United Continental Holdings CEO Discusses Q3 2010 Results - Earnings Call Transcript

Executives

Nene Foxhall – EVP, Communications and Government Affairs

Tyler Reddien – Managing Director, IR

Jeff Smisek – President and CEO

Jim Compton – EVP and Chief Revenue Officer

Zane Rowe – EVP and CFO

Gerry Laderman – SVP, Finance and Treasurer

Analysts

Hunter Keay – Stifel Nicolaus

Jamie Baker – JP Morgan

Bill Greene – Morgan Stanley

Kevin Crissey – UBS

Gary Chase – Barclays Capital

Duane Pfennigwerth – Raymond James

Will Randall – Citigroup

Michael Linenberg – Deutsche Bank

Glenn Engle – Bank of America/Merrill Lynch

Josh Freed – Associated Press

Mary Jane Credeur – Bloomberg News

Doug Cameron – Dow Jones Newswires

Jenna Moreno – Houston Chronicle

United Continental Holdings, Inc. (UAUA) Q3 2010 Earnings Conference Call October 21, 2010 10:30 AM ET

Operator

Good morning and welcome to United Continental Holdings earnings conference call for the third quarter of 2010. I will be your conference facilitator today. Following the initial remarks from management, we will open the lines for questions.

(Operator Instructions)

This call is being recorded and is copyrighted. Please note that no portion of the call may be recorded, transcribed or rebroadcast without the company’s permission. Your participation implies 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 hosts for today’s call Nene Foxhall and Tyler Reddien. Please go ahead.

Nene Foxhall

Good morning everyone and welcome to United Continental Holdings third quarter 2010 earnings conference call. Joining us here in Chicago to discuss our results are United Continental Holdings’ President and Chief Executive Officer Jeff Smisek; Executive Vice President and Chief Revenue Officer Jim Compton; Executive Vice President and Chief Financial Officer Zane Rowe; Executive Vice President and Chief Operations Officer Pete McDonald; and Senior Vice President of Finance and Treasurer Gerry Laderman.

On October 1, 2010 Continental Airlines merged with a wholly owned subsidiary of UAL Corporation and along with United Airlines became a subsidiary of UAL Corporation. At the closing of the merger UAL Corporation changed its name to United Continental Holdings Inc. As UAL and Continental were separate companies and not affiliated through the end of the third quarter, we will be discussing the two companies’ results independently as well as a preliminary estimate of pro forma combined results.

Jeff will begin with some overview comments after which Jim will review both companies’ capacity and revenue results. Zane will follow with a discussion of both companies’ cost structure and balance sheet. At that point we will open the call for questions.

Analyst questions will follow the executive comments and then we will take questions from the media. We would appreciate it if you would limit your questions to one with one follow-up.

With that I’ll turn it over to Tyler.

Tyler Reddien

Thank you, Nene. Our earnings release and separate investor update were issued this morning and are available on our website at ir.unitedcontinentalholdings.com. As Nene mentioned, UAL and Continental were separate companies during the third quarter, so we will be discussing the two companies’ results independently. A preliminary pro forma estimate of the financial results for the combined company including estimates of purchase accounting has been provided in our investor update issued this morning.

In addition, we have provided preliminary pro forma quarterly financial statements for the combined company based on the financial information provided in the form S-4 filed with the SEC effective August 18th.

These preliminary financial statements provide a view of the combined company’s financial performance as if the merger had been completed as of January 1, 2009. Let me point out that information in this morning’s earnings 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, Forms 10-Q and other reports filed with the SEC by both United Continental Holdings and Continental Airlines 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, a copy of which is available on our website at www.unitedcontinentalholdings.com.

Unless otherwise noted, as we walk you through our numbers for the quarter, we will be excluding special charges, certain other accounting items, merger related expenses and fuel hedge, non-cash, net mark-to-market gains and losses. These items are detailed in our earnings release.

And now I’d like to turn the call over to Jeff Smisek, President and CEO of United Continental Holdings.

