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UAL Corporation (UAUA)

Q3 FY07 Earnings Call

October 23, 2007, 11:00 AM ET

Executives

Kathryn A. Mikells - VP - IR

Glenn F. Tilton - Chairman, President and CEO

Frederic F. Brace - EVP and CFO

John P. Tague - EVP and Chief Revenue Officer

Graham W. Atkinson - EVP and Chief Customer Officer

Analysts

Frank Boroch - Bear Stearns

Gary Chase - Lehman Brothers

Robert Barry - Goldman Sachs

Michael Linenberg - Merrill Lynch

William Greene - Morgan Stanley

Raymond Neidl - Calyon Securities

Kevin Crissey - UBS

Jamie Baker - JPMorgan

Daniel McKenzie - Credit Suisse

Susanna Ray - Bloomberg

Barbara De Lollis - USA Today

Ted Reed - TheStreet.com

Kelly Yamanouchi - Denver Post

John Pletz - Crainís Chicago Business

Laura Mandaro - MarketWatch

Presentation

Operator

Good morning and welcome to the UAL Corporation's earnings conference call for the third quarter of 2007. My name is Bill and I will be your conference facilitator today. Following the prepared remarks from UAL's management, we will open the lines for questions from analysts. At the end of the analyst Q&A, at approximately noon Eastern Time, we will take questions from the media. [Operator Instructions]. This call is being recorded and is copyrighted. Please note that it cannot be recorded, transcribed, or rebroadcast without UAL's permission. Your participation implies consent to our recording of this call. If you do not agree with these terms, simply drop off the line.

I would now like to turn the presentation over to your host for today's call, Kathryn Mikells. Please go ahead, ma'am.

Kathryn A. Mikells - Vice President - Investor Relations

Thanks, Bill. Welcome everyone to UAL's third quarter earnings conference call. The earnings announcement was released earlier this morning and is available on our website at www.united.com/ir. Let me point out that the statements in the press release and those made during this conference call may contain various forward-looking statements, which represent the company's expectations or beliefs concerning future events. All forward-looking statements are based upon information currently available to the company. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our press release, Form 10-K, and other reports filed with the SEC for a more thorough description of these factors. Lastly, during the course of our call, we will be discussing several non-GAAP financial measures. For a reconciliation of these non-GAAP numbers to GAAP financial measures, please refer to our earnings release.

And now Iíd like to turn the call over to Glenn Tilton, UAL's Chairman, President and CEO. Glenn?

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Thanks Kathy, and good morning and welcome everyone on the call. Joining me and participating on the call today are Jake Brace, our Chief Financial Officer; John Tague, Chief Revenue Officer; also here with us and available to take questions are Peter D. McDonald, our Chief Operating Officer and Graham Atkinson, our Chief Customer Officer.

Earlier today, we reported our third quarter results, which reflect the financial gains being driven by our work to improve every aspect of the core business. Our performance is among the best in the industry across nearly every financial metric, be it revenue, profits, margin, and cash flow. We reported a pre-ax net profit for the quarter, excluding special items, of nearly $0.5 billion, well over twice the pre-tax profit we reported a year ago.

Our net income, again excluding special items, was $295 million, increasing by some $132 million, 81% higher than the quarter a year ago, in spite of fuel at around $75 a barrel and a tax rate that was 17 points higher year-over-year. Both our operating revenues and expenses had special items associated with them this quarter, the effect of which was an increase in GAAP pre-ax net income, and Jake will speak to these in a few moments.

We continue with United our disciplined approach to capacity management and our numbers clearly demonstrate that we are benefiting from the work of John and his team to aggressively manage deployment of our assets and to improve our revenue performance. Our passenger revenue performance was among the best in the industry, with mainline passenger unit revenue, excluding special items, increasing by 9.7% compared to the third quarter of last year. John will add his personal perspective and that of his team on the quarter later in the call.

We are continuing to focus on controlling our costs, with operating expenses in line with our guidance, up approximately 0.5% from the previous year. As we indicated, when we provided guidance last month, our third quarter CASM was impacted by a non-cash charge for surplus and obsolete maintenance inventory and increased accrued expense for profit-sharing programs that would be paid out to all employees and have been driven by the improved revenue expectations I discussed a moment ago. As has been often mentioned, this is a high-class problem for United.

Itís worth noting that our programs to have the same metricsÖ our programs have the same metrics for everyone, management and frontline, and our profit-sharing program phased out essentially from the first dollar in pre-ax profit. Our employees have earned over $100 million in profit sharing year-to-date. Actual payouts, of course, will depend on our fourth quarter performance. Our operating profit, excluding special items, was $589 million, almost double that of the previous year. With an operating margin of 10.7%, we improved upon the strong margins we achieved last quarter. In addition, we generated operating cash flow of $342 million, $211 million higher than a year ago. Our strong cash flow distinctive to United flow allows us to reinvest in the business, reduce our debt, and consider shareholder-friendly options.

In that vein, last month we met with our Board for our annual strategic planning session to discuss the future of the company. The management team and our directors have taken a deep analytic dive across all the elements of our business, looking ahead to our competitive position in the marketplace five years out. The entire team, those who developed the plan and those who have responsibility for its execution, joined the Board for that discussion. As I told our employees on a recent call, the performance we are posting across the company as evidenced by the results this quarter have put us in a position to look to our future with confidence.

Our five-year plan builds on our strong competitive results, as we work to further differentiate ourselves in the marketplace with our best customers. Our five-year plan provides the roadmap to better manage through the down-cycles that are inevitable and to create value for all stakeholders, both of which, the vast majority of the U.S. airline industry has consistently failed to do. Rather as those of you on the call know better than most, U.S. airlines have consistently destroyed value. We recognize that in order to succeed, we must take a different approach, resuming all opportunities to create value and position the company for long-term success.

We have long stated our belief that consolidation is a strategic imperative for the industry and can create benefits for all stakeholders. We are looking at every segment of our business to determine what is core and what is not to eliminate cross-subsidies that mask inefficiencies. We are identifying how to unlock the value associated with the portfolio of businesses such as Mileage Plus in our maintenance division. By dis-aggregating and eliminating cross-subsidies, weíll strengthen these businesses and our core business. While discussion of unlocking the value of these businesses has drawn considerable attention, the bulk of our effort is concentrated on improving the airline.

We will further strengthen our airline by continuing to focus on delivering better experience for our customers, offering differentiated products and services our customers value, developing new sources of revenue, controlling our costs, implementing standard work processes across the system, and by providing the tools and training our employees need and by improving their work environment.

We measure and we track our success through a balanced scorecard that aligns work across the company for all workgroups. We set stretch targets, which are tied directly to our success sharing and our profit-sharing programs in which, as I said earlier, everyone participates. Our scorecard is a critical connection from our boardroom across the organization, with performance boards throughout the airports and management offices along with issues boards, where every employee is expected to raise issues and ideas that impact or improve performance. This brings transparency to our goals and our progress, and most importantly involves everyone in achieving these goals.

