Continental Airlines Q2 2007 Earnings Call Transcript

Jul.19.07 | About: United Continental (UAL)
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Continental Airlines (NYSE:CAL)

Q2 2007 Earnings Call

July 19, 2007 10:30 am ET

Executives

Ned Walker - SVP of Corporate Communications

DeAnne Gabel - Director of IR

Larry Kellner - Chairman & CEO

Jeff Smisek - President

Jeff Misner - EVP & CFO

Jim Compton - EVP, Marketing

Analysts

William Greene - Morgan Stanley

Robert Barry - Goldman Sachs

Ray Neidl - Caylon Securities

Mike Linenberg - Merrill Lynch

Dan McKenzie - Credit Suisse

Frank Boroch - Bear Stearns

Bill Mastoris - Bank of New York

Gary Chase - Lehman Brothers

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Continental Airlines' Second Quarter 2007 Financial Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session (Operator Instructions).

As a reminder, this conference call is being webcast and recorded Thursday July 19th, 2007. I would like to turn the call over to Ned Walker, Senior Vice President of Corporate Communications and DeAnne Gabel, Director of Investor Relations.

First, Mr. Walker. Sir, you may begin.

Ned Walker

Thank you very much, Tatiana, and welcome everyone. Joining us here in Houston today we have Larry Kellner, our Chairman, our Chief Executive Officer, as well as Jeff Smisek, our President and member of the Board of Directors. Also Jeff Misner, our Executive Vice President and Chief Financial Officer, Jim Compton, our Executive Vice President of Marketing, Mark Moran, our Executive Vice President of Operations and Gerry Laderman, our Senior Vice President and Treasurer.

The format is similar to what we've done in previous earnings calls. Larry will have a broad overview comments on the industry as well as Continental. Jeff Smisek then will follow-up with capacity and revenue review, followed by Jeff Misner who will look at the cost structure and the balance sheet.

We've allocated about 20 minutes for the executive comments followed by 25 minutes for analysts' questions and after that 15 minutes for the media questions. Once again, we ask everyone if they can have one question with a quick follow-up, that way we can accommodate people as much as possible.

With that, I'll turn it over to DeAnne.

DeAnne Gabel

Thanks, Ned. Earlier today, we issued an update for investors with any information relating to our financial and operational outlook for the third quarter and full year 2007 and other information. This investor update was included in a filing with the SEC and can be found on our website under the Investor Relations section.

Today we will be discussing some non-GAAP financial measures, such as net income excluding special items. A reconciliation of the GAAP to non-GAAP financial measures to be discussed can be located on Continental's website at continental.com under the Investor Relations section. In addition, our discussion today may contain forward-looking statements that are not limited to historical facts but reflect the company's current beliefs, expectations or intentions regarding future events. Our forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. For examples of such risks and uncertainties, please see the risk factors set forth in this company's 2006-10-K, and as well as securities filing.

With that, I'd like to turn it over to Larry.

Larry Kellner

Thank you, Ned and DeAnne. Good morning and thanks for joining us. First off, I want to thank my entire team of more than 45,000 co-workers. They're the backbone of our success, and they've done a tremendous job overcoming the daily challenges of running an airline and maintaining consistently reliable operation. Once again, they've pulled together to deliver solid results, achieving the largest second quarter pre-tax profit the company has posted since 2000.

I know that the high-low factors we've been running and the continuous weather issues add to the daily challenges, but I admire my co-workers' tireless commitment to customer service and quality. I'm proud to work with the most professional men and women in the business.

For the second quarter, Continental reported net income of $235 million, or profit of $2.10 per diluted share excluding special items, which is a 13% improvement over the same period last year. Including special charges, we reported a net income of $228 million, or a profit of $2.03 per diluted share for the quarter. As a result of our financial performance, I'm pleased to say that through June 30th, we've accrued $92 million for profit-sharing this year, which is a $32 million improvement over the same six month period last year.

The actual amount of profit-sharing to be distributed to co-workers next February depends on the company's full year 2007 financial results. But our goal is to stand at even bigger profit-sharing checks than we did this past February. My co-workers also earn $10 million in cash incentives during the quarter for finishing first in on-time monthly performance among the major network carriers in June and for finishing in the top three major network carriers in both April and May. Once again, we've shown when we work together, we win together.