Jeff Smisek

Thanks, Tyler and Nene, and good morning and thank you all for joining us on this, the first earnings call for the new United. This is an exciting time for the company as we integrate Continental and United to create the world’s leading airlines. I like to thank all of my united and Continental coworkers for delivering solid operational and financial performance this quarter.

My coworkers at the new United share my commitment to delivering great customer service and clean, safe and reliable air transportation. Their commitment is evident in our results, and I thank them all for their hard work.

Pete McDonald, our Chief Operations Officer, is a very experienced hand and he has assembled a superb team from both United and Continental to run our operations going forward.

Today, we reported net income for United of $473 million for the third quarter or $2.12 per diluted share. This is more than a half billion dollar improvement over the same period last year.

For Continental, we reported net income of $367 million for the quarter or $2.24 per diluted share, a $365 million improvement year-over-year.

We continue to see the benefits of capacity discipline as well as the revenue generated by offering a global network enhanced by Star Alliance. The gradual improvement in the economic environment has also helped drive improved yields.

While we still see good demand, particularly as business travelers are coming back, we are mindful that general macroeconomic trends remain uncertain and fuel prices have increased considerably lately.

Against this backdrop of factors outside our control, we remain focused on what we can control: running a clean, safe and reliable airline, working together as a team so we can provide great customer service, successfully integrating Continental and United, improving our revenue and maintaining a competitive cost structure.

We’ve had a good operation in the third quarter. Continental had a mainline completion factor of 99.8% while United had 99%; that represented United’s best quarter in six years. During the quarter, Continental and United coworkers earned $20 million in incentive program payouts for on time performance and at United for customer satisfaction.

As we integrate the two carriers, we won’t lose sight of the day-to-day basics of running our airline.

Having closed the merger of Continental and United on October 1^st, we’re now beginning the integration process. We expect to deliver between $1 billion and $1.2 billion of annual net synergies by 2013 and are focused on harvesting approximately 25% of those synergies next year. While we’ve only had a few weeks to share full information since we closed the merger, what we are seeing excites our team and we have many opportunities as we work together.

Over the course of the next few months, you’ll start to see us bring home some quick wins. We are beginning our schedule optimization to use the combined fleet to better match supply and demand and take advantage of the opportunities provided by the scale of the combined company. We have begun the process of optimizing the network and we’ve already made several announcements about changes to our flying. We announced a new service to Mexico adding four new routes to Cancun and León, Guanajuato and boosted service to Mexico City from United’s hubs solidifying our industry-leading service from the US to Mexico.

We are adjusting the schedules of our inter-hub capacity improving time of day coverage. In addition, United Express will begin service with 70 seat regional jets for flights out of our Cleveland, Newark and Houston hubs that are currently served by 50-seat regional jets.

The introduction of the 70-seat aircraft to these markets not only allows us to better capture demand, it offers customers a great product and the choice of a first class cabin.

I want to be clear that at the new United, we remain committed to capacity discipline and currently expect the consolidated capacity for the combined company will be up just 1% to 2% year-over-year in 2011.

We will not grow for growth’s sake but only if we can maximize our profitability by doing so. We’re analyzing many aspects of the combined operation including aircraft interior configurations and the appropriate array of products and services across the combined company.

We expect to complete this analysis in the coming months and we will revise our capacity guidance as appropriate for any effects our decisions may have.

Both companies expanded ancillary revenues again in the third quarter with United’s up 15.5% and Continental’s up almost 21% year-over-year. United generated more than $15 of ancillary revenues per passenger in the quarter and Continental generated almost $14 per passenger.

We expect to continue ancillary revenue growth as we expand choices for our customers. For instance last week we introduced an enhanced meal offering for purchase in the economy cabin on select Continental flights. Providing customers with value added products and services for which they are willing to pay not only benefit the company’s bottom line, it creates better and more tailored experiences for our customers improving their satisfaction.