Our success is a direct reflection of the work our people are doing across the company to improve our performance and our focus on improving our customersí experience at every interaction is working very well for us. We continue to invest in new products and services for our customers. Very shortly, our inaugural flight for our new international premium products takes off from our hub in Dulles to Frankfurt. This is a significant upgrade and will ensure that United has the leading U.S. premium products with fully lie-flat seats in both first and business class and is competitive with the best foreign carriers.

Taking United apart by providing a more personalized experience for our best customers, coupled with the impact of process improvement across the system, will continue to drive margin leadership and improved reliability. Reliability and on-time performance are just as important to our customers. Regardless of our exposure to ATC challenged airports, we outperformed peers on average on-time performance and the handling of bags.

Weíve demonstrated our willingness to work with the government on solutions to relieve the burden on the nation's antiquated ATC system, as we did when we voluntarily reduced arrivals at O'Hare, our largest hub. These measures whilst somewhat effective in the short term are not the answer to the problem, as they constrict growth and competition and can limit service to smaller markets nor it is charging for slots or congestion pricing that penalizes carriers for flying when their customers want to travel and does nothing to address the inequity of how the system is currently funded.

We need to move to a satellite-based system, funded appropriately with both commercial and corporate jets paying their fair share and we need to do so now to meet customer demand and eliminate delays that cost airlines and their customers billions of dollars each year. We continue at United to strengthen our international network with the announcement of a new route to China. Next year, weíll begin service between San Francisco and Guangzhou, our sixth daily non-stop service to China, resourcing aircraft from our existing fleet for new international service by moving out of less profitable routes and operating our aircraft more efficiently. This disciplined process is key to improving margin and performance, and generating a reasonable financial return on the capital we have deployed throughout the business.

With that, Iíll hand over to Jake to take us through more of the quarter's results. Jake, over to you.

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Thanks, Glenn. Good morning everyone. As Glenn mentioned, this quarter we were clearly hitting on all cylinders with great revenue results, exceptional margin improvement, continued strong below the line performance, and improved cash flow. The result this quarter, as Glenn mentioned, include a number of special items associated with our bankruptcy case impacting both revenue and operating expenses.

We had a one-time non-cash credit to passenger revenue of $45 million this quarter related to the final resolution of certain administrative claims from our restructuring. We also had $22 million in restructuring-related cost reduction. As we walk you through our numbers for the quarter, we will be excluding these items in order to provide a clear picture of our fundamental performance. We generated an operating profit of $589 million this quarter, a year-over-year improvement of $284 million or 93% resulting in a nearly 5-point improvement in our operating margins to 10.7%. Pre-ax income which given our NOLs is the primary metric we use to measure our performance, was up 127% to almost $0.5 billion.

Net income this quarter was $295 million or $1.96 per diluted share, beating the consensus. Our third quarter net profit is after applying a tax rate of 41%. Iíd note that this tax rate was a couple of points higher than the rate used to develop the consensus, this means that our outperformance of consensus was greater than it would appear at first flush.

As Glenn noted earlier, in the third quarter of 2006, we had a tax rate of 24%. As you may recall, the third quarter of last year was the first time we booked a tax expense since emergence. That expense was based on year-to-date pre-tax income and resulted in a lower effective tax rate for that quarter. With that being said, despite the large increase in the tax rate, net income grew by $132 million or 81% year-over-year.

As weíve noted in previous quarters, tax expense should be viewed primarily as a non-cash item. Due to our large NOL balance, we anticipate paying only minimal cash taxes for the foreseeable future. As you know, our reported earnings include a number of non-cash fresh-start exit-related charges and we are attempted to identify these impacts for investors. As usual, all of the details of these effects can be found in the tables to our earnings release and posted on our website.

The impact of Mileage Plus accounting was modest this quarter. The fresh-start accounting methodology cost us $35 million in revenue versus the previous method, which was more than offset by a $50 million revenue benefit from the change to the expiration period for miles from 36 to 18 months. Net-net, the effect of Mileage Plus accounting changes resulted in passenger revenues increasing by $15 million. On a year-over-year basis, these accounting changes resulted in revenues increasing by $32 million. As many of you will have noted, passenger unit revenues came in significantly above guidance. First, we had the one-time special credit to passenger revenue of $45 million, which I noted earlier. Second, September core revenue performance was significantly stronger than we had expected, higher by approximately $50 million.

John will provide you more details on our strong revenue performance in a few minutes. Cargo and other revenue of $438 million came in slightly above the top end of our guidance. We saw a strong performance in cargo revenues, which grew by 8.2%, reflecting increased freight volumes in both domestic and Atlantic markets.

One factor affecting other operating revenues is lower third-party pass-through fuel sales at United Aviation Fuels Corp. This quarter, pass-through fuel sales were down $85 million to just $3 million. We expect to record other revenue of approximately $225 million to $235 million for the fourth quarter and $990 million to $1 billion even for the full-year 2007. Included in that guidance is our expectation that UAFC revenue will be about $5 million in the fourth quarter. Including UAFC, third quarter mainline RASM increased 9.7% year-over-year. Consolidated RASM, again excluding UAFC, increased by 9%.

Turning to costs, our cost performance this quarter was good, especially in light of the 1.3% consolidated capacity reduction, with operating expenses up approximately 0.5% and mainline CASM of 1.2% this quarter versus the same quarter of 2006. As Glenn mentioned, our mid-September cost guidance reflected $31 million in additional expenses to recognize a non-cash charge for surplus and obsolete maintenance inventory and also higher accruals for profit-sharing programs driven by improved revenue expectations. As we close the books for September, our better-than-expected revenue performance cost us to increase our accruals for profit sharing even further. As a result, mainline CASM, excluding fuel, was up to 5.8%, at the top end of our guidance.

Now, let me walk you through some of the expense categories where we saw significant changes this quarter. Maintenance was up 17% or $43 million due to a combination of higher maintenance volumes and rate increases on our V2500 powered by the hour contracts. Purchase services were $42 million or 14% higher, primarily due to increased IT expenses for new applications and other technology being deployed in support of our customer and employee initiatives. In addition, we increased outsourcing versus last year and also had a small negative impact from the weakening dollar. Finally, depreciation and amortization costs were up $19 million due to the one-time non-cash charge of $18 million for surplus and obsolete maintenance inventory that I just talked about.

We recognized a net gain on hedge contracts of $18 million, of which $8 million related to hedge position selling in the third quarter. All of this is recorded in fuel expense, including the benefits of hedging. Average mainline jet fuel price, including taxes, was $2.22 per gallon for the quarter compared with $2.30 last year. On the non-operating side, we recorded total non-op expense of $91 million, at the low end of our guidance. Before going through our cash performance, I wanted to point out that starting this quarter we've included a condensed cash flow statement along with our press release, I hope you find this information helpful.

We again delivered strong cash flow in the third quarter. Our operating cash flow of $342 million was $211 million or 161% higher year-over-year. As a reminder, our cash flow from operations was up 38% in the first quarter of this year and up 51% in the second quarter. Free cash flow, which we define as operating cash flow less capital expenditures, came in at $60 million this quarter, up from $38 million last year. Free cash flow was artificially depressed by the effect of an aircraft financing transaction that we completed this quarter.