In addition to improved financial results, the team set new operational records. We posted a record second quarter consolidated load factor of 83.2%, half a point higher than the records set last year. We're also making strides in demonstrating our commitment to the global environment. During the quarter, we announced a relationship with Sustainable Travel International, to offer customers the option of participate in a Carbon Offsetting Program. Proceeds from the purchased offsets will be invested into high impact sustainable environmental projects.

In addition, we continue to work on making our fleet more fuel efficient. During the quarter, work continued on our project to install winglets on 37 of our 737-500s and 11 of our long-range 737-300s. We expect to have winglets installed on more than 200 aircraft by the end of the year. We will itself reduce fuel consumptions and emissions by up to 5% by reducing drag and increasing aerodynamic efficiency.

Looking forward, as many of you know, we're operating at a tough domestic revenue environment. We've decided to scale back our growth plans for next year and now expect to grow mainline capacity 3% to 4% rather than the previous target of 5% to 7%. Our long-term plan beyond 2008 remains to grow mainline capacity an average of 5% to 7% annually. But as we've stated before, in some years that growth may be more and others may be less.

We will continue to execute our international growth plan. I'm sure many of you watched the unveiling of Boeing's new 787 Dreamliner. This will be one of the most technologically advanced customer pleasing planes ever built. And we're competitively well positioned with 25 firm orders and options for many more. We're excited to add the 787 to our fleet beginning in 2009 and think it'll be a gain-changing aircraft with which to broaden our international footprint.

Before I close I have a few comments about the competitive environment. A lot is happening. Open skies with the EU brings both opportunities and challenges. Continental will for the first time have access to London Heathrow, while likely facing increased competition across the Atlantic and the prospect of additional European consolidation. Meanwhile in the U.S., new low-cost carriers are entering the market and existing low-cost carriers are growing. We expect the domestic market environment, although bolstered by strong summer demand, to continue to experience soft yields.

Finally, we're challenged by high energy prices. West Texas intermediates at over $75 a barrel and jet fuel is over $90 a barrel. As a results of all these, the competitive environment is changing, and we'll be responsive to that change. We have the best people and the best product in the industry and have a modern fuel-efficient fleet with 89 new Boeing aircraft on firm order including 25 Boeing 787 Dreamliners. We also have the only powerhouse hub in the New York area, and here in Houston our hub at Bush Intercontinental serves as a premier gateway to Latin America.

With that I'll call the call over to Jeff Smisek and Jeff Misner to discuss the quarter's revenue and cost performance details.

Jeff Smisek

Thanks, Larry. I join Larry in thanking the entire Continental team for doing a great job this quarter. During the past three months we faced many challenges across our system, as summer storms caused delays and record heat made it tough to work on the ramp and in some of our shops. But the team did a great job maintaining the integrity of our operations and providing the high quality of service our customers expect. Thanks to all my co-workers for the superb job they do everyday.

The tough weather hurt our second quarter on-time performance however, I'm proud of our team for delivering a systemwide mainline segment completion factor of 99.4% during the quarter despite the bad weather. We know that while customers don't like to be late, they like it even less if we cancel and they're unable to get to their desired destination. So kudos to our entire team for being committed to getting the job done and getting our customers where they want to go.

During the quarter we once again achieved good top-line growth with passenger revenue increasing 5.2% to $3.4 billion. As a result of record load factors and increased international yields, consolidated passenger revenue per available seat mile for the quarter increased to 0.5% year-over-year despite pressure on domestic yields and our reduction in regional flying.

In the second quarter, both domestic and international demand were strong, and we achieved a new record for second quarter consolidated load factor. Although we saw good mainline RASM results in June, we're hesitant about celebrating a domestic recovery quite yet, as we continue to see yield pressures in the domestic region.

Although there's been some recent domestic capacity reductions announced, we estimate that low cost carriers will put more than 25 additional aircraft in the domestic service during the second half of the year. We're doing what we can to drive our domestic yields up, such as our $7 domestic fuel surcharge, being selective about the sale fares we match and careful revenue management.