We continue to make great progress on our joint venture strategy. The department of transportation tentatively approved antitrust immunity for us and our partner A&A, which when final will allow our joint venture across the Pacific. This will be in addition to approved antitrust immunity with Air Canada and Lufthansa, which allows our joint venture with them along the Atlantic. We also entered into a memorandum of understanding with Air Canada to establish a trans-border joint venture for flights between the US and Canada. These joint ventures will provide customers with a greater selection of routes, reduced travel times and enhanced service offerings and will help us increase the profitability of our international networks.

Beyond our international joint ventures we continue to broaden our network through Star Alliance. This year two new members have joined Star, Tam in Brazil and Aegean in Greece and Star announced that it expects Ethiopian Airlines to join Star Alliance in 2011.

Our alliance partnerships are important to our success, providing access to the destinations that we do not directly serve and great benefits to our customers through frequent flyer reciprocity.

In the 20 largest premium travel airports worldwide, Star has premium traffic share leadership in 16. Star carries 625 million passengers a year, 250 million more than the next largest alliance. The combination of the new United network, which is the best single carrier network in the world with the power of Star Alliance and our existing and planned antitrust immunized joint ventures across the Atlantic, Pacific and Canadian border, creates and unparalleled and non-reproducible platform, from which to compete for premium customers.

We’re also making progress towards achieving a single operating certificate. We’re well along in our discussions with the FAA regarding our single operating certificate transition plan. Based on those discussions and our own internal work, we currently expect to achieve our single operating certificate by the end of 2011, well ahead of our initial schedule.

We also continue to have good discussions with our labor unions. We want to reach agreements that are fair to our coworkers and fair to the company. I have set a goal to have all of our joint collective bargaining agreements in place by the time we receive our single operating certificate. As negotiations are best left face to face at the bargaining table, that’s the only comment I intend to make on our labor negotiations.

With that I’ll turn the call over to Jim and Zane to walk through the revenue environment and financial results.

Jim Compton

Thanks Jeff. I join Jeff in thanking our coworkers from both United and Continental for running a very good operation. Both carriers achieved excellent on time performance and excellent completion factor. There were many potential distractions during the quarter and I commend the teams for focusing on running a smooth operation.

Moving on to our third quarter revenue results; United and Continental operated as separate companies during the third quarter. And since United and Continental had different accounting classifications for passenger revenue, the RASM results we are presenting for each carrier are based on each carrier’s individual historical presentation.

On a year-over-year basis United’s mainline RASM was up 18.9% and Continental’s mainline RASM was up 20.8%. RASM results for both carriers were driven primarily by strength in mainline yields. Both carriers also reported strong improvement in regional RASM for the third quarter, with United’s regional RASM up 11.1% and Continental’s regional RASM up 15.8% year-over-year. Consolidated RASM was up 183% for United and 19.8% for Continental.

Although not all of our competitors have reported we are confident that third quarter consolidated year-over-year RASM growth for both United and Continental will be among the best in the industry.

Both United and Continental experienced strength in RASM throughout all regions, primarily due to strength in yields with some load factor improvement in certain regions.

Trans-Atlantic business first RASM for Continental was up 35.6% year-over-year due to strong yields and higher load factors and United’s Trans-Atlantic premium RASM also performed well during the quarter, up 18.6%. Both carriers’ Trans-Atlantic coach RASM experienced double digit increases, greater than 15%.

Both companies continued to see substantial improvement in Trans-Pacific yields as well as higher load factors in both the front and back cabins. China continues to be on fire as both United and Continental experienced RASM increases in this region of about 50% versus the third quarter last year due to both higher yields and load factors.

Japan is doing quite well too. Our Japan RASM including Japan Trans-Pacific routes was up 27% for Continental and 33% for United year-over-year primarily due to higher yields.

Both companies are also seeing a nice rebound in Deep South America, which helped drive strong third quarter year over yield improvement in the Latin Region for both carriers. In the third quarter, United and Continental had about 2% of its consolidated capacity allocated to Mexico and we added eight daily flights to six destinations that will begin in the fourth quarter to backfill the displacement caused by Mexicana seizing operations. This is a well-timed adjustment and we’ve seen an uptick in Mexico yield as that region adjusts to new competitive dynamics.