In order to refinance certain aircraft in our fleet at a lower cost, we purchased three aircraft during the quarter that were previously leased for a total purchase price in excess of $150 million. The purchase of these aircraft was financed with the proceeds of the EETC transaction that we executed near the end of the second quarter. I want to stress that this transaction did not result in any change to the company's fleet count, which remains at 460 mainline aircraft. The purchase price for these aircraft was classified as a capital expenditure causing free cash flow to be lower than it otherwise would have been. Excluding the effects of this transaction, we would have generated more than $200 million of free cash flow this quarter, significantly higher than last year.

We also continued our efforts to de-leverage our balance sheet, repurchasing 76 million of debt securities. These securities are classified as held-for-sale investments on our balance sheet that are effectively a reduction in debt. As we noted in our press release, when we discussed our total debt balance, we deduct this repurchase debt.

During the quarter, we reduced our total debt by $210 million through the execution of the transactions I just referred to, as well as scheduled debt amortization. We ended the quarter with total debt, including off-balance sheet capitalized aircraft rents and municipal debt of $12.2 billion. Year-to-date, we have reduced total on and off-balance sheet debt by $1.6 billion, and expect a reduction of approximately $100 million in 2008 financing cost through these and other transactions implemented since the first of the year.

Our unrestricted cash and short-term investment balance remained steady at $4.2 billion, despite the cash outflows during the quarter for the aircraft purchases I mentioned, other capital expenditures, and debt reduction. Our net debt currently stands at $8.0 billion, a reduction of approximately $2.7 billion in the last 20 months. Despite the challenges produced by an environment of increasing load factors and ATC congestion, our recent operating performance continues to improve our relative standing in the DOT on-time ranking. For the 12 months ended August, United ranked third for on-time arrivals among the six network carriers, in comparison a year ago we ranked fifth. Our baggage performance also continues to improve, with United ranking first among our peers in DOT baggage performance in both July and August.

As we move forward with our five-year plan, which Glenn highlighted a few minutes ago, we are working to mitigate the difficult ATC environment and are pursuing nearly 40 policy processes, resource, and infrastructure opportunities to strengthen the liability across our system, including pursuing an ATC mitigation strategy with the FAA and supporting the O'Hare Modernization Program. Our expectation is that these initiatives will improve our performance while simultaneously helping us to control costs.

John will now fill you in on the quarter's revenue results and the work underway to continue to drive the strong revenue performance.

John P. Tague - Executive Vice President and Chief Revenue Officer

Thanks, Jake. During the third quarter, United's passenger revenue performance was among the best in the industry. We achieved these results by delivering against our strategy of continuously driving improvement in all areas of revenue execution and aggressively managing our capacity. Third quarter mainline PRASM was up 9.7%, and consolidated PRASM was up 8.9%. Strong results for September pushed us above the guidance we provided and further reflect the benefits we are enjoying as a result of the actions we have taken to improve our revenue performance.

International markets continued to perform exceptionally well. Despite a very difficult comp year-over-year, we still delivered significant international PRASM growth of 10.8%. Latin American PRASM increased by 11.7% year-over-year, Pacific PRASM growth was particularly robust, up 9.2% on top of a 14.1% increase last year. PRASM growth in the Atlantic was strong, growing by 12.2% year-over-year on top of a 10.8% increase last year and against a capacity increase of 4.4% this quarter.

Our performance across Europe was solid. One of the things that differentiated us from our competitors was that our Heathrow performance was quite good, with year-over-year RASM growth in the low double digits. Earlier this year, we knew we had to act decisively to reverse the domestic drag on our performance. And I am pleased to report that our domestic improvement has kept pace with our international momentum.

Domestic mainline PRASM was up 9%, aided by a year-over-year capacity reduction of 4.6%. Regional markets also improved, with PRASM up 4.6%, lower than our mainline results due in part to a 4.6% increase in stage length and capacity growth of 1.3%. Overall, Express continues to improve its contribution of the bottom line, in fact increasing by 13% or $8 million year-over-year. I know that many of you are interested in our transcon performance in the face of new LCC competition. While new competition obviously affects us, our RASM performance in those markets continues to be excellent, with year-over-year RASM growth of 13% in the quarter.

Our consolidated results were driven by an approximately 1 point higher load factor and a 7.8% increase in yield versus the third quarter of 2006. Our mainline results were driven by a 1.1% increase in load factor and a yield improvement of 8.2% year-over-year, providing nice evidence that these load factors continue to reach record levels, we can drive performance improvements through yield.

I would like to spend a few minutes discussing Unitedís view and strategy on capacity planning and allocation. United has had a longstanding commitment to capacity discipline. Three years ago, we led the industry in shifting capacity towards high-performing international markets, while dramatically reducing our domestic capacity spends. This past spring, we accelerated this strategy once again, reducing our domestic capacity growth by about 2% from previously planned levels without compromising the quality of our schedule. This decisive action is part of a long-term strategy to drive improvements in revenue performance at United, particularly during softer domestic market conditions.

Clearly, our approach is paying off, given our second and third quarter results. This in combination with effective revenue management and actions to strengthen the network resulted in a turnaround of our domestic unit revenues. Our five-year plan that Glenn discussed earlier calls for the continued dedication to responsibly drive capacity discipline in a manner that reflects market realities around profitable demand. I want to emphasize profitable demand. United is not meeting available demand today, and if we were our revenue performance would not be nearly as strong. Far too long this industry has deployed capacity based on a slavish belief in marginal economics. Somewhere in the process the industry has lost sight of the fact that marginal costs donít stay marginal and marginal revenues not only often stay that way, but can actually be destructive to core revenue performance. Itís the quality of the revenue that will ultimately enable the industry to produce a sustainable return on the assets and capital that we have deployed in the business.

Our observation over the last few years is that rather than expanding the revenue pie, marginal capacity pollutes the entire pricing curve. United has shown that by being disciplined, we can improve the quality of our revenue and expand our profit margins. As we look forward, you can expect that we will continue to be prudent in our capacity planning, while we utilize all the other levers we have available to continue to strengthen our revenue performance.

Our five-year plan seeks to expand upon the gains we have achieved through execution quality, while bringing to scale the successes we have had in creating new revenue streams. We need to have the commercial courage around enhancing the revenue model and reducing selling costs. It is the right capacity plan that makes that possible. Our results demonstrate that is true for United and we believe true for our industry.

As Jake will discuss momentarily, we will be taking further reductions in domestic capacity in 2008, while pursuing quality growth opportunities internationally. There has been a lot of discussion recently about a weakening economy and its potential effect on travel demand. From our perspective, we are not seeing any evidence of a slowdown in demand. Looking close then at the fourth quarter, we expect strong and balanced unit revenue growth, both internationally and domestically.