These efforts do make a difference at the margin but as an industry we've not been as successful as we were last year in increasing domestic fares to keep pace with the rising cost of fuel. It's also been a disappointment to see the level of industry fare selectivity that we've seen in this, the peak summer season.

Looking at our domestic system on a hub-by-hub consolidated basis for the second quarter, in Newark and Houston we have small capacity increases with load factors about flat. Cleveland load factors were down about 1.5 points year-over-year on capacity growth of 11%. For its O&G size, Cleveland has always been underdeveloped, and with some of the recent capacity decreases by our competitors in nearby hubs, we've got the opportunity now to begin to right size in the Cleveland market.

While domestic yields in general were down year-over-year in the second quarter, a considerable amount of the yield pressure was concentrated in our domestic markets out of the northeast. Our domestic network is an integral part of our system that provides our customers the connecting opportunities that help make our international market successful.

So we want to maintain a healthy balance between our domestic and international capacity and thus plan to grow our consolidated domestic capacity 2.8% this year. However, we are being responsive to the current domestic revenue environment, and as Larry mentioned, we are scaling back our mainline growth plans for next year. Substantially all of that reduction will be in the domestic system.

Looking forward to the third quarter, we expect overall demand to remain strong with our mainline load factor up year-over-year to between 84% and 85% and with our regional load factor also coming in higher at between 80% and 81%. We expect third quarter consolidated capacity to be up about 3.5% with consolidated domestic capacity up 2.1% and consolidated international capacity 5.3%. Even with our expected reduction in mainline capacity growth to between 3% and 4% in 2008, we'll continue to execute on our growth plan with a focus on international expansion, while maintaining our flexibility to react to a changing environment.

From a strategic perspective on the revenue side earlier this month, we entered into comprehensive alliance with Kingfisher Airlines, one of the fastest growing airlines in India. This alliance gives us frequent flier and airport lounge access reciprocity and future coach sharing providing better service to customers who travel between the U.S. and India and transfer between the two carriers. This relationship will compliment our existing service to Delhi and our new service to Mumbai, which is scheduled to start on October 1 of this year pending government approval.

Additionally, in June, we entered into a strategic relationship with China Southern Airlines for frequent flier and airport lounge access reciprocity and extensive coach sharing providing better service to customers who travel between the U.S. and China and transfer between the two carriers. And earlier this week we applied for service between New York and Shanghai for 2009 under the recently expanded bilateral agreement between the United States and China.

In closing, I again want to thank my co-workers for the great job they did this quarter. Our plan is working and yielding good results and we remain focused on returning to sustained profitability. We're going to continue to execute on our plan but will also be responsive to the changing environment. Regardless of what the future holds or what challenges must be overcome, as we work together we'll continue to win together. With that, I'll turn the call over to Jeff Misner.

Jeff Misner

Thanks, Jeff, and again thanks to all of you for joining us this morning. Well despite all of our weather and ATC operational challenges, we're pretty pleased with our second quarter results. Revenue came in a bit stronger than we initially expected, and we continue to work the cost side of the ledger. I'd like to also join Larry and Jeff in saying thanks to all of our employees for a job well done. As DeAnne mentioned, because we thought it would be helpful to our investor community, we did file our investor update this morning which we used to file after the call. The update contains our third quarter full year '07 guidance, so I won't repeat a lot of the details in my comments.

So on the cost side, on a year-over-year basis, the increase in same quarter costs was primarily attributable to increased flying, higher maintenance costs and increase in profit-sharing and other variable compensation. Our second quarter mainline costs per available seat mile, is CASM, on a GAAP basis, increased $0.09 on 1% year-over-year. Excluding special items and holding fuel rate constant, mainline CASM was up 1.5% year-over-year, which was a little better than our guidance.

Looking ahead to the third quarter, we expect our mainline CASM, again including special items and holding fuel rate constant, to be up about 3% year-over-year. As I mentioned last quarter, throughout 2007, we'll continue to see pressure on the maintenance line as our fleet ages and a larger number of heavy checks are needed. We also have some program escalations in our aircraft maintenance contracts but we are working on a couple of initiatives to offset some of these increases and hope to have some of those initiatives in place by year end.

