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Executives

Nene Foxhall - EVP, Communications and Government Affairs

Tyler Reddien - IR

Jeff Smisek - President and CEO

Jim Compton - EVP and CRO

Zane Rowe - EVP and CFO

Gerry Laderman - SVP of Finance and Treasurer

Analysts

Michael Linenberg - Deutsche Bank

Jamie Baker - JPMorgan

Bill Greene - Morgan Stanley

Gary Chase - Barclays Capital

Hunter Keay - Wolfe Trahan

Kevin Crissey - UBS

Duane Pfennigwerth - Evercore Partners

Glenn Engel - Bank of America Merrill Lynch

Helane Becker - Dahlman Rose

Josh Freed - The Associated Press

Mary Jane Credeur - Bloomberg News

Jenna Moreno - Houston Chronicle

Jeremy Lemer - Financial Times

United Continental Holdings Inc. (UAL) Q2 2011 Earnings Call July 21, 2011 10:30 AM ET

Operator

Good morning and welcome to the United Continental Holdings earnings conference call for the second quarter of 2011. (Operator Instructions) I would now like to turn the presentation over to your hosts for today's call Nene Foxhall and Tyler Reddien.

Nene Foxhall

Thank you, Mitchell. Good morning everyone and welcome to United Continental Holdings second quarter 2011 earnings conference call. Joining us here in Chicago to discuss our results our President and CEO, Jeff Smisek; Executive Vice President and Chief Revenue Officer, Jim Compton; Executive Vice President and CFO, Zane Rowe; and Senior Vice President of Finance and Treasurer, Gerry Laderman.

Jeff will begin with some overview comments after which Jim will review capacity and revenue results. Zane will follow with a discussion of our cost structure and the balance sheet. Jeff will make a few closing remarks and then we will open the call for questions. First from analyst and then from the media. We would appreciate it if you would limit yourself to one question and 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. Let me points out that information in this morning's earnings press release, and investors update 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-K and other reports filed with the SEC by United Continental Holdings, United Airlines 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. As with last quarter we will present our second quarter 2011 results on a combined basis for United Continental Holdings. All prior period results discussed today including comparisons against prior periods will be based on unaudited pro-forma results for the combined company and include estimates of the impact of purchase accounting. For additional details please refer to investor updates issued during the fourth quarter of 2010 and the first and second quarter of 2011, which are also available on our website.

Unless otherwise noted, as we walking through the numbers for the quarter, we will be excluding special items, merger-related expenses, and our 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.

Jeff Smisek

Thanks, Tyler and Nene, and good morning and thank you all for joining us. I'd like to thank my co-workers for delivering solid operational and financial performance this quarter. Within a period of transition as we worked to integrate our two subsidiaries and my coworkers continue there professional focus on delivering clean, safe and reliable air transportation for our customers.

Today we reported a net profit of $577 million for the second quarter or $1.49 per diluted share delivering a 6% pre-tax margin for the quarter. Our operational results during the second quarter were good, despite challenging summer storms in the mid-west in June. Both subsidiaries carries completed more than 98.5% of all flight during the quarter.

Based on a year-to-date profit and our solid operational performance, we have accrued $90 million in profit sharing and had paid $23 million in on-time performance bonuses to our coworkers so far of this year, while the finance profit-sharing amount will be based on full year results. We look forward to being able to share the company's success with our coworkers. Although fuel prices moderated somewhat during the quarter. They've remained very high and volatile. We saw our second quarter fuel expense excluding the impact of hedges rise $1.1 billion compare to the same period of 2010.

In addition, we are operating in a tepid economic environment in the U.S. with significant uncertainty here and abroad. We have responded appropriately raising fares in the face of high fuel cost and reducing our planned capacity to reflect the challenging environment that we face. At the new United, we are focused on achieving sustained and sufficient profitability for the benefit of all of our stakeholders. To do this we must create economical value generating returns in excess of our cost of capital across the business cycle.

This quarter's results demonstrate our commitment to this important goal. As we continue to integrate our two great carriers and realize the synergies from our merger, we will well-positioned to deliver on the significant potential of the new United. We are on track with the merger integration made significant progress this quarter. We've aligned our major polices and procedures across the travel experience and have enhanced our technology to create a more seamless experience between the two subsidiary carriers. Our kiosks now serve both carriers passengers.

We now have a single area for checking for either subsidiary at 275 of our more than 370 airports, and we've have painted 601 aircraft in our new livery. Since the closing of our merger, we've been working hard to reach the joint collective bargaining agreements with our labor groups. These are complex negotiations about complex agreements. And we are actively engaged in discussions with representatives from several of our labor groups.

Although. I've made it clear to my own negotiators that I would like to reach joint collective bargaining agreements promptly. We're not going to repeat the mistakes of the past and create an unsustainable cost structure that's not good for anyone. Any collective bargaining agreement must be fair to my co-workers and fair to the company. I originally said that admittedly aggressive goal of reaching joint agreements with all of our representative workgroups by yearend. I don't think we'll achieve that goal, given the complexities of merging mature long standing contracts as well as factors outside of our control.