The bottom line is that we are encouraged about our revenue performance as we look forward to 2008 because we have appropriately set the table, and we have a willingness to use all the tools at our disposal to influence the outcome, while executing a strategy that, we believe, is consistent with our shareholdersí expectations.

Now, back to Jake.

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Thanks, John. Moving to guidance, our fourth quarter capacity guidance is appropriately conservative reflecting escalating fuel prices, with spot rates close to $90 a barrel. For the fourth quarter, we expect North American capacity to be down 4.5% to 5.5%, while international capacity is expected to be up 4.5% to 5.5%. Overall, fourth quarter mainline capacity is expected to be down 0.5% to 1.5%. Express capacity is expected to be up 2.5% to 3.5%, resulting in fourth quarter consolidated capacity flat to down 1%.

For the full year of 2007, we expect mainline capacity to be down 0.5% to 1.5% and consolidated capacity to be flat to down 1%. For 2008, we expect mainline capacity to be flat to up 1%, with domestic mainline capacity down 3 to 4% and international capacity up 5.5% to 6.5%. We expect United Express capacity to be up 1% to 2%, leading to consolidated capacity being flat to up 1%. And with said all that, we retain the ability to further reduce capacity, if necessary, as we have a large number of unencumbered aircraft, as well as some that come up for lease renewal next year.

On the cost side, we estimate that mainline CASM, ex fuel and special charges, will be up 6% to 6.5% in the fourth quarter, approximately half of the year-over-year increase is driven by higher maintenance cost due to increased heavy maintenance volumes, both airframe and engine, as well as rate increases in some of our outsourcing contracts. Another 1 point of the increase is due to lower operating expenses in the fourth quarter of 2006 from the two favorable insurance settlements, higher profit-sharing expenses causing 1 point of the year-over-year increase. Since the end of the second quarter, our earnings forecast has risen causing a substantial increase to our profit-sharing expectations.

A comment on the implied change in our fourth quarter cost guidance. While we didnít provide explicit cost guidance in the fourth quarter, if you use the data we provided you for the three quarters and the full year, you would have backed into an increase in fourth quarter CASM, ex fuel, of 4.8% based on our previous guidance, that obviously at midpoint is being raised to 6.25%, an increase of some 1.4 points. There are three things that drive that; one is we have further lowered capacity versus the previous guidance we gave you; second, I just mentioned our profit-sharing expectations have grown for the year, Iíd note that we book profit sharing a little bit differently than some of our competitors in that we estimate our full-year profit and then we book a proportion of that in each quarter, and since our full-year profit expectations have gone up, the amount that we will be book in the fourth quarter has also gone up; and then the third piece that has increased our guidance somewhat modestly is maintenance expenses and we can talk about that more in the Q&A.

For the full-year 2007, CASM, ex fuel, special charges, and severance, is expected to be up about 2.5%, slightly higher than our prior guidance reflecting higher maintenance cost and the increased profit sharing I just mentioned. We are still in the process of completing our budget and weíll provide 2008 CASM guidance on our fourth quarter conference call. You can find our fuel and hedge position guidance in our earnings release.

And now, Bill, we are ready to open the call for questions.

Question and Answer

Operator

Thank you very much, sir. First, we will take questions from the analyst community, then we will take questions from the media. The question-and-answer session will be conducted electronically. [Operator Instructions]. Our first question comes from the line of Frank Boroch of Bear Stearns. Please proceed.

Frank Boroch - Bear Stearns

Good morning. Glenn, I was hoping maybe you could shed some light on some of the 250 initiatives you alluded to, sort of whatís first up in the five-year strategic plan that you can share with us today?

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Frank, there are two types of initiatives, I appreciate the question, that weíre focusing on. Strategic, as I mentioned in my comments, and I think Jake and John have both referred to. We discussed with the Board, we are further along in developing the possibility of the MRO transaction than we are with Mileage Plus. And weíve said previously that we are focusing on both businesses within the portfolio, businesses at United, so that we can clearly make a distinction as to their value. We hope to have a P&L for Mileage Plus developed by the first of the year and then we will run the business accordingly. But, we are further along with the maintenance division. The 250 initiatives really speak to the issue of the core business. We have initiatives all across the business that were a function of the $4 billion capital budget that we have allocated across the strat plan, and they cover the full spectrum of the margin from revenue, all of Johnís initiatives that he alluded to in his comments, through Peter in the management of the operation, and Graham in the customer experience initiatives that we have underway. The point that we wanted to make about 250 is that we think weíve reached a point at which the improvement that we expect of ourselves throughout the five-year plan is going to come in smaller increments than those that you might be accustomed to, we are a company thatís just come out of restructuring, weíve talked about increments of value in large numbers. These are going to run the full spectrum from managed in the context of tens of thousands up to millions, and I think thatís the point that we wanted to make with 250, we also wanted to make the point that we are very transparent in the way that we account for the accountability around these initiatives, Frank.

Frank Boroch - Bear Stearns

Okay. Great. Thatís helpful. And Glenn, if you could maybe touch on your latest thinking with oil approaching $90 a barrel and some calls for a recession next year, do you think the likelihood of industry consolidation has increased?

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Well, two things, Frank. Number one, I think that oil is going to continue to have a risk premium associated with it that is virtually incalculable. Evidenced by the current situation playing out on the Turkish-Kurdish border, that clearly the market didnít expect. And I think that triangulates then Frank into a financial speculation relative to the risk premium. That probably puts anywhere from $15 to $20 into oil that, frankly, we simply canít account for relative to the fundamentals of supply and demand. You continue to see demand being pulled down, I think I saw a report yesterday, Frank, that talked about Chinese demand coming in lower than expectations. But, sooner or later, the fundamentals obviously are going to have their moment. And I think as well, prices at anywhere between $70 to $90, you can continue to stimulate alternative forms of energy. And that ultimately will have its effect, too. But, right now I think that the market is all about risk in financial players and commodities, we need to recognize that. With respect to recession, John spoke to the fact that in our business anyway, we arenít seeing any evidence of it, Frank, but my view is that at some point we are all going to do the work that we are able to do independent of one another. In some point, we should turn our attention to the synergies that exist between us and the industry, which we would classify in our vernacular here, United is [inaudible].

Frank Boroch - Bear Stearns

Great. Okay, thank you.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

You bet.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Gary Chase of Lehman Brothers. Please proceed.

Gary Chase - Lehman Brothers

Good morning, everybody.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Good morning, Gary?

Gary Chase - Lehman Brothers

I wanted to see if you guys could give us a little bit more flavor for the capacity plans you put in the release regarding 2008. It looks like the domestic cuts are a bit deeper than weíve been thinking and certainly more than the run rate you are on now. So, incrementally, can you give us a little flavor for whatís happening there? And then, also, John, in the vein of kind of what you were saying, this slavish reliance, I think you call that on marginal economics. Can you just explain it to us? Iím sorry.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Thatís exactly what he said.

Gary Chase - Lehman Brothers

Can you explain to us on the international side, whatís the opportunity thatís driving the need to dial up the growth there, because it seems like thatís what you are doing is supplanting domestic for international?