We'll also see some increase in the wage and benefit line due to increased volume variable pay and our 2% compensation increase for all work groups that agreed to reductions in 2005 which went into effect earlier this month. Our cost pressures will be partially offset by improvements in our regional jet economics as we complete the transition of part of our regional flying to Chautauqua. Larry mentioned our current plan to scale back mainline growth a bit next year. That of course will put some additional pressure on CASM but we think it's the right thing to do in the current environment.

As I mentioned earlier, we'll keep working on the cost side, but we're not going to sacrifice our operational integrity just to save a buck. We're going to continue to invest in our product and in tools that help us do our jobs better including in investing in our people which means continuing to have sufficient staffing. As has been adequately demonstrated by some of our competitors lately, you can tighten things only so much from a staffing perspective before it ends up costing you more than you save.

On the fuel side, high fuel costs continue to plague the industry. During the quarter, Gulf Coast jet spot prices averaged $86.19 per barrel and they've continued to climb. Yesterday jet fuel spot price closed at $90.41 per barrel. To match higher fuel prices we're going to continue with our fuel hedging program. And as of yesterday, we've hedged approximately 34% and 13% of our projected fuel requirements for the third and fourth quarters respectively using general cost collared contracts. You'll find a lot more detail on our hedge position in the Investor Update.

In the third quarter, we expect fuel prices to average about $2.26 per gallon which includes taxes and the estimated impact of our hedges. For the unhedged portion of our third quarter fuel requirements, we're assuming an average cost per barrel for crude oil of $73.08 based on the forward curve as of July 10, with jet price for being $18 for July and $20 for August and September. Now as we said before, our best hedge is that we have the most fuel efficient fleet of any U.S. network carrier.

For the fleet earlier this month, we made some adjustments to our fleet plan as part of our continuing efforts to optimize our operations. Anticipated change in our fleet plan in the near term includes selling 10 Boeing 737-800 aircraft to Transaero. These aircraft are scheduled to be removed from the fleet from October 2007 through November 2008. We are also in discussions for the sale of five more Boeing 737-500 aircraft which would be removed from our fleet before the end of 2008. Additionally, we accelerated the delivery of three Boeing 737-900 ER aircraft from 2009 to 2008 to bring our total deliveries for new Boeing aircraft in 2008 to 33. I may have misstated that. I might have said 757-300s. What I meant is all those 10 and the additional five are 737-500 aircraft.

Briefly looking at the balance sheet, we entered the second quarter with $3.18 billion of unrestricted cash and short-term investments and expect to be in the third quarter with $2.8 to $2.9 billion of unrestricted cash. We'll provide you second quarter debt balances in the 10-Q which we expect to file later today. With respect to our defined benefit pension plans, we've contributed a total of $211 million to our pension plan so far this year and expect our total contributions during 2007 to total over $325 million. This significantly exceeds our estimated minimum funding requirement of $187 million for this year. Taking care of our obligations to employees is a defining part of our culture, and we'll continue to work hard to secure their future.

In conclusion, we continue to face cost pressures both on an absolute basis, as well as on a relative basis, because a number of our peers have been able to drastically cut their cost structures through bankruptcy process. But we'll keep our discipline, and we'll continue to work on efficiency and productivity gains to help offset some of the pressure. You can find the investor update we discussed that we filed this morning detailing our forward-looking guidance just discussed, including GAAP to non-GAAP reconciliations, in the Investor Relations section of our website. And as I mentioned, later today we'll file our second quarter Form 10-Q. With that, I'll turn the call back to Larry.

Larry Kellner

Thank you, Jeff and Jeff. We're pleased with the results of this quarter but remain focused on the road ahead. There will always be challenges but I have confidence that my co-workers will make the best of every situation. We have the right people, the right product, the right fleet and the right facilities to meet the challenges ahead as we work together to continue to deliver the high quality products our customers expect. Once again I want to say thank you to my co-workers for the contributions they make to the business everyday. Together we look forward to delivering more good results in the future. With that, I'll turn the call back over to DeAnne to begin our Q&A.

DeAnne Gabel

Thank you, gentlemen. With that, we'll begin the question-and-answer session for the analysts, followed by the Q&A for the media. Tatiana, if you could please review the Q&A process, we'll be ready to begin.