We remain cautiously optimistic about revenue trends heading into the fourth quarter. We think the trends that we’ve experienced this year are in line with our belief that this is going to be a long slow recovery. Early indications from our corporate account indicate that they agree with this characterization. We are seeing some recovery in pairs but the number of corporate travelers, it’s still lower than we’d like it to be. However, several recent surveys indicate that corporate travel volumes will increase in 2011.

Continental’s spool up in Star Alliance is continuing to go very well. Continental is already connecting more than twice as many passengers with Star partners at international gateways than it did with its former alliance partners during the peak of its alliance with them.

On the revenue front, Star Alliance adds tremendous value to Continental. On a year-over-year basis, Continental’s third quarter total passenger revenue was up 20.6% but its total partner revenue was up about 83% due primarily to its membership in Star Alliance and the implementation of many aspects of its Trans-Atlantic joint venture with United, Lufthansa and Air Canada.

Last quarter we shared that United and Continental had implemented many aspects of its Trans-Atlantic JV but had not yet implemented the revenue share structure. We currently expect to implement the revenue share structure in the fourth quarter, which will be retroactive to January 1, 2010.

Based on our strong Trans-Atlantic revenue results this year, we expect that we’ll have a liability for revenue sharing payments to our joint venture partners. We estimate that these payments for the combined company will be approximately $100 million for the nine months ended September 30, 2010 and will be accounted for as other operating expense.

Now turning to the outlook for October RASM, when we release RASM results in November, we will be reporting October RASM on an individual carrier basis based on the respective historical presentation for each carrier.

Once we have completed our review of purchase accounting adjustments and income statement classifications, we will publish historical conformed monthly year-over-year percent changes in RASM.

Based on our current outlook and given that we still have over a week left in the month of October for things to change, we estimate United’s consolidated RASM will be up about 12% with mainline RASM up about 14% year-over-year.

We estimate Continental’s October consolidated RASM will be up about 16% with mainline RASM up about 17% year-over-year. Again, these numbers are preliminary estimates based on the data we have for October thus far.

With that I’ll turn the call over to Zane.

Zane Rowe

Thanks, Jim. I just want to thank both the United and Continental teams for all of their hard work in helping deliver strong operating and financial results for the quarter. Both airlines exhibit good cost control in the third quarter and while we still have work to do, we are well positioned on the path to our goal of sustained profitability.

United and Continental faced cost pressure in the quarter due to higher fuel prices year-over-year and higher revenue related costs such as commissions and credit card fees.

I’m going to address each carrier separately. On a standalone basis, United’s consolidated operating expenses increased about 11% in the third quarter, of which approximately half was due to an increase in fuel expense. Mainline fuel expense increased $178 million largely due to a 15% increase in jet fuel prices compared to the third quarter of 2009.

Holding fuel rate and profit sharing constant, United’s third quarter mainline CASM increased 2.5% year-over-year and its consolidated CASM increased 2.4%.

During the quarter, United faced increased inflationary pressure on revenue related costs and rents and lending fees. These were partially offset by improvements in productivity.

Continental’s consolidated operating expenses increased 8% in the third quarter, almost half of which was due to an increase in fuel price year-over-year.

Holding fuel rate and profit sharing constant, Continental’s third quarter mainline CASM increased 3.1% year-over-year and consolidated increased 2.7%. Similar to United’s third quarter results, unit costs for Continental were also negatively impacted by increased revenue related expenses. While both companies are experiencing some cost pressure, we continue to look for efficiencies and cost savings in every area of the business.

Both companies generated significant margin improvements in the third quarter. United’s pretax margin for the quarter was 8.8%, a more than 10-point improvement from 2009. Continental’s pretax margin for the third quarter was 9.3%. While these results are good, we’re heading into a seasonally weaker period and oil prices have increased, so the next couple of quarters will be more challenging.

Moving onto the balance sheet, United and Continental ended the third quarter with a combined unrestricted cash and short-term investment balance of $9.1 billion. During the quarter, United and Continental generated combined operating cash flow of $750 million. Combined capital expenditures were $186 million.