John P. Tague - Executive Vice President and Chief Revenue Officer

Yeah. So, I think as it relates to the capacity guidance, while we are not providing quarterly guidance for next year, you should assume that most of that capacity reduction is coming out in the first six months of next year, as we dialed our capacity down throughout 2007.

Gary Chase - Lehman Brothers

Right.

John P. Tague - Executive Vice President and Chief Revenue Officer

We think thatís the right place to be. I mean that we simply reject the idea that capacity plans should remain stagnant regardless of the price of fuel, itís justÖ it doesnít calculate. We are quite comfortable, but we retain the flexibility, as Jake said, to move up or down. We have been relatively cautious in terms of international growth as compared to some of our peers, but are growing at a rate that is greater than others. I think, as Glenn pointed out, we continue to have significant opportunity to re-optimize within the existing fleet. So, we are eliminating some marginal performing routes in favor of greater opportunities. We are also improving our asset utilization as we re-look at some of our maintenance criteria. So, we are getting good economics out of the existing fleet. We too are cautious as to whether these unit revenue growth rates can continue to run at the level they are and consequently, I think thatís reflected in a relatively modest growth rate for international next year, but international margins are recovering quite nicely.

Gary Chase - Lehman Brothers

Is there any way to characterize what youíre doing domestically, has it come disproportionately from one area?

John P. Tague - Executive Vice President and Chief Revenue Officer

I think as we done really throughout the last three to four years, weíve worked very hard to maintain the depth and breadth of our schedule and the schedule quality, particularly for our corporate customers and thatís been achieved by effectively utilizing the 70-seat regional jet capability, moving our wide bodies into more effective use internationally and consequently, simply down-gauging the domestic network, and thatís been the right answer for us in terms of margin performance. We know that others are pursuing up- gauging in pursuit of lower marginal cost to that again in our view except unprofitable marginal demand. So, we are just going to continue down this path and we are very pleased with the results. I will point out that we donít think we are executing, as well as we will be able to in the future on the revenue side and thereís lots more of make our own luck opportunities on the revenue side at United.

Gary Chase - Lehman Brothers

It didnít sound like there are any big red zones we need to be aware of, right?

John P. Tague - Executive Vice President and Chief Revenue Officer

No. We are seeing a very, very balanced outcome across the entities, which tells us that our capacity allocation is on target right now, but we are very, very keen to constantly reevaluate that, the wonderful things about airplanes is they are moveable.

Gary Chase - Lehman Brothers

And then just a quick net, on the 13% transcon gain, is that in Virgin overlap markets only or is that for the entire transcon entity for United?

John P. Tague - Executive Vice President and Chief Revenue Officer

Thatís for the entire transcon entity for United, but again weíre pretty circumspect about how weíre managing our capacity against LCCs. Weíre not fighting the battle between the titans, weíre trying to offer a product for our corporate customers and to demonstrate that we can produce an acceptable financial return in the phase of continuing LCC competition and thatís where our strategy is focused.

Gary Chase - Lehman Brothers

So, itís not materially different in the Virgin markets?

John P. Tague - Executive Vice President and Chief Revenue Officer

No, I will point out that JFK San Francisco, where we had the most significant Virgin overlap during the quarter, did experience positive unit revenue growth year-over-year.

Gary Chase - Lehman Brothers

Okay, thanks everybody.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Robert Barry of Goldman Sachs. Please proceed.

Robert Barry - Goldman Sachs

Hi, guys. Good morning. Hello?

Operator

Just pause one moment, Mr. Barry, our speakersÖ we have a technical difficulty here. We are going to reestablish in one second. Weíll take your question then, okay?

Robert Barry - Goldman Sachs

Okay.

Operator

Iím actually going to clear you out of the queue, if you can do me a favor and just re-key star one once youÖ once I get you out of the queue here. Hold on one second for me.

Robert Barry - Goldman Sachs

Okay.

Operator

And folks just hold on for me just one second, weíll get our speakers right back online, weíll continue our call. Thank you. Thank you again, ladies and gentlemen, very much for your patience, we do have our speakers back on the line and Robert Barry was next in queue. Sir, you may proceed.

Robert Barry - Goldman Sachs

Okay, great, thanks. Let me see if I can remember my question.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Robert, [inaudible] anything you said.

Robert Barry - Goldman Sachs

Two questions, one is on the fuel hedge fund, could you just update us on your thinking there? It looks certainly versus what weíve seen come through so far. There seems to be lower hedging at United for 4Q and a higher expected oil price?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

This is Jake, I would comment on the last part of that thing. We were obviously having a difficult time with the volatility of fuel, so our higher expected fourth quarter price is driven by the forward curve and I think other people may have driven it out at a different time. With the recent run up in prices, our expectations for the fourth quarter have going up. Having said that, weíre relatively modestly hedged in the fourth quarter, Glenn talked earlier about the risk premium being built into the products out there and weíre looking for opportunities to hedge at some point that we think makes sense and $88 we donít think make sense to lock any fuel at these prices, so we donít think this is the long-term rate, but we are looking to be opportunistic in 2008 hedging, but we have very, very little low hedge positions in 2008 right now.

Robert Barry - Goldman

Was the ë08 capacity plan developed under the assumption that that $15 to $20 would come back out within the relatively short time frame of the fuel price?

John P. Tague - Executive Vice President and Chief Revenue Officer

So ñ this is John here. Our capacity plan continues to be flexible and as we enter the year, we will reassess what the forward curve looks like at that point in time and whether that causes us to consider different capacity plans. Weíve obviously not done that yet.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Robert, as you watch the market go into backwardation, you know that the market is suggesting that it sees the same circumstances close in that we do relative to the risk premium, butÖ and that also gives you pause when a market backwardates.

Robert Barry - Goldman Sachs

Okay, then just finally could you update us on the timing for the mileage business, it sounded like having the P&L done by the first of the year was the next step. And then what happens beyond that? Would you kind of run it a little while before considering successive steps or how are you thinking about that?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Youíre exactly right. We have a goal to get a P&L up by the beginning of 2008, so that we can begin internally looking at the performance of that business unit. Where we go from there, we havenít determined yet, because the first step really want to see what that business unit looks like, what the opportunities are. But we will look at that and move quickly once we have visibility into the P&L and whatís that entity really looks like. So, we donít have a specific timing. We havenít decided what to do and whether to share the P&L information, obviously our bias as to both share the information and to do something that creates shareholder value with that entity. Thatís our bias and we intend to act pretty quickly after January 1st.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Okay, certainly worked our benefit, Robert, to have the management team of the MRO in a position to be able to understand their internal P&L prior to talking to interested parties relative to due diligence and we want to be in the same position with respect to the management team at Mileage Plus.

Robert Barry - Goldman Sachs

Right, fair enough. Okay, thank you.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Thanks, Robert. I appreciate it.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Mike Linenberg of Merrill Lynch. Please proceed.

Michael Linenberg - Merrill Lynch

Yes, gentlemen two questions, good morning.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Good morning, Michael.