Questions-and-Answers Session

Operator

(Operator Instructions) Our first question come from William Greene from Morgan Stanley, please go ahead.

William Greene - Morgan Stanley

Yeah. Hi. With regard to the growth rate cut in capacity for next year, how much flexibility do you have to move it down and the five other aircraft that you might sell, is that already included in this or might that be additional?

Larry Kellner

This is Larry. We have estimated, yeah, that those five aircraft are out in our fleet plan to the 3% to 4% expected growth rate assumes that the 15 737-500s exit between the end of this year and through almost to next year.

William Greene - Morgan Stanley

And do you have flexibility to drive it lower if you needed to or is that of all we can do at this point?

Larry Kellner

No. We've cranked since 9/11 the utilization of the fleet quite a bit. And clearly our plans based on a pretty strong utilization of the fleet that we have. We always have some flexibility if the market conditions change to take that utilization down.

William Greene - Morgan Stanley

Okay. And how should we think about the balance sheet impact of those sales? Or is it going to affect the cash balances very significantly?

Larry Kellner

We believe that it will be slight positive cash.

William Greene - Morgan Stanley

Okay. But they're mostly all leveraged so there is no doubt.

Larry Kellner

There is data on all the aircraft. We believe it will be a slight positive.

William Greene - Morgan Stanley

Okay. And then just lastly were there any one-time items here in the quarter related to weather or the northwest issues or what not that you can talk about or add color on that might have affected either RASM or some of the expense categories?

Larry Kellner

It’s hard to tell. June came out a little better than I thought it would at the beginning of the month and as far to tell how much of that Dallas had a tremendous amount of weather. But as we are having this call we’ve got the rain beating against the window here in Houston. We’ve had our share of weather here in Huston. Also it’s hard to net it out and say put a number on it. But clearly June performed pretty well for us.

William Greene - Morgan Stanley

Okay. So we'll just sort of have to go with that it would –

Larry Kellner

Yeah. It’s just part of our…

William Greene - Morgan Stanley

Is it a material or you can't net it out?

Larry Kellner

Yeah. Within the net of our weather negatives were offset by anything we picked up from anybody else's weather or operational problems or it was just a stronger market. In my sense looking at July it was just a little stronger market.

William Greene - Morgan Stanley

Okay. Thanks for your help.

Operator

Thank you. Our next question comes from Robert Barry from Goldman-Sachs. Please go ahead.

Robert Barry - Goldman Sachs

Hi, guys, good morning.

Larry Kellner

Good morning.

Robert Barry - Goldman Sachs

I wanted to follow-up on the growth question and I was wondering if you could just elaborate a little bit more on your logic for doing it, and to what extent it has to do with your a stance in the past about not feeding any market share to certain competitors?

Larry Kellner

It doesn't tie our market share comments. We have no change in our willingness to see market share, for instance, in the New York market. What it does tie to is the fact that there is a good market on a global basis for small narrow bodies 737-500, once regional jets came in had been our toughest fleet type and so we had the opportunity to reduce that fleet by the 15 we own. We started looking into marketplace for a chance to do that. And this just reflects both that fleet type and where the market is for fleet and the chance that we could do that.

We've got 64 new 737s on order new-gens from Boeing and so clearly this is a case where as you look at over the next three years we clearly have a number of aircraft coming from Boeing and we had some flexibility. We also plan to retire 300s. The reason we have got the 500s in the longer fleet plan is because the other 48 500s on lease from 2012 to 2015. And so we know that’s the fleet type will be operating on a long-term basis.

But we are gradually moving out of the classics to the more fuel efficient new-gens and this is just a chance to take advantage of market opportunities.

Robert Barry - Goldman Sachs

That is interesting. So I mean, I assume that there is also some embedded assessment of the '08 expected supply and demand dynamic in the market or is it really just about an opportunity that to sell the aircraft?

Larry Kellner

Well, it is a combination of the two. Clearly if fuel was $20 a barrel and domestic market was extremely strong you wouldn't be looking at those options. So I mean if you got to look at it in total.

Robert Barry - Goldman Sachs

Sure. And then…

Larry Kellner

And small 737 is the least fuel efficient than the 737s we operate on a per-seat basis.