The companies made $295 million in scheduled debt and lease payments in the quarter. Additionally, United prepaid $140 million of debt in the quarter. Continental issued $800 million of 6.75% senior secured notes during the quarter and used approximately $350 million of the proceed to prepay a secured term loan facility.

During the third quarter, Continental contributed $79 million to its defined benefit pension plan bringing year-to-date contribution through the third quarter to $153 million. In addition, United and Continental contributed $61 million this quarter to their 401(k) plan, totaling over a $190 million in contributions year-to-date.

The combined company expects to make approximately $540 million of scheduled debt payments in the fourth quarter and has combined capital expenditures of about $260 million for the quarter. We will be conservative in managing our liquidity levels as we work to integrate the two carriers.

We will use our cash wisely whether it’s continuing to invest in the business or taking opportunities to manage the balance sheet.

Currently we expect to end the year with a combined unrestricted cash and short-term investment balance of approximately $8.4 billion.

Our combined fleet is one of the most fuel efficient in the industry and we’re working to optimize the new United fleet in order to have the right aircraft in the right markets to meet demand. We ended the third quarter with a combined fleet of 708 mainline aircrafts in service. During the fourth quarter, we will remove one Boeing 747 that had been servicing as an operational spare and add two Boeing 737-900 ERs to the fleet.

On the regional side, we ended the third quarter with a combined 547 regional aircrafts flown on our behalf under capacity purchase agreements.

During the fourth quarter, we plan to add five Q400 aircrafts to the fleet.

In the fourth quarter, we expect the combined company’s consolidated and mainline capacity to increase between 3% and 4% year-over-year. The primary driver is the restoration of service, mostly international that was temporarily suspended last year during the depths of the recession.

Jet fuel prices have increased more than 11% since mid-August. In the fourth quarter we expect our consolidated fuel price to be $2.40 per gallon for the combined company, an increase of nearly 17% from last year.

We’ve hedged approximately 74% of fourth quarter fuel needs and about 44% for the first half of 2011. We continue to hedge through a mixture of calls, swaps and collars in order to mitigate fuel price volatility. You can find details of our hedges in our investor update published today. Our fuel efficient aircraft and operating procedures continue to be our most effective hedge against rising fuel prices.

As Jeff mentioned, we’re hard at work to capture the $1 billion to $1.2 billion in annual synergies. Working together over the past two years as alliance and joint venture partners, Continental and United have built a solid foundation for driving a successful integration and achieving our synergy targets.

Overall for the fourth quarter, we expect consolidated unit cost excluding fuel and profit sharing expense for the combined company to be up between 0.5% and 1.5% year-over-year before the impact of the Trans-Atlantic JV true up that Jim spoke of earlier. This adds about 2 points of year-over-year increase for the quarter. In the future, adjustments tied to our performance in the JV will be recorded in passenger revenue.

This year-over-year guidance is based on the preliminary pro forma financials that were produced for the S-4 filed in August and assumes purchase accounting as effective as of January 1, 2009. In mid-November, we will provide a final presentation of the October 1, 2010 purchase accounting valuation and line item reclassification for pro forma quarterly results for 2009 and the first nine months of 2010. At that time, we will also update our guidance to reflect the final valuation and presentation.

In conclusion, oil prices have risen and continue to be volatile and the pace of the global economic recovery is uncertain. However, we’re bringing together two of the world’s best airlines and are committed to improving our cost performance and increasing our revenue.

Our entire team is working together to run a clean, safe and reliable operation and achieve our goal of sustained profitability. This quarter’s results demonstrate another step in the right direction.

With that I’ll turn the call back over to Jeff.

Jeff Smisek

Thanks, Zane. We are just beginning to unlock the full potential of the new United. I spent a lot of time traveling around the system over the past few weeks and I can tell you my coworkers at both Continental and United are very enthusiastic about this merger and what we can accomplish by working together. We are committed to becoming the airline customers want to fly, coworkers want to work for and shareholders want to own. To do that, we must deliver sustained profitability across the business cycle. We have the right people, the right network, the right fleet and the right products and services and working together, we will create the world’s leading airline.