Michael Linenberg - Merrill Lynch

First, theÖ what are the CapEx plans in ë08 and the ASM forecast that you provided us, does that anticipate any fleet retirements in 2008?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

The answer to the second question is no. Weíd assume the same fleet going forward, 460 as I mentioned. We do have flexibility too could we have unencumbered aircraft. We also had some aircraft that are coming off lease next year. So, we can adjust downward if we want, given this environment. Itís unlikely that we want to adjust upward, but we also have a flexibility to adjust upward with someÖ by getting some additional regional capacity next year, but obviously our focus is with fuel this high, itís unlikely that we are going to want to do that. The capital plan for next year is for $650 million and, as I said, no aircraft swaps or no aircraft changes, I mean the fleet we have right now is the fleet we intend to have in the next year.

Michael Linenberg - Merrill Lynch

Okay. And then just my second and this touches on a statement made by John where he characterized the London Heathrow performance is quite good. I think he indicated that RASM was up in the low double digits. When you look at your markets and you look at your primary competitor, you both fly from Chicago and LA to Heathrow, you are not in the New York market. Is part of this may be what you have in place with the Star Alliance carriers. Is this BMI feeding you and sort of as a corollary to the question, weíve seen an announcement from Delta and Air France on their JV. Should we anticipate that over the next couple of months that United and maybe its partners over there are going to step up their agreement or not?

John P. Tague - Executive Vice President and Chief Revenue Officer

So, I think we are clearly benefiting in Heathrow from the elimination of our New York service year-over-year. So, thatís a clear indicator. Relative to the Air France-Delta comment, we launched a pretty comprehensive joint venture relationship with Lufthansa in 2000 that creates sales with our preference on both sides, the Atlantic creates pricing management by the respective parties in their home markets and itís been quite effective and driven exceptional revenue performance for us across Europe, but obviously particularly in Germany. So, we think that we are well down that path on a very comprehensive agreement with Lufthansa and that we also possessed by far the broadest antitrust immunity with our partners in the Star Alliance across the transatlantic. So, clearly contributing to our current results, it remains to be seen as to whether this recent agreement has accomplished something we have not yet accomplished. If thatís the case, weíll take that onboard and work with our partners to try and make sure that we equalize competitively.

Michael Linenberg - Merrill Lynch

Hey, John, have you guys ever thrown a number out there about the size of your relationship, revenue number out there, maybe thatís what I am getting at?

John P. Tague - Executive Vice President and Chief Revenue Officer

No, we have not.

Michael Linenberg - Merrill Lynch

Okay. All right. Very good, thanks.

John P. Tague - Executive Vice President and Chief Revenue Officer

Thank you.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Thank you, Michael.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of William Greene of Morgan Stanley. Please proceed.

William Greene - Morgan Stanley

Yeah, hi.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Hi, William.

William Greene - Morgan Stanley

Jake, Iím wondering if you can comment a little bit on CASM trends. If we look at the second half of ë07, the CASM ex fuel is rising faster within the first half. So, are you going to be able to offset all of the inflation that weíll have for 2008 or should we assume that it will actually grow that rate or even faster as you make these adjustments?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

We arenít giving specific CASM guidance for 2008 yet. I can tell you that the run rate we are seeing in the third and fourth quarter is not going to happen in 2008, we are going to handle it. So, we areÖ again, we knew going into the year that the back half of the year was going to be difficult on a CASM comp basis could we had some pretty low performance, this fourth quarter maintenance cost last year was unusually low. And so we knew going into the year that the back half was going to be challenged on a CASM basis. We think that full-year CASM at 2.5% is respectable, we clearly want to do better than that, but respectable in this environment especially when we are shrinking capacity. So, next year, weíre not looking at anything like what weíre looking at in the back half of this year.

William Greene - Morgan Stanley

Okay. And then for either Glenn or Jake, on dividends, should we still expect that youíll sort of make some decision here toward year-end and give us sort of an update on what youíre thinking in terms of either a dividend policy or what you may do?

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Yeah, as weíve said, we have spoken to our Board on subsequent occasions on this matter, we have a theme laid out for them, we have committed to them to go back to the Finance Committee and the Board in December of this year, which we will do. We have another meeting this week. Weíll update them then on our thinking. I think we pretty well soaked them in the philosophy of the company, which weíve shared with you. Then toward the end of the year, as Jake, I think, said on a call ago, we will present to the Board our recommendation as to how best to proceed. Jake, you want to add anything there?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Yeah, Iíd just mention that we have covenants in our bank deal that would currently prohibit us from doing a dividend or a buyback. Weíre talking to them right now about that, I obviously donít have a resolution yet. So, we areÖ but weíre pushing the ball down the field in that regard. So, itísÖ obviously with what happened to the.. with the subprime meltdown it didnít help our situation in getting an amendment, but we are trying to work through those issues with the banks.

William Greene - Morgan Stanley

Okay. And then one just quick one. Jake, can you share with us the profit-sharing number that you accrued in the third quarter?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

No, I canít, because we havenít done that and weÖ because of the way we book profit sharing where we make an annual forecast and then we book a percentage of it. If Iíd give you that number, you know where our forecast was and I donít want to do that.

William Greene - Morgan Stanley

And thenÖ well, did I misunderstand you when you said year-to-date, it was $100 million?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

We said that they earned $100 million year-to-date and thatís is simply taking the pre-tax income for the year down to 15%.

William Greene - Morgan Stanley

Okay. Okay. Thank you.

Frederic F. Brace - Executive Vice President and Chief Financial Officer

You bet.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Ray Neidl of Calyon Securities. Please proceed.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Ray, how are you?

Raymond Neidl - Calyon Securities

Good. How are you doing? Very good quarter, guys.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Thank you very much, Ray.

Raymond Neidl - Calyon Securities

TheÖ demand still remains strong as you pointed out all over domestic, international, and so forth. Domestically, what would you say is the main component of increasing prices faster than they have been increasing? I know youíve put some price increase last week and some of itís being pulled back now. Is there any certain airline out there or airlines that are preventing the industry from putting through the prices that the demand justifies?

John P. Tague - Executive Vice President and Chief Revenue Officer

Well, it wouldnít be appropriate for me to comment on that. I would say that we have mixed results with the price increase we put out last week, but nonetheless overall favorable. We continue to believe that a prudent capacity planning is critical to get a long-term revenue model here that deals with these shocks as an expected consequence of our business as opposed to the exception. So, we are driving very, very hard to create more commercial discipline on all of our pricing behavior and believe if the industry accomplished commensurate returns with other businesses, thatís going to have to be the past.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Ray, we also think it triangulates back to the benefit, just aggregating the businesses, so that you donít have the intrinsic subsidy issue in the portfolio, which could actually extend to the subsidizing effect of a fuel hedge.

Raymond Neidl - Calyon Securities

To get back to the flight restrictions that youíve talked about before, if they do put flight restrictions at JFK, will that have any effect on your hub operation in Dulles?