Although some of our workgroups now have a common union, others still don't, and representation election will still need to be held for them. We've experienced recent progress as our flight attendants completed their representation election. And the representation election for our fleet service workgroups is now underway. Just as we have been working with the representatives of our pilots and our tech ops groups, we will work with a newly elected representatives of our flight attendants and fleet service group, to reach collective bargaining agreements as promptly as practical.

Integrating our two subsidiaries is not the goal of our merger. We're building the world's leading airline. The airline people want to fly, co-workers want to work for, and investors want to invest. We planned to be the airline of choice for the smart business traveler. And beginning a series of significant product enhancements designed to improve our passengers' experience. We were investing in the on-board product across the domestic and international fleet.

As you know, we've already announced that we're bringing our successful economy plus product to the continental fleet beginning next year. We're also taking delivery next year of 19 Boeing 737-900ER aircraft, which will be equipped with our very popular DirecTV service as well as the new Boeing Sky interior.

Our domestic enhancements are not limited to the mainline fleet, as we are adding first class and Economy Plus seating to our Q400 regional aircraft significantly expanding the available premium seating options on those aircraft. On the international front, next year we'll take delivery of six of the 50 Boeing 787 Dreamliner we have on order. We're also working to complete the reconfiguration of our international fleet premium capitals, which will have flat-bed Seats in first and business class. We currently have flat-bed seats on 123 of our aircraft more than any other U.S carriers.

We understand how important any other connectivity options will be coming to customers, and we've signed a letter of intent to install Ka-band Wi-Fi on our aircraft and have DirectTV. We're currently developing a strategy to deploy Wi-Fi across the rest of our mainline fleet, providing additional insight entertainment options and partnership opportunities for the company.

Our in-flight product is not the only part of the experience that we're improving. We'll be launching our re-branded lounge program, the United Club in the third quarter and have plans to refurbish and upgrade lounges across the system.

In June, we're aligned the United Club beverage and snack offerings, world wide. We are investing in our facilities including building a terminal for our regional aircraft in Houston, and upgrading baggage system at our hubs to improve bag service for our customers.

Later this year, we will introduce our new loyalty program under the name Mileage Plus. The program features for our combined loyalty program, will be effective for the 2012 program year. Earlier this week, we launched our new co-branded credit card offerings, the explore card from Chase which provides customers with valued features and benefits. We'll also be making a number of other loyalty related announcements in the coming months.

For now, our job is to deliver on the significant potential of our two great companies as we combine them. Mergers in the airline business are extremely complex and time consuming and we're only part way down a long and winding road. However, what we've experienced so far is very exciting and I'm pleased with our progress to-date.

As we continue to build the worlds leading airline, we won't lose sight of our daily mission, running a clean safe and reliable airline and generating sustained and sufficient profitability.

With that I'll turn the call over to the Jim and Zane to review the revenue environment and financial results.

Jim Compton

Thanks Jeff. I would also like to thank our co-workers for the hard work this quarter. United second quarter revenue results would continue to improve and built upon the success of the last two quarters. On a year-over-year basis consolidated unit revenue was up 9% and mainline PRASM was up 9.1%.

Regional PRASM improved 8.8% versus the second quarter of 2010. Yield growth and capacity discipline continue to be the principle sources of year-over-year unit revenue improvement. Yield in both the mainline and regional systems grew up 10% year-over-year in the second quarter.

Mainline domestic PRASM increased 9.7% year-over-year with capacity down nearly 2% versus second quarter of 2010. Second quarter mainline international PRASM was up to 8.3% driven by yield improvement of 10.8% versus 2010 due largely to our second quarter international average fairs increasing 10% versus the second quarter of 2010.

Latin America was a standout performer among mainline international entities this quarter. With unit revenue up 20.2% and yield up 22.7% as compared to 2010, the average fair to Latin America increased more than 20% versus last year, driving extremely strong unit revenue growth in Central America, the Caribbean and Deep South America.

Central America results led the entity with PRASM up 30% and yield up 28% year-over-year. Specific PRASM was up 5.7% year-over-year in the second quarter, with premium cabin PRASM up 8% and yield up 10%. Premium cabin traffic to China was up more than 5% in the quarter driving premium cabin PRASM of 13%, versus last year.

This quarter's specific revenue result was reduced by approximately $100 million or approximately five points of year-over-year PRASM growth, due to the Japanese earthquake and subsequent tsunami and nuclear crises. As the second quarter progress, we saw the pace of Japan point-of-sale net bookings improve and believe that, over the course of the third quarter net bookings from both U.S and Japan, point-of-sale will return to more normal level.

Second quarter mainline transatlantic PRASM increase 5.6% and yield increased 8.3% versus 2010. The Middle East and India continue to outperform Europe with double-digit yield improvements in the quarter. We shared of a portion of our transatlantic revenue success with our transatlantic joint venture partners, again this quarter.

And we are seeing significant benefits coming from the joint venture structure. One opportunity we are leveraging is the ability to coordinate capacity plans with our joint venture partners. We along with Lufthansa and Air Canada have reduced our fourth quarter joint venture transatlantic capacity by more than six point in light of the demand environment.

