending upon the hub. So we continued to experience a Denver you mentioned specifically, I guess I'll give you that one was up on a mainline basis almost 15 points year-over-year. So a good performance in Denver.
Helane Becker – Jesup & Lamont
Great. Okay, thank you very much for your help. I appreciate it.
John Tague
Thank you.
Operator
Our next question comes from Bill Mastoris with Gleacher & Company.
Bill Mastoris – Broadpoint Gleacher
Thank you.
John Tague
Hi Bill.
Bill Mastoris – Broadpoint Gleacher
Really the best liquidities and I can recall in United's history and kind of the prospect for an improved revenue environment relatively benign fuel prices and looking forward to 2011 obligations. There is a shock that those obligations might not be redeemed certainly not by the olders. What would you do Kathy, with all that excess cash?
Kathryn Mikells
Having a little bit of a excess cash is not the worst problem in the world to deal with, but clearly one of our focuses is to simply delivering and that's something that we're looking at very closely and in fact earlier this month we prepaid a private transaction about $75 million worth. We're certainly potentially looking at doing some of the things that we can do before we run into creeping tender on some of our public debt obligations but we very much understand that during these good economic times, we clearly need to strengthen our balance sheet, it's good for shareholders and you can expect that that is going to be a focus of ours.
Bill Mastoris – Broadpoint Gleacher
Okay and then status of the Narrow-body order, is that going to be a decision that's going to be made before year-end or is that a post merger announcement?
Kathryn Mikells
You asked to speak up, we did not.
Bill Mastoris – Broadpoint Gleacher
I'm sorry, Narrow-body order all right, that you referred to a little bit earlier in the year.
Kathryn Mikells
Yes, so.
Bill Mastoris – Broadpoint Gleacher
I'm sorry go ahead.
Kathryn Mikells
No, that's okay, I got the question now. We clearly in terms of making incrementally very significantly decisions, we need to ductile that with our integration planning so that we can at least make those decisions on the basis of what's going to be right for the new company and the new company's sweep [ph] plan. So that probably will work that.
Bill Mastoris – Broadpoint Gleacher
Okay. Thank you very much.
Kathryn Mikells
Thank you.
Operator
Thank you ladies and gentlemen this concludes the analyst and investor portion of our call today. We will now take calls from the media. (Operator Instructions). One moment while we compile the question. Our first question comes from Mary Jane Credeur from Bloomberg News.
Mary Jane Credeur – Bloomberg News
Hi folks, you were talking a little more about some incremental $600 million in bag fees over the long-term. My click back and (inaudible) in math is assuming 30 bucks a pass that would be 20 million passengers paying that additional fee or are you trying to tell that something along the lines of a brand new fee like maybe for a roller board or something?
John Tague
I just barely know because I said that 40% of the bags that flow through the United system currently pay a fee. As you've seen growing applicability of these fee is not only domestically but really throughout the world by a number of other carriers in a number of other regions. It appears that the trend is firmly in place that overtime more and more bags will be assessed fees. If you were to take that to its end results, we're generating about that 350 to $400 million on 40% and it's simply extrapolation of that. Not a prediction but I think that if you look at the trend not only within the US but throughout the world it's clearly towards a paper bag type service.
Mary Jane Credeur – Bloomberg News
And will it be just more of a same.
Glenn Tilton
Mary Jane.
Mary Jane Credeur – Bloomberg News
Yes.
Glenn Tilton
Mary Jane, it goes back to answering Dan McKenzie's question. What opportunities just (inaudible) what opportunities are as yet unrealized towards the objective of getting to an acceptable rate of return for the industry.
Mary Jane Credeur – Bloomberg News
And would that been more along the lines of simply extending the current fees to more people or would it be new fees or higher fees?
John Tague
No, I'm going to speak to it on a forward-looking basis, Mary Jane I'm simply saying that this trend is well established throughout the world. If it were to become ubiquitous the area of opportunities in that order of magnitude.
Mary Jane Credeur – Bloomberg News
Thanks a lot.
Operator
(Operator Instructions). I have a question from John Freed with The Associated Press.
John Tague
Hey John.
Josh Freed – The Associated Press
Hi this is Josh Freed with the AP here. Hey, so I just wanted to follow-up I guess on the capacity issue. If you guys are out there staying with capacity discipline as you've said, that you're competitors aren't, how quickly does that become an issue especially I'm thinking in terms of Asia where you're so head to head with Delta?
John Tague
I don't know that we clearly fit quote, unquote [ph] with our competitors are not, there are different capacity plans across the industry.
Glenn Tilton
Were you asking a hypothetical, Josh?
Josh Freed – The Associated Press
No I guess, I'm just trying to get a feel for your level of concern about maybe your approach towards capacity if it turns on as it looks to be (inaudible) different from your competitors.
John Tague
So Josh (inaudible) was question appropriately during one of the TeleWise interviews this morning and if I recall request or response accurately, she said the entire industry is come to understand the financial benefit of matching, to demand and we're mindful of the historic penalty that the industry has paid when it has not and we remain encouraged that the industry not just United, has learned that lesson pretty well.
Josh Freed – The Associated Press
All right. That's what I have got. Thank you very much.
Kathryn Mikells
All right. Thank you.
Operator
I'm not showing any further questions in the queue. I'd like to turn it back over to Glenn for closing comments.
Glenn Tilton
Thanks very much. I appreciate all the questions both from the media and from the analysts and as I said and my close, this has been a very strong quarter for our company and it reflects all of the hard work across the company, but also those commitments that we've made to all of our constituents including our investors. Thanks very much.
Operator
Thank you, ladies and gentlemen. This concludes our call today. You may now disconnect.
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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
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