Glenn F. Tilton - Chairman, President and Chief Executive Officer

I would think only positive in terms of the regional impact, but none from a scheduling perspective.

Raymond Neidl - Calyon Securities

Great. And Jake, tax rate going forward about 41%?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Yeah, I could use this rate that we had this quarter.

Raymond Neidl - Calyon Securities

Good. Thank you.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Thank you, Ray.

Operator

Thank very much, sir. Ladies and gentlemen, your next question comes from the line of Kevin Crissey of UBS. Please proceed.

Kevin Crissey - UBS

Good morning everyone.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Hi, Kevin.

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Good morning, Kevin.

Kevin Crissey ñ UBS

I wanted to focus on the Mileage Plus and try to hopefully get a little more color there. If we think about the miles that are actually purchased between the third party and the airline, is in any way you could give us a sense as to which is larger? And youíve talked about $800 million in third-party revenue a couple of years ago. HowÖ if we look at it in terms of miles rather than in revenue, how would we think about the airline relative to that?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Yeah, I donít think that we are prepared to give any information on that right now, Kevin. WeÖ because there is something that you heard us talk about when we were in Europe together, which is that the economic relationship between the airline and the Mileage company needs to be determined and that can be dialed up or down.

Kevin Crissey ñ UBS

Right.

Frederic F. Brace - Executive Vice President and Chief Financial Officer

So, I donít want to by giving you the number of miles with the airline awards sort of imply anything on what that economic relationship is going to be. So, we are working through that very issue right now as we create a P&L for the Mileage business and I donít want toÖ I donít want to foreshadow that result.

Kevin Crissey ñ UBS

Okay. But when we think about theÖ you creating an internal P&L, itís an internal P&L for not just the third party, but the internal P&L for the entire business, including having some sort of transfer of paymentÖ payment for the airline, is that--?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Yes, yes. And there would also be payments from the Mileage company to the airline to [inaudible].

Kevin Crissey ñ UBS

Right.

Frederic F. Brace - Executive Vice President and Chief Financial Officer

So, that relationshipÖ the amount that the airline pays for miles and not that the Mileage company pays for transportation is yet to be determined, but you are absolutely right, thatís how we think about the business is more than just a third party sale.

Kevin Crissey ñ UBS

Okay. And in terms of the risks of the strategy, do you believe that youÖ you as a management team have identified what all the risks of a spinout might be?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

I donít think we have yet. We are going through that process. We think weíve identified a number of them, but we have not finished our work. So, I wouldnít say that we have identified all of the risks. So, obviously somebody has done this before and Air Canada and Aeroplan have done this. So, thatís helpful in thinking about the risks and itís encouraging that they found a way toÖ they got comfortable with all the risks, but we havenít completed that work yet, Kevin.

Kevin Crissey - UBS

Okay. And would the contract be an evergreen contract or you donít know yet?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

We donít know yet.

Kevin Crissey ñ UBS

Okay. Thank you very much.

Frederic F. Brace - Executive Vice President and Chief Financial Officer

You bet.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Thank you, Kevin.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from line of Jamie Baker of JPMorgan. Please proceed.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Good morning, Jamie.

Jamie Baker - JPMorgan

Good morning gentlemen. Your earlier technical delay would have been more entertaining had you piped in Channel 9. Jake, following up to an earlier question, what sort of lead time do you think you require not only in terms of with the banks as it relates to on asset spend or a dividend payment, but also in terms of the labor approval as it relates to spinning off the MRO?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

So, you are focusing on the MRO process?

Jamie Baker ñ JPMorgan

Thatís correct.

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Yeah, so that processÖ we have a process underway right now and we are talking to both private equity and to various strategics and theyíre going through their due diligence process now. And I expect that before we get to a labor result, weíre going to have to identify who is the winner, if you will, and what the terms of that are and weíre going to have to go talk to labor about all of that. So, I donít think that that clearly itís not going to happen by the end of this year and itís more likely something thatís in the first quarter by the time you are actuallyÖ toward the end of this year or early in the first quarter by time you are actually talking to labor about a specific deal.

Jamie Baker ñ JPMorgan

But, you are suggesting that interested buyers would step up prior to knowing what an assumed labor buy off would cost?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Well, no, I think, we canÖ they would obviously have their own expectations about what that would cost and whetherÖ and what they could offer and what we could offer to the union, and then we have to go see if we could make that happen.

Jamie Baker ñ JPMorgan

Okay.

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Obviously, there wouldnít be any commitment until you actually had a deal with the union.

Jamie Baker ñ JPMorgan

Okay.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Jamie, when you think about it, the answer to your question it probably is contingent upon who the interested party if it succeeds would be and what their perception would be about the economics of such a transaction, including the labor transaction.

Jamie Baker - JPMorgan

Okay. Thank you very much, gentlemen.

Frederic F. Brace - Executive Vice President and Chief Financial Officer

You bet, thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Daniel McKenzie of Credit Suisse. Please proceed.

Daniel McKenzie - Credit Suisse

Yeah, hi.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Hi, Dan.

Daniel McKenzie - Credit Suisse

Good morning. John, this may be a little bit early, but Iím wondering what kind of preliminary perspective you can provide on ë08 corporate travel trends?

John P. Tague - Executive Vice President and Chief Revenue Officer

Weíre not seeing any statistical evidence nor are we hearing any significant anecdotal discussion around demand concerns from our corporate portfolio. So, we are obviously not oblivious to what you and I read in the paper, and I think that we are being conservative based upon the prospects of that, but weíre not seeing any evidence in fact or in discussion to feedback.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

In fact, Dan, we have been looking for it. Your question posed by a series of other folks on this matter, including our directors and we have actually been looking for signs of our significant corporates cutting back on their business travel. But, it actually seemed that the economic concern is driving them to compete on a face-to-face basis looking for an edge, such at least in the near term in this period as to ñ we are not yet able to call the next economic cycle is to when it begins and when we now experience [inaudible] we are actually seeing a sustaining experience.

Daniel McKenzie - Credit Suisse

Very interesting. And then I guess the next question I guess either for you Glenn or Jake. United has clearly been a strong advocate of industry consolidation, but two counterarguments have been that the political window has closed and then separately a concern is been expressed about consolidating at the peak of the earnings cycle. And then Iím just wondering how do you respond to these investor concerns?

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Two points. First is, I think I said on the last call that we havenít really tested the political window at all other than in the context of a hostile attempt. So, any perception, itís consistent, that which you mentioned a moment ago is hypothetical. We havenít gone to Washington and tested the antitrust and the political window with the proposition of a constructive and accretive to all stakeholdersí transaction, until we do, until the industry does, I donít think we are going to know the answer, but we are not going to know the outcome. I do think that at the smaller airline level there has been some activity that led to constructive consolidation that was resolved with the various regulatory authorities. So, Iím still of a mind that there is a tremendous amount of redundant overhead and redundant expenditure that amounts to waste that we independent of consolidation are all pursuing on our own. It would be hugely accretive to stakeholders if we pursued it in the context of consolidated industry that wrung that waste out of the industry. I donít think that there is a constituency out there that it would poorly serve.