Robert Barry - Goldman Sachs

Okay. And then just a question on the international outlook, clearly it continues to be very strong. I'm wondering what your thinking about it going forward, and if we should start to be concerned at all about tough comp. I know there is some enthusiasm about comps getting easier on the domestic front. On the fleet side, should we be getting concerned about difficult comps on the international front?

Jim Compton

Robert, this is Jim. Obviously, this thing we saw strong performance across all the entities and international side and bookings going forward also are consistent with what we saw in the second quarter. So, at least this is kind as far as you can see, which is, what we kind of talk about going forward, and in the third quarter we don't see any really changes. We still see good strength in the internal across all the entities.

Robert Barry - Goldman Sachs

Okay. Great. Thank you.

Operator

Thank you, our next question comes from Ray Neidl from Caylon Securities, go ahead.

Ray Neidl - Caylon Securities

Yeah. With the Boeing 737-500s you are not going to be taking a penalty by reducing the size of that fleet and operating only 48 are you? In other words with crew training, spare parts, they're interchangeable with the other 737 types, is that correct?

Larry Kellner

Well the classics are quite a bit different than the new-gens, but we have still got 48 300s which we'll also be facing out over time. But we look at the size of our classic fleet which is still over 100, we have a lot of flexibility there, as we work that down. We'll still have a decent; we'll still have 48 of them as we get to 2012 in the classic group. So we don't think it is a big impact.

Ray Neidl - Caylon Securities

Okay. Great. And then regarding the fleet on the small-end, what's the current status, it sounds like you are pretty well complete with your regional jet contracts, but I'm just wondering what the status is of ExpressJet, to your service, to your costs, are you satisfied with them? And if you are still contemplating maybe at some point using larger RJs.

Larry Kellner

Well, Ray, couple of things. One, ExpressJet has always done a good for us operationally. Clearly we continue to work the cost side there. And if you look at the larger RJs our scope clause and our main line pilot contract is that 50 seats, we don't think we can make the economics work on a 70-seater flown at the main line. And so we don't have any plans in the 70-seat jet area at the moment.

Ray Neidl - Caylon Securities

Okay. Great. Thank you.

Operator

Thank you, our next question comes from Mike Linenberg from Merrill Lynch. Please go ahead.

Mike Linenberg - Merrill Lynch

Yeah. Good morning all. I got two questions, my first one related to follow-up Ray with ExpressJet. Can you give us a timing on the outcome of this binding arbitration? When do we expect to hear something, some part A to that? And part B would be how the transition has gone with Chautauqua, how you view that relationship, how that is looking. And then I have a follow-up.

Larry Kellner

Sure, Mike. On ExpressJet, I think our best guess is that you'll hear about the end of the month to early in August on that arbitration. And with Chautauqua, the June performance, they had a controllable completion factor in June, so that excludes the weather and ATC if you start other completion factor but if you look at what they can control maintenance (inaudible), and 99-3. So clearly we’ve got into the transition with stock where they're doing a very good job for us. We're pleased with how that is working.

Mike Linenberg - Merrill Lynch

Okay. Good. And then just my second question I'm sure, you perused the joint application for antitrust immunity between northwest, delta, KLM and air France, basically it looks like they want to operate as one across the north Atlantic. Do you, given sort of your role in sky team? Do you view that as a threat?

Larry Kellner

I think we look at it competitively the right thing for us with our hub at Newark Liberty is to keep growing that hub. We have clearly got 787 coming in and which is going to make a big transition for us internationally. Our sky team is very important to us as it gives us a lot of reach we wouldn't otherwise have. Right now, we think we're headed in the right direction on the international front.

Mike Linenberg - Merrill Lynch

Okay. Very good and nice quarter.

Operator

Thank you, our next question comes from Dan McKenzie from Credit Suisse. Please go ahead.

Dan McKenzie - Credit Suisse

Hi. Good morning. Two questions here. You touched on fleet flexibility for 2008, but fuel at $75 and we haven't even had a hurricane yet. I am just wondering how you’re thinking about the risk of fuel going significantly higher. We have some prognostic occasions with fuel it could even go north of 90, how are you thinking about that risk and how could you respond there I guess how quickly could you respond?