With that I’ll turn it over to Tyler to open it up for questions.

Tyler Reddien

Thank you, Jeff. First we will take questions from the analyst community, then we’ll take questions from the media. Please limit yourself to one question and if needed one follow-up question. Operator, please describe the procedure to ask a question.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Hunter Keay of Stifel Nicolaus.

Hunter Keay – Stifel Nicolaus

Zane, a couple of follow-ups for you on the cash deployment. I guess as you move through the integration process in 2011, what are going to be your priorities between taking out say some secured stuff and the converts? And when you say you’re going to be conservative with cash during the integration, are you thinking about maybe staying above a certain target metric for cash?

Zane Rowe

Yes, there are obviously a number of metrics that we are closely monitoring and continue to evaluate our cash position through the integration. I think we’ve always been thoughtful and conservative as it relates to our cash deployment as well as how well we manage the balance sheet. Gerry has numerous ideas, I’ll let him weigh in on some of the thoughts he has but we’re being thoughtful through this business cycle and the integration and also looking at the maturities that we have.

Gerry Laderman

Hunter, this is Gerry. It’s a little too early to talk about a cash target. As Zane said, between the integration investments we’d like to make in the business and managing the debt maturities we see over the next few years, we will maintain a relatively conservative view on cash.

Hunter Keay – Stifel Nicolaus

This is a question, a similar question I asked US Airways yesterday. I’d love to hear your opinion now given your size and sort of market leadership. And I’m not asking you whether or not you’re going to do international first bag fee but I guess as you think about sort of the ancillary revenue issues, which, Jeff, you touched on in your opening comments, how should we think about that? As I said, given your size, do you think you’re going to be in a position to sort of spearhead maybe unpopular but very profitable initiatives like that going forward?

Jeff Smisek

I won’t go down that trail because the lawyers will spank me, I guarantee you that. But what I will tell you is that we have been successful at Continental and United has been successful at United in ancillary revenues. We think they’re actually good for customers because they let customers pick and pay for the product attributes if they want to consume and not pick and not pay for product attributes they don’t want to consume. So you will see us continue to grow our ancillary revenues.

Operator

Your next question comes from the line of Jamie Baker.

Jamie Baker – JP Morgan

Jeff, I guess you may have had some time to think about it. Hoping you would also take a stab at what discipline actually means to you and the new team. And one reason I want to ask the question is we’ve gotten some good answers from your peers but I have yet to hear a management team address return on invested capital as one of the defining parameters. Any thoughts on that?

Jeff Smisek

As we said, we are a demand driven business and I assume by discipline, you don’t mean the discipline I used to get from my dad but capacity discipline. And we’re going to be responsive to demand but we’re going to grow only where we can make money doing it and we won’t dilute ourselves in that growth. I think it’s very important for this industry and for the new United to be profitable and to provide an appropriate return on the capitals invested in the business and we’re going to be very focused on that.

Jamie Baker – JP Morgan

You spoke to 70 seat jets before which, of course, the predecessor company had considerable flexibility in operating whereas your prior employer did not. When we think about wage differences between pilots, a lot of that is easy to work through, I know you don’t want to comment on labor. But I’m struggling to find an easy fix on scope. I assume that none of the regional contracts that you as a prior Continental employee inherited have any change of control provisions that would offer you any early outs if scope negotiations don’t go smoothly, is that correct?

Jeff Smisek

At the new United we have contracts with many regional providers and those contracts are binding on us. But in any event we’re able at the new United to offer 70 seat regional jets as we discussed we’ll be flying them out of the old Continental – the legacy Continental hubs, and that’s a great product that we’re going to be offering as a result of this merger.

Jamie Baker – JP Morgan

And just as a customer, when can we expect some decisions to be made on stuff like two class versus three class global services, etc.?

Jeff Smisek

We’re working through that right now. There was a lot of data we couldn’t get to before October 1st because the lawyers wouldn’t let us see it. Now we get to see it and we’re working our way through that and when we’re ready to announce something, we’ll do so.

Operator

Your next question comes from the line of Bill Greene.