We now expect fourth quarter transatlantic capacity for the joint venture to be roughly flat versus our fourth quarter 2010 capacity. The benefits of our joint venture don't stop with capacity. We are currently developing joint pricing and inventory management system and processes across the full joint venture. As we continued to develop and improve these systems and processes, we expect the benefit of our transatlantic joint venture to grow.

Corporate revenue continues to show the slow but steady improvement in the second quarter. The recovery has been driven by yield improvement with corporate yields up 9% when compared to 201. We continue to run our airline with the business customer in mind.

In addition to the solid demand environment we saw this quarter; we have developed the strong fair environment. Second quarter fair's benefited from the many fare increases that began in February, resulting in double-digit fare increases in both the domestic and international markets, as compared to 2010.

International fuel surcharges in the second quarter also remained elevated versus 2010, with fuel surcharges up 47% in Latin America; 36% in the Atlantic and 48% in the Pacific. While the pace of fare increases activity has slowed versus early in the year, we are seeing success in managing yields upwards to revenue management strategies.

Our capacity discipline supports higher fares by adjusting the size of our airline to the current demand environment. Early in the year, in response to the volatile fuel and a tough as U.S. economy, United reduced expected consolidated capacity growth for full-year 2011, to be roughly zero versus 2010. And we still believe that is the right plan for our airline. We continue to optimize our capacity plan in light of high oil prices in the macroeconomic environment and have reduced our capacity plans modestly from our prior guidance.

We now expect our third quarter consolidated capacity to be flat to down 1% year-over-year. In our fourth quarter capacity, should be down nearly 3% year-over-year. We are building the preferred airline for the smart business traveler and we are committed to investing in our product. On the ground and in the air, we have aligned the food and beverage items in our 57 United Clubs worldwide.

We continue investing in our international premium cabins and have retrofitted 123 aircraft with flat-bed seats. We expect to complete that retrofits next year. These and many product enhancements just mentioned earlier are just some of the improvements that are on the horizon. As we renew our fleet and improve our product offering for our customers.

Ancillary revenues for the quarter were up modestly year-over-year. As we saw very strong growth in value-added products and services offset by reduction in that fees due to the growth of avid travelers and co-branded credit card holders as a percentage of the total. This growth in high valued customers is positive to revenue overall but it does impact this line.

We recently announced the introduction of second bag fees to Asia, excluding Japan and Hong Kong as well as Latin destinations. Custom demand grew for Economy Plus and extra legroom seats this quarter. With seat upsell revenue increasing 34% year-over-year, as we expand the channels through which our customers can purchase Economy Plus seats and optimize our pricings.

We have seen similar growth rates with our other travel option products such as Premier Line, which provides an elite holiday experience, and Award Accelerator, which allows our Mileage Plus and OnePass customers to earn the awards faster when they fly.

Second quarter cargo revenue increased 5% versus the same period last year, with yield up more than 20% and volume down 13% year-over-year. Since closing the merger nine months ago, the team has taken action to begin to capture the $800 million to $900 million of revenue synergies we have identified.

One of our revenue synergies is redeployment of our continental subsidiary aircraft in united subsidiary markets and vice-versa. We continually monitor the global economy and actively manage our capacity by choosing the right aircraft and frequencies for any given market. This quarter we optimized our New York to Zurich service, replacing our subsidiary continental Boeing 767-200 with a subsidiary United Boeing 767-300.

In June we also introduced a second frequency between Washington D.C. and Paris, using a subsidiary continental Boeing 757. In addition to fleet redeployment and other synergy source is network optimization. United's network is an unmatched access with gateway hubs ringing the U.S. This unique structure allows us to identify new routes to serve that on standalone basis, neither United nor Continental prior to the merger could profitably serve.

Two examples of network optimization this quarter includes the launch of our Los Angeles to Shanghai flight, and expanding our Mexico footprint by adding service to Guadalajara from Los Angeles and San Francisco. Between network optimization, redeployment and other initiatives underway, we estimate that the passenger revenue synergy is captured in the quarter to be approximately $50 million.

Turning to the outlook for July revenue. Based on our current outlook, we estimate United's mainline and consolidated PRASM will be up approximately 7% for July year-over-year. This PRASM estimate is preliminary, based on the data we have for July thus far.

With that, I'll turn the call over to Zane.

Zane Rowe

Thanks, Jim. I'd like to thank the entire team for its contributions to this quarter's results. While we still have a lot of work ahead of us, the team is doing a good job, integrating our two carriers, and we are beginning to see those results in synergies.

United consolidated operating expense increased approximately 12% or $965 million year-over-year in the second quarter, primarily as a result of higher fuel prices. Consolidated fuel expense including the benefit of our hedges increased $787 million year-over-year, more than 30% increase. Consolidated unit cost for the second quarter increased 11% year-over-year and mainline unit cost increased 10.7%.