Larry Kellner

First of all, fuel is already above 90 because when we're buying jet fuel, not crude. We've approached fuel several ways. One, obviously, our investment in our modern and fuel-efficient fleet is incredibly important. We have got the most fuel efficient fleet among the majors and we continue to invest in new aircraft and obviously all the ancillary operations that we do, our operational methods we do to minimize our fuel burn.

We also hedge the fuel component of tickets we’ve already sold and we rely on the market, frankly to price fuel correctly in the future. We can quibble as to whether the market is doing a good job pricing of fuel right now, and I don't think we've done as good job as in industry this year as we did last year, but what we're relying, frankly, on, you know, carry that (inaudible) rationing as fuel prices increase.

We’ve done I think a superb job having a fuel-efficient fleet and continuing to renew that fleet, and our employees are also doing a great job in the operations everyday to conserve fuel. And so I think we're in a quite a good position compared to our competitors, but nobody likes really, really high fuel prices, but it is something we learned to live with.

Dan McKenzie - Credit Suisse

Yes. Sure. And just for clarification, I was talking WTI north of 90, not necessarily jet fuel.

Larry Kellner

You tell what the (inaudible) fuel prices, but the fact is where it -- fuel is higher than we could of imagine it being a year or two ago and yet we turned in the largest second quarter profit that we had since the year 2000, so I think we're handling it pretty well, frankly.

Dan McKenzie - Credit Suisse

Sure. Second question, you know, relates to the FAA reauthorization bill. I'm just wondering, what you're seeing there and, how far away are we from some improved air traffic control efficiency and what are you guys working on and how would you sort of quantify potential savings from many efficiency improvements and of course the timing of those?

Larry Kellner

Sure. Dan, this is Larry. The professional air traffic controllers of the FAA are doing the best they can with the tools they got and we need to get them new tools and that's going to take several years, not several months. And we have to figure out how to pay for those tools. And I think step one is figuring out how to pay for those tools and inside what those tools are going to be so, we can get on with the process of getting the controllers and the tools they need.

I think the challenge we got is we can't continue to have a commercial airlines and the passengers paying for over 90% of the system and using about two-thirds of it. And as private jet aviation and distinguish private jet. There is a lot of confusion out there. Piston-powered aviation isn’t using the air traffic control system. This isn't about prop and piston flying.

This is about jet flying. But very light jets that are coming out like a (inaudible) aviation we got have a further impact on the air traffic control system and we've got to figure out a process for how we're going to pay for these new tools and we need to make sure the people who are paying for the tools get first priority on the system.

So, I think we have a lot of work to do. I think congress is making progress, but we need not to put this off for another year or two because even after we decide how we are going to do it, we have then got to figure out what tools we're going to use and then get into the implementation. So we're years from getting a better fix to a system that it’s already add its capacity. And, again, I think the controllers are doing the best they can with the tools they got. But we need to move forward. Hard to estimate cost savings but they will be significant and we just need to see exactly how the system works out how rolls it.

Dan McKenzie - Credit Suisse

Okay. Thanks a lot.

Operator

Thank you. Our next question comes from Frank Boroch from Bear Stearns. Please go ahead.

Frank Boroch - Bear Stearns

Hi. Good morning. My first question is, I wanted to see if you could talk about how the trends can performed in the second quarter and your outlook for the current period.

Jim Compton

Yes, frank, this is Jim. Transcon perform within the domestic continued to be strong for us implemented horizon point of view and load factor point of view. And you know one of the stronger domestic entities for us.

Frank Boroch - Bear Stearns

Okay. Great. That’s helpful. I look historically, it seems as though it Continental moving into the third quarter relative to the second quarter, unit revenue tends to increase about half of a percentage point. Is there anything -- this year that suggested that that -- maybe is different with capacity changes or last year we had the security scare and what not that somehow this year might be different than the historical sequential average of RASM up about half point over the second quarter.

Jim Compton

I'm not going to comment on the seasonality of it. I just refer to our comments and the investor updates overall versus that trying to speculate on the seasonality. But you have that seasonality, and I kind of go with that.

Frank Boroch - Bear Stearns

Okay. Thanks.

Operator

Thank you, our next question comes from Bill Mastoris from Bank of New York. Please go ahead.