Bill Greene – Morgan Stanley

I’m curious what you think about the competitive landscape. Small carriers in this industry have had an ability to affect pricing. Do you think we’ve had enough M&A to make this a more sort of sustainable and investable business or do you think there’s more to go to get to that point?

Jeff Smisek

I don’t know the answer to that, I really don’t know the answer to that question. I think that we’ve always been price competitive with low cost carriers. We’ll continue to be price competitive with them. Whether there’ll be additional consolidation in this business, whether there will be additional international consolidation, clearly there have been a number of transactions and there may be more coming down the pipe, but there’s no way for me to know that.

Bill Greene – Morgan Stanley

If we look at your synergy estimates, as Delta went through the process they got more. Your process is already kind of going faster here, but you’ve not sort of updated those numbers. Is it reasonable to think that as you kind of get into the guts here, there’ll be more opportunities than you expect, you’re being conservative or how do I think about how that sort of evolves?

Jeff Smisek

We’re very comfortable with the numbers that we published and I’ll leave it at that.

Bill Greene – Morgan Stanley

So, no? There’s no opportunity for more or –

Jeff Smisek

I didn’t say that. I just said I don’t want to comment on that. You know us, we go back a long way and we tend to underpromise and overdeliver as a management team. Clearly we’ll want to try to exceed those numbers but we’re very comfortable with the numbers that we have got.

Zane Rowe

This is Zane. We’re also obviously focused on running the underlying business and there’s always that balance between what you call a synergy due to the merger and just managing the underlying business of the combination. So we’re mindful of that and obviously, our focus is on results here.

Operator

Your next question comes from the line of Kevin Crissey of UBS.

Kevin Crissey – UBS

Some of the RASM commentary, I think, it has been surprising for me and I think to others as well in terms of the progression from October to November to December. Not being maybe as steep of a falloff as we would have expected in year-over-year, the comps look more difficult apparently than they really are, maybe it’s the year-over-two-year issue or something like that. Can you speak to how United and Continental’s RASM might progress, all things normal, if you will?

Jim Compton

It’s Jim. We’ll only talk about October, which I did, I wouldn’t talk about the progression. But just to remind you about some of the past when you mentioned two years ago, some of the early falloff with the financial markets was clearly to New York to London and things like that. So different geographic regions had different things happening to it particularly on a year-over two-year basis. But you are right, last year as recovery began, it began to take some hold in the fourth quarter. There are some more difficult comps as you go through the fourth quarter.

Kevin Crissey – UBS

Have you guys been able to identify the Delta $1.5 billion synergies? I mean you’re asking investors to believe in these net synergy numbers and I guess the frustrating thing is is that net from what starting point, which you clearly probably don’t want to provide for lots of different competitive reasons. So we’re trying to figure out – we can’t necessarily identify your $1.5 billion, we’re trying to figure out how we’ll identify your $1.2 billion or more if you get that. And then, would you be willing if you’re so confident in it to tie management pay to its achievement?

Jeff Smisek

This is Jeff, a couple of things. We’re very comfortable with the synergy numbers. We are going to be as transparent as possible with the Street, with our own employees on the achievement of those numbers. Fundamentally, it’s all about the results. And in answer to your question, yes, we’re more than willing to tie management’s incentive achievement of these synergies; in fact, we’re going to do so.

Kevin Crissey – UBS

Your net CapEx, I was kind of hoping that that would go away. It’s a nice way to keep CapEx looking low, but any chance to go-forward basis we get a gross CapEx number?

Zane Rowe

We’ve actually debated this internally. We like the way we presented today, and I think we’ll continue doing this for some period of time here. I thought you were going to criticize the actually amounts of net CapEx.

Kevin Crissey – UBS

No, I mean, who cares what the net amount is, if you can get off financing to a gazillion dollars. I mean that’s the problem with it, right?

Zane Rowe

I mean that’s exactly right I mean. We obviously even gave you the net amount in the forecast and then, we’re transparent on the delivery. So we’ll let you assume the financing portion.

Operator

Your next question comes from the line of Gary Chase.