Thanks to the efforts of the team, we managed our costs well. So the consolidate unit cost, holding fuel rates and profit sharing constant was up only 1.3%. This is the first quarter that we began to realize more substances benefits from merger related cost synergy. And we're on track to achieve our full year estimate of over $200 million. We realize synergies in a number of areas, including managements, overhead and procurement savings. In aggregate, we generated approximately $100 million of revenue and cost synergies in the quarter.

As in the first quarter, we faced some inflationary pressures, most notably in the area of aircraft and maintenance. Staff increases and certain of our engine contracts and a larger number of heavy checks drove maintenance expenses up 20% year-over-year. The volume of heavy checks begins to moderate on a year-over-year basis in the second half of the year.

Our second quarter pretax income was $581 million, representing a 6% pretax margin. For the last 12 months, our pretax margin was 4.2%. And our return on invested capital was 12%, exceeding our cost of capital. We recognized the importance of generating returns in excess of our cost of capital across the business cycle.

We continue to focus on this objective during this period of slow economic recovery and high and volatile fuel prices. We accrued $90 million in profit sharing this quarter, based on our year-to-date profitability. Profit sharing payments are made on the basis of full year profitability. And at this point, we expect to accrue additional profit sharing expense in the second half of the year.

Moving on to the balance sheet, we ended the second quarter with an unrestricted cash and short-term investment balance of $8.6 billion. We reduced our total debt during this quarter, paying $1 billion in debt and capital lease obligations. This includes $570 million paid to holders of UALs 4.5% convertible notes that were put to the company in June.

The company also prepaid a $106 million of aircraft back debt in July, bringing our year-to-date debt prepayment to approximately $300 million. The company has $769 million of scheduled debt payments due in the remainder of 2011, which in addition to prepayments made year-to-date will bring our expected full year total debt payments to $2.5 billion.

As we continue to pay down debt and strengthen our balance sheet, we're also building a base of unencumbered assets. Currently, based on appraised values, we have about $1.8 billion of unencumbered assets, of which nearly 50% of Section 1110 eligible aircraft. During the quarter we generated over $750 million in operating cash flow. Growth capital expenditures were $178 million, which includes the delivery of one Boeing 737-900ER aircraft.

We are committed to managing our expenses aggressively in this competitive business. Particularly in light of the high price of fuel. We expect our full year non-fuel consolidated CASM, excluding profit sharing expense, to be up just under 2% year-over-year, with capacity flat to 2010. We anticipate third quarter non-fuel consolidated CASM to be up 1% to 2% year-over-year.

We have approximately 51% of our expected fuel consumption for the remainder of 2011 hedge, at an average Gulf coast at equivalent price of $3.12 per gallon. Based on the forward curve as of July 18, we expect our consolidated fuel price to be $3.18 per gallon in the third quarter, the year-over-year increase of 37%. And $3.10 per gallon for the full year, an increase of nearly 33% compared to 2010.

We expect our gross capital expenditures to be about $290 million in the third quarter and $1 billion for the full year. As Jim mentioned, we will continue to invest in the product and customer experience and are doing so in a fiscally responsible way.

In addition to the 737-900ER we invested into service in April, we expect to add one 737-800 in the third quarter. We removed three parked aircraft from our fleet in the quarter, selling two Boeing 737 Classics and one Boeing 747. We also removed one Boeing 767-200 from our operating fleet. Our regional fleet declined by two aircraft in the quarter, as we allowed 9ERJ-145 leases to expire and added three Q400 and four Q300 aircraft.

Fundamental component of our fleet strategy is incorporating flexibility, allowing us to resize the fleet to best match the demand environment, while continuing to improve fuel efficiency. With almost half the fleet coming off-lease, so becoming unencumbered over the next four years, and our significant new aircraft order book, we have the ability to retire older, less efficient aircraft, and acquire modern fuel efficient aircrafts.

As we discussed earlier, we're seeing good momentum in the integration as well as in the achievement of our synergies. We continue to expect at reach 25% of the $1 billion to $1.2 billion of total annual estimated synergies this year. This is a highly competitive business with competition from both global and low cost carriers, with the slow phase of the economic recovery and high fuel prices. The current environment is challenging, that says, we have the right people, the right assets and the right plan to position ourselves to achieve our long term goal of generating returns and access of our cost of capital and creating stability and success for all our stakeholders. With that I'll turn the call back over to the Jeff.

Jeff Smisek

Thanks Zane. Well, we're pleased with our results this quarter. We're more excited about what's to come. We're doing the hard work necessary to create the world's leading airline. Our goal is to create an airline that will provide great products and services for our customers, stability and rewards for our coworkers and sustainable and sufficient profitability for our shareholders.

We have much more work to do. And it will take us considerable time. But I am confident, it will be successful. With that I'll turn the call over to the 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. Mitchell, please describe the procedure to ask a question.

Questions-and-Answer session

Operator

(Operator Instructions) Our first question comes from Michael Linenberg from Deutsche Bank.

Michael Linenberg - Deutsche Bank

Yes, good morning everyone. I guess a question just on the guidance that without this morning. You gave a view on the advance book out over the next six weeks, and if I see that we go back and we look at it versus the guidance from about a month ago, it looks a little bit better at least on domestic. It looks like maybe it's up a 10th. The international book low looks better by about one point. How much, I mean maybe I am reading too much into it, how much of that is seasonal or, and I realize this brings us to the end of August, are there seasonal factors there? are there may be back-to-school issues, or is it just that maybe we were in a bit of a soft patch in June and maybe things are moderating somewhat? How should we think about that?