Bill Mastoris - Bank of New York

Thank you. With regard to the 10-737-500s are any of those in your double ETCs and if they are, and if any of the other five potential sales are in the double ETCs, would it be correct in saying that you will continue to be the obligor and on even all the potential sales of those 737-500s.

Gerry Laderman

This is Gerry, if you look at the whole group of 15, some of those are in some of those double ETCs that I am sure you're familiar with and to the extent that we sell aircraft any of the aircraft that currently have debt on them, we would pay off the debt before we sell the aircraft.

Bill Mastoris - Bank of New York

Okay. And okay. That's pretty much what I would expect. I didn't know whether you were going to continue to be the obligor, but obviously you answered that. But my second question this has to do with the applications or start-up I should say of Virgin America.

You were one of the major objectors on to their application and normally you wouldn't do that unless you would consider them at least a potential future threat. Maybe you could comment on what type of impact you might think they would have on Transcon yields going forward.

Larry Kellner

Yes, Bill, this is Larry. Once they amended their application we didn't oppose it. We had only opposed before an ownership elements and that was not -- I mean, whether its sky bus or if you look at last couple years jet blue or several other airlines that have started, we know there will be new entrants into the market and that has been a continual thing since 1978.

So I would just clarify what we opposed in the Virgin America application was for ownership aspects and the structure, and not. Truly from competitive standpoint truly they are going to compete with us just like every other start-up in the U.S. does. I saw this morning where they announced the routes, clearly they are going to put a significant amount of capacity in the Transcon.

If you look at the number of planes they have and where they're going, primarily San Francisco and L.A. to JFK and Dulles and they're also going to do some north south flying on the west coast between San Francisco and L.A and San Francisco and Vegas that won’t have impact on us all the capacity in the Transcon which has some impact on us though it’s a big market and they are not flying the exact cities pairs we’re flying that they're going to JFK and not to Newark.

Bill Mastoris - Bank of New York

Okay. Thank you.

Operator

Thank you. Our next question comes from Gary Chase from Lehman Brothers. Please go ahead.

Gary Chase - Lehman Brothers

Good morning, guys. Just a couple quick questions for Jim. Obviously, I think through some of the comments you’ve made on the call, you know, obviously noting continued softness in the domestic environment, but I'm just curious, we shouldn't take any other comments you made to mean I think you are getting incrementally worse.

Can we say that the things are getting incrementally a bit better? We do have capacity reduction as we move into the second half and as you said things did look pretty good in June. So is there some inflection point that we should be thinking about as we move into the second half?

Jim Compton

Gerry it is Jim. You know, my ability to see far out is always obviously difficult in this business and so forth so that as Larry mentioned we are pleased with our June revenue performance and have seen some of that continuing in July so forth. So some of what I talked about kind of, where are we at an inflection point? But we’re clearly able to kind of – do better in the summer high demand periods and so forth. And so, we've been able to do some things Jeff mentioned in his comments, a $7 fuel surcharge each way in the domestic business. That is a result of studying the high demand relative capacity and so forth. And obviously those things begin to change in the fall. So, what we see is a continued weak pricing environment in the domestic. A number of sales, even during the summer period, that, again with -- at a micro basis some we match, some we don't. And as you get out to the fall you don't have that offset of the high demand period and constraint capacity during the summer as you head into the fall.

Gary Chase - Lehman Brothers

Okay. And I guess, as I remember, the latter part of last year, I mean, I think, at least by memory, people were affected by the liquid ban and terror alert in the international markets, so I mean is that wrong perception that you kind of went through that internationally without any difficulty in contrasted domestic? Because I would be thinking that the international comps get a little bit easier as you move into the second half as well.

Larry Kellner

I think clearly for us, seems like you always have to be a historian in this business. In the Tel Aviv market where year-over-year some of the things that were happening in Tel Aviv last year and then as you mentioned in August with the London situation, so clearly there was some fall-off in traffic in associated revenue in that, that will have year-over-year based on kind of the way we see bookings right now that is positive.

Gary Chase - Lehman Brothers

Okay. Thanks, guys.

Larry Kellner

Thank you, Gary.

Operator

We have no further analyst questions at this time.

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