Jim Compton

I think I'll describe it is more seasonal than anything. The couple things that obviously we focus on should always managing the booking curve from the revenue management's perspective and so forth, but also the next six week outlook is a really strong peek period in the trans-Atlantic, as you kind of move through the second-half of July and August. But overall we're seeing kind of the demand that we've seen, that's been relatively a strong demand environment continues. So I think that relative to growth factors more than seasonality.

Michael Linenberg - Deutsche Bank

Okay, and then just my second and this is to you Jim as well. I realize everybody wants to know about September because it is predominantly much more business travel by definition. You kind of don't know what it is until it is on top of you. But I know has a big Company now and you've had a lot of continuous conversations with the corporate. Are you sharing anything about their views on travel in the fall or whether or not they hit their full year budgets given where pricing has been? I mean, any color on that front? To give us a feel for maybe, what some early read on September?

Jim Compton

Both from the data perspective, we look at the corporate and we see kind of consistent demand and environment there. The sales team once again had a corporate advisory team to keep the dialogue going with our corporate partners and so forth just recently concluded that. And really the discussion within there, and the things we heard from the corporations was that it's kind of right now business as usual, tight to that kind of slow growth subject to kindly what you're seeing in the economy and so forth. But really no change at least at the margin right now. But you are right, September is out there out there and for me to comment on September is too far out there versus the kind of the business outlook. But what we hear from the corporations is it kind of business as usual right now.

Operator

Our next question comes from Jamie Baker from JPMorgan.

Jamie Baker - JPMorgan

Good morning everybody. First, to Jim Compton, I appreciate you building an airline for the smart business traveler. I certainly hope I can fit into that category at some point that you never know. Question for Zane. Delta has a pretty aggressive non fuel cost target for 2012. No a guarantee they will get there but that is the plan nonetheless. And I haven't heard one firm United. I know you like to talk in synergy terms, but what is your view on consolidated ex-fuel CASM going forward. I am not looking for that. With all the structural changes, merger benefits, I would expect you to eventually achieve something better than the 8.5 that you did in 2010. Any thoughts on this?

Zane Rowe

Sure Jamie obviously, we are benefiting from the synergies and a lot of hard work by all the teams here and you see some of that improvement through the course of this year. It's premature for us to weighing on 2012 as it relates fairly to cost. I will tell you as we restructure the business and restructure the network you may see some elements that actually apply some cost pressure and yet make sense for us to do for instant economy plus taking seats out of the continental subsidiary aircraft as well as the lot more international flying that may actually put some cost pressure on the network and yet yield a better result for us. So the teams are all working quite aggressively at managing expenses, we were not at a point but we were ready to give 2012 guidance just yet, but we feel pretty good about the progress we are making today.

Jamie Baker - JPMorgan

Okay, that's helpful. And Jeff, I think we all appreciate the update on the labor situation in some of the complexities and challenges there, but by dragging out this process, are you running the risk that AMR will get to go first? I mean, is the benchmark moves from Delta to something even higher that AMR, doesn't that put you at risk?

Jeff Smisek

Well, Jamie, first of all just to be clear, we are not dragging the process out. This process takes time and we've got workgroups. We don't even have a consistent union that we can negotiate a common union. So we don't have any intentional dragging out. We got to make sure that we got to deal with certainly company increment and turning our coworker to well. We are going to pay competitively we are going to pay fairly. That's very clear and we will take a look over the market is determining that. But that's our goal and we will take the time that takes to get there. But we are working hard to get there as fast as we can. And the second think I want to say, I think, Jamie you are such a smart business driver. You fly United exclusively.

Jamie Baker - JPMorgan

I certainly wasn't implying that management was latterly dragging it. I was just talking about the process overall. Thanks for all the color gentlemen I appreciate.

Operator

Our next question is from Bill Greene from Morgan Stanley.

Bill Greene - Morgan Stanley

Can I ask about your thoughts about the American fleet order? Does it change the competitive landscape, which is the deal sort of a size and type that you would need to do to remain competitive? So how do we think about it? Is this a game changing or is it not that big a deal for you?

Jeff Smisek

No, I don't think it changes things for us at all. Actually we are very comparable with where we are we have a good fleet today. We have a solid aircraft ordered not only for a narrow body aircraft, but for a widebody aircraft, we've got a lot of fleet that is coming off financer off-lease. Over the next four years, we have lot of fleet flexibility. Our intention is to continue to take modern fuel-efficient aircraft and retire older aircraft. And so we're very comfortable where we are and Americans decision doesn't change in any course.

Bill Greene - Morgan Stanley

Okay. Jim, can I ask you about your comment; you mentioned that you're looking to have some further products out there that customer's value. Should we take that as an indication that there's a lot more to go here in ancillaries? And if so was that included in synergies when you first, sort of, talked about these? So what do we think about that pipeline?

Jim Crompton

Yes, in terms of merchandising I do think there is significant upside. As we developed technologies that allow us more and more at customers and to kind of, be part of that experience to travel with them. So I do think, not only are there more products, but I think how we presented the products that we have today. And how we kind of bundle those together and I think that drives, I think a lot of opportunity going forward. And the teams really focused on. The synergies there were, obviously those merchandising synergies as we brought the two companies together and I think of that separate from the overall opportunities that's happening on the merchandising side for us.

Operator

Our next question comes from Gary Chase from Barclays Capital.

Gary Chase - Barclays Capital

Wondered If I could just ask Jim, to comment a little bit, just as on the value that you're getting out of the JV agreement. We see these adjustments that come at the end of the quarter and I definitely understand that, that sort of a mechanical issue. But, optically it feels like this money flowing out of United into the joint venture. And again, I understand what's behind that. But can you just give us a sense; do you think you're getting the value that you're supposed to be out of the JV? Is that something that's to come, and the processes that you're describing of getting closer together?

Jim Crompton

Gary, yes, I do think we're getting the value of the JV. A lot of the revenue we're driving through the JV. But our partnership with the times that of Germany is quite significant and the amount of connection that are new to the network that is not there before and so forth. So I do think that there is tremendous value coming from the JV.

I also think that the JV works very well together. As I mentioned in my comments that if the JV as a group is also keeping it's eye on the macro environment work capacity. And so we've made some adjustments as a group to manage that.

And then the third thing is JV structure has a structure within and that the base gears and move, and so that as you move through it a new base is set. And so it's built in a way that all partners can always move toward an equilibrium and that's the goal. So yes, the benefits are there on the revenue side. We've clearly, again in this second quarter, as I mentioned, outperform our partners and there is payment, but we're very optimistic and we're very excited about the future of the JV.

Gary Chase - Barclays Capital

You obviously think the payment is, the out performance you're getting, is enough that it's offsetting some of the money that's out flowing, right?

Jim Crompton

Yes, I do.

Gary Chase - Barclays Capital

The $50 million you said in synergy that you've achieved in the quarter was that an annualized number? Was that just for 2Q?

Jim Crompton

That's just Q2.

Gary Chase - Barclays Capital

So you're about 200 of the 8 to 9?

Jim Crompton

Yes. That's Q2, so we'll keep monitoring as we go through the year, and keep measuring it with the measurements that we've set up.

Operator

Our next quarter comes from Hunter Keay from Wolfe Trahan.

Hunter Keay - Wolfe Trahan

Just wondering if you can help us out a little bit on how to think about at least directionally, how you're approaching the capacity plan for 2012? Maybe help us sort of bracket in, with the conservative and aggressive way to think about growth and flexibility? And maybe how that fits into the getting enough data? And how do you think about potentially putting in a fleet type, which I think you referenced back in April?

Jim Compton

We're very early in the stages now. We're beginning our planning process right now. From a process point of view and I don't think anything is going to change about our focus on the macro-environment and keep an eye on where fuel price are and so forth and obviously our transportation.

And so over the last couple of years, we've had a good record of capacity discipline and given the environment and that'll keep focusing on that capacity, at this point as we look out forward. But we're just right now beginning the process with the planning. So it would be early to comment on 2012 specifically.

Zane Rowe

With regards to the fleet, obviously, we're accessing all of our aircraft requirements and have significant flexibility. But I don't think, we've been out talking about actually putting down a fleet type at least not at this point.

Hunter Keay - Wolfe Trahan

And I guess may beyond that, in that same sort of, you've obviously got a bit of above way which you want to call that as of aircrafts deliveries next year, I guess, 25 coming in. How should I think about maybe the CapEx component and giving your cash balance, is there any thought that BP is ramping the back half of this year. Is there any thought to maybe about building over equity in this planes and paying cash for them as they come on?

Zane Rowe

Hunter, we're not going to, give much guidance on that one just yet. We'll offer our overall CapEx guidance probably early in the fourth quarter as it relates to our 2012 deliveries.

Operator

Our next question comes from Kevin Crissey from UBS.

Kevin Crissey - UBS

This question is probably for Jim. I would imagine, has there been a shift in website direct sales versus travel agencies? Anything you noticed there?

Jim Compton

Yes, the both United.com and Connell.com continue to perform very well. And both have seen sales growth over the most recent period. We don't really put out our guidance in terms of share versus, for instance, OTAs and that. But both Connell.com and United.com has seen significant growth over the first six months of the year.

Kevin Crissey - UBS

And your Travelocity deal, any change in terms or method for delivery or any director anything that would imply direct connect through anything or is it just a straight renewal?

Jim Compton

Well we're not disclosing details of the agreement. I will say that we're excited to have reached an agreement with Travelocity that allows our customers to have access to full fares in schedule. But we're not commenting the specifics of the agreement.

Kevin Crissey - UBS

Did you talk about the profitability by hub at all, and if not can you?

Jim Compton

We didn't and we don' do that.

Operator

Our next question comes from Duane Pfennigwerth from Evercore Partners.

Duane Pfennigwerth - Evercore Partners

Just a follow-up to Jamie's question, practically speaking, what is the lack of a joint bargaining agreement prevent you from realizing specifically on the pilots, prevent you from realizing from a synergy perspective? Seems like it primarily keeps your cost lower?

Jeff Smisek

The synergies that we talk about in general are net synergies net of dis-synergies and not having an agreement. It doesn't affect our net synergy target obviously. We'd like to get agreements promptly. I think it's good for the company, it's good for the enterprise, it's good for the culture, and we're working hard to do that.

Duane Pfennigwerth - Evercore Partners

Thanks. And then just a follow-up. I guess it's been reported in the press that one of the things that's on the tape was go for relaxation beyond 70 seaters, I think I read a 100 seaters. Can you comment on that?

Jeff Smisek

No.

Duane Pfennigwerth - Evercore Partners

And then just lastly, can you give us some idea of the currency impact in the quarter on revenue and operating profit?

Zane Rowe

Sure, Duane. I'll touch on the revenue portion. As we look at the Atlantic side and obviously there is a number of currencies involved, but just generally speaking it helped on both the Atlantic and the Pacific. On the Atlantic side about 3 points of our revenue increase was FX change year-over-year. And on the Pacific side about 3.9 points to that increase was due to that. We don't typically mention the impact as that relates to the operating margin, but that's about the amount right there.

Operator

Our next question comes from Glenn Engel from Bank of America Merrill Lynch.

Glenn Engel - Bank of America Merrill Lynch

Two questions please. One, can you go through the technology integration timeline, what we accomplished? What's the timeline for finishing other things? And two, earlier in the year I was hearing problems with the reservations line, so the phone lines were running long to reach you. Are there any other integration you should have on service that you're struggling with?

Jeff Smisek

The technology integration actually is the integration of a large number of different platforms. We have roughly 15 base platforms and of course a lot of other related (software). So the timeline is over an extended period of time, because of all the different things we're doing. For example, our revenue accounting system, we will migrate to that, I believe, in November of this year.

The more customer facing aspect, which is the passenger service system, we're working on now with our partners at Travel Port and Hewlett Packard, HP. And we will migrate to a single passenger service system in the first quarter of next year.

In terms of our reservations, the call lines have lengthened in terms of talk time. And that is for a number of reasons, including consumer's normal interest and some degree of confusion from time-to-time relating to the merger. And so the whole times have lengthened and we're addressing that.

We've bought back a number of our folks into our reservation group and we're going to bring back some additional folks, because we do need to get the whole times down. And the whole times down are just because of lengthened talk times. And that the issues are more complex, because of the merger. And we are going to address that. We're in the process of doing it now.

Glenn Engel - Bank of America Merrill Lynch

And the other big technology ones like crew scheduling and maintenance, when are those likely to be integrated?

Jeff Smisek

We're going through the process between now and throughout 2012 to get things done. I don't think we're public on each and every one of the items. But it's a considerable long process. We're making sure that the customer facing issues are done well. And of course we're making sure all the issues are done well. It's a considerable timeline, but this does take quite a bit of time. We try to get some things that will produce for us the highest value earliest and with a lot of focus on this.

Operator

Our next question comes from Helane Becker from Dahlman Rose.

Helane Becker - Dahlman Rose

There has been some talk in Washington about taxing ancillary fees. And I know that's a growing part of your revenue component. Can you just talk to what you're showing and what you're thinking about relative to that?

Jeff Smisek

Well whenever Congress is in session, we're always at risk. We are, Helane as you know, we are a brutally over taxed business as it is. We're taxed more heavily than alcohol, tobacco and firearms. And on an average 20% of the consumer's tickets domestically goes straight to the government. So we're always at target. Our mini business is a target. We hope that given the over-taxation and all the regulations to this industry that they want taxes even more and we'll be of course working hard to prevent that.

Helane Becker - Dahlman Rose

And then my other completely unrelated question is, can you say what the long-term or net-debt position was at the end of the June quarter?

Zane Rowe

Sure Helane, this is Zane. Our net debt at the end of the quarter was just over $14 billion, down from $15.8 billion at the end of the last year.

Operator

Thank you ladies and gentleman. This concludes the analyst and investor portion of our call today. We will now take calls from the media. (Operator Instructions) Our first question comes from Josh Freed from The Associated Press.

Josh Freed - The Associated Press

You mentioned this morning that integration of the two airlines is not the goal of the merger. Can you say a little more about what you mean by that and are you okay with sort of long-term non-integration?

Jeff Smisek

No. What I'm saying is we need to integrate the carriers, but that's not the end-goal of what we're creating. What we're creating is a spectacular airline with the best network in the world with a globally competitive product, great service and a great culture, which of course leads to great service. So the integration is something that we need to do. We are working on. We are working diligently on and a lot of people are working very hard. What I meant by that is, that isn't the end of what we're doing here, what we're creating is a world's leading airline.

Josh Freed - The Associated Press

And what is sort of the current status of labor talks and all the other integration issues. What does that means in terms of getting a single operating certificate? Is that still end of 2011 thing or is that get pushed out a little?

Jeff Smisek

Well the discussion with our various work groups have nothing to do with a single operating certificate. The single operating certificate is ongoing right now with the FAA. It's a point at which we can legally and safely operate as a single carrier. The discussions with our workgroups are completely unrelated to that. And we are currently on tract to receive our single operating certificate by the end of this year.

Operator

Our next question comes from Mary Jane Credeur from Bloomberg News

Mary Jane Credeur - Bloomberg News

Jeff, I wondered if you could talk a little bit more about the labor discussions and where the biggest hurdles or roadblocks are that are making this take longer than you anticipated?

Jeff Smisek

Well I'm not sure there are big roadblocks anyway. It's taking time for our various workgroups to select their representatives with whom we can bargain. And as reflected their new unions for example we start the negotiation. Those, for example, such as our pilot group who are above ALPA, we've been negotiating since about August or so of last year. And we continue those negotiations. It's just that these are on both sides are mature labor contracts with different outlooks.

There are some kinds of some political elements involved as well, with the labor organizations and these things naturally take time. I'm still very focused on getting things, again I hope to get some deals done by the end of this year. But because of the pace of representation election reference and that the matters, some of the agreements will slipping to next year. But we are very much focused on it. We've a lot of people working hard to get it done.

Mary Jane Credeur - Bloomberg News

With the pilots specifically of course were coming up on a year. That you've been discussing a new contract with them and Core's representation wasn't an issue? What is taking so long there? And you have a new target for, when is that for the 2011 year anything is that a first half of 2012?

Jeff Smisek

Mary Jane, I'm not going to talk about this specific of any workgroup and discussions with them, but the target remains to get a deal done as quickly as we can. I would love to get a deal done by end of this year. I don't know whether we'll be able to do that. It does take two to tango.

Operator

Our next question comes from Jenna Moreno from Houston Chronicle.

Jenna Moreno - Houston Chronicle

My question is also about leverage. So, Jeff, do you expect to have any of the agreements done by the end of this year? And if so, which one?

Zane Rowe

Jenna, I don't know. We work hard, and we'll get agreements done as prompt as we can that said. We need to make sure that we maintain our competitiveness and which contract that are fair to the company and fair to my co-workers.

Operator

Our next question comes from Jeremy Lemer from Financial Times.

Jeremy Lemer - Financial Times

Just a quick question for Jeff. Could you give us your kind of top level view about consumer and corporate demand, and particularly sort of linkages, some of the global macroeconomic events that we've seen in the recent weeks and months essentially giving out their prices in Europe, some of the concerns over employment (inaudible) in the U.S. Could you give us a sense how it's still pretty free to have a demand at the consumer and corporate level?

Jeff Smisek

Jeremy, I think from a corporate global front, obviously our U.S. point of sales is our strongest presence and so forth in the U.S. based carrier and that. But I think what we're seeing is again pretty consistent corporate demand that we've seen during into course of the year. So, do not see at this point any significant change in the demand that we've seen during the first six month of the year. I will think it's been average fair driven. And I mentioned that in my comment. And so those, the fair environment remain strong and the demand say is at about where we've seen it over the last six months.

Jeremy Lemer - Financial Times

Somebody asked you earlier a little bit about the impact of American Airlines, very large aircraft orders. You said it wouldn't have an impact. I wanted to press a little bit more on that. The American order does tick-up some leasing slots from the (inaudible) takes production slots from quite a number of slots from the largest airline manufacturers.

Would that have any impact in your ability to get hold of the aircraft that you want? And it also changes the advertising dynamic content about having the youngest fleet in the market? And then in the couple of years times, the things here to Pan American will be also making that place? So could you give us a take on those points?

Jim Crompton

Sure, I think that from the perspective with skyline we're comfortable with the skyline we have plus the availability of the skyline from our partners. We are very good partners in both Boeing and Airbus and we're comfortable with that. In terms of our ability to raise the appropriate capital to take deliveries, I have Gerry Laderman, will speak of that in just a moment.

And in terms of the fleet, what's important to us to have very good onboard product and when we're investing in it and as you'll see number of additional announcements in the future on our investments in our onboard products and in our service and we're more than happy to compete against American or any one with our network and our fleet and our product and our people. And with that all I'll ask Gerry to speak to the capital management.

Gerry Laderman

The American's order really won't impact. As far as we're concerned, the availability of financing both in the debt capital market and (inaudible) aircraft. We believe we have sufficient availability there. The other point worth mentioning is one advantage of the American order is that it finally led to Boeing deciding what to do about the new narrowbody, which is helpful really to all of us in terms of our long range of planning.

Jeremy Lemer - Financial Times

So that gives you see the chance to reengineer Boeing in certainly earlier timeframe than you might have got. So it's a different new aircraft later on?

Jim Crompton

Well, it's just good that Boeing's now sort of laid out the time table.

Nene Foxhall

Thanks, everybody. We're out of time, so need to conclude the call. Really appreciate you joining us today. Please call corporate communications if you have any further questions. And we look forward to talking to you next quarter. Thanks.

Operator

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

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