Frederic F. Brace - Executive Vice President and Chief Financial Officer

And Iíd just add that the case where the economy is slowing and fuel is high, thatís all true, that only makes the case for consolidation even stronger.

Daniel McKenzie - Credit Suisse

Okay, great. Thanks a lot guys.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you ladies and gentlemen, this concludes the analyst and investor portion of our call today. Before we take questions from the media, I would now like to turn the call back to Mr. Tilton for closing comments.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Thanks very much, Bill. As I said earlier today in a message to our employees, our results at United reflect the continuing work and discipline across the entire company. This quarter we saw significant gains in revenue and profit and our performance clearly sets us apart from our domestic peers. With that having been said and as your questions reflect, we know there is more needs to be done to succeed in an industry that is fast becoming global and weíll see intensified international competition over the next five years in all markets, including the United States and thatís the work that our five-year plan sets out in detail, as we continue to improve this company for all of our stakeholders. And as weíve told you on many occasions and again on this call, weíd be aggressive in looking at all of our opportunities to generate value for our shareholders. At United, we believe that we should aspire to deliver returns competitive with American industry in general, be it by further strengthening United Airlines, unlocking the value of businesses under the UAL umbrella, using our cash for shareholder-friendly actions or by advocating as we did a moment ago for consolidation of the sector. Itís clearly a loss to get United in a different approach if needed if we are to be successful in breaking the historical boom and bust cycle of this industry. At our company, we resolve to talking a different approach, being proactive rather than reactive and creating sustainable value over the long term for shareholders and all of our stakeholders.

With that operator, we are now ready to take questions from the media.

Operator

Thank you very much, sir. We will now take calls from the media. [Operator Instructions]. Our first question comes from the line of Susanna Ray of Bloomberg. Please proceed.

Susanna Ray - Bloomberg

Hi, there. I just have a couple of questions about the maintenance unit. Iím wondering what exactly you mean by various strategics and Iím wondering how many interested parties you are speaking with. And then Iím also wondering what will be done with the proceeds, I know employees are very keen to get some of those proceeds. And then my last question is just whether you are considering selling perhaps your cargo operations or any of your United Express slots or anything else other than maintenance and the Mileage plan? Thanks.

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Okay, let me handle that in sort of reverse order. We donít own any of our United Express partners. So, there is no potential for a transaction right there.

Susanna Ray ñ Bloomberg

So, what about the slot?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

I am sorry.

Susanna Ray ñ Bloomberg

What about the slots? I think you are on the slots, right?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Yeah, we are not planning on selling any slots.

Susanna Ray ñ Bloomberg

Okay.

Frederic F. Brace - Executive Vice President and Chief Financial Officer

As to the proceeds, I think itís way premature to talk about the proceeds, weíve gotten a lot of interest from various parties. Iím not going to name them for you, but strategics would be people who are in the MRO business and obviously who private equity is. But, we are not going to name anyone. Weíve agreed to do this confidentially and thatís the way we are proceeding. But, we got a lot of interest, a lot of people are looking at it. And again we donít know at this point whether we are going to be able to push the ball over the goal line or not because of, I am sure youíve heard the conversation we had with Jamie Baker a little while ago. We had some issues to work out with labor and itís not clear whether we are going to be able to work those issues out. The maintenance business for us is something that as an airline, we donít think we can invest a lot of capital in it and make it grow. And so in order to have that business grow, we think it makes some sense to get a third party involved, we canít invest the capital to grow that business. So, we think over the long term it could be quite a good business.

Susanna Ray ñ Bloomberg

And just one last question about the timeline, you mentioned something at the end of the year or beginning of the next year, youíll have a specific deal to take to labor. Does that mean you would anticipate selling it in the first quarter of 2008?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

I think that the timingÖ the timing of the process is going to be a little bit unpredictable, because we obviously are going to have to engage labor in a discussion if we got proposals from someone that we find acceptable, first of all. So, we havenít got to that point yet, but we first of all have to get a proposal that we find acceptable, then we have to go and see if we can work things out with labor and having done all that, then we can give you a timeline. But right now, itíd be way premature to talk about a specific timeline.

Susanna Ray ñ Bloomberg

Okay, thank you.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you very much, maíam. Ladies and gentlemen, your next question comes from the line of Barbara De Lollis of USA Today. Please proceed.

Barbara De Lollis - USA Today

Thank you. I was hoping you could talk about how important the new international premium product will be for United. For instance, do you think it will help you regain customers you lost to foreign flags that had a better product? Do you think youíll sell more business class tickets to people whoíve been sitting in coach? Thank you.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Barbara, let me have Graham Atkinson, our Chief Customer Officer, to take the first part of your question.

Barbara De Lollis - USA Today

Thanks.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

You bet.

Graham W. Atkinson - Executive Vice President and Chief Customer Officer

Yes, good morning, Barbara. So, the product is coming to market shortly and we spent a couple of years designing and developing this product with an eye very much focused on our international best-in-class competition, thatís why we developed the fully lie-flat ñ 180 degree angled lie-flat seats in business class, as well as a completely new product in first class. And we believe itís going to drive significant yield improvement and a significant share shift. And thatís been the whole rationale for the development of this project. We fully acknowledge, we are middle of the pack right now and we intend to change that.

Barbara De Lollis - USA Today

Are there some risks that are going to reallyÖ that you think will really form better once this is in place?

Graham W. Atkinson - Executive Vice President and Chief Customer Officer

Iím sorry, I couldnít catch that.

Barbara De Lollis - USA Today

Are there some risks that really scream out for this improved product? Do you think youíllÖ I know itís starting at Dulles-Frankfurt, but what are the risks do you think?

Graham W. Atkinson - Executive Vice President and Chief Customer Officer

Well, we have a very diverseÖ uniquely diverse network Iíd say right across the world and we have world-class competitors in all regions. So, obviously some of the routes thatÖ most attractive are those that are the longest and those fly across the Pacific against some of the world-class competition that resides on the other side of Pacific. But, I would say right across the gambit, we feel ready to compete with anyone with this new product.

Barbara De Lollis - USA Today

Okay. Thank you very much.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you very much, maíam. Ladies and gentlemen, your next question comes from the line of Ted Reed of the TheStreet.com. Please proceed.

Ted Reed - TheStreet.com

Hi.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Ted, How are you?

Ted Reed - TheStreet.com

Good. How are you?

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Good.

Ted Reed - TheStreet.com

John, Iíd would like to ask you, why is this that your RASM increase is so much higher than your closest competitors and 9% versus the 5 or 6%? I know you are taking out capacity, I assume you have great yield management, but those things arenít different. So, why is you are so much higher?

John P. Tague - Executive Vice President and Chief Revenue Officer

Well, in fact, our capacity reduction was less than some of our principal competitors. So, I donít think thatís quite the catalyst for competitive performance in all cases. I would probably debate the notion that everybody has revenue management, therefore everyone executes equally. Our whole principle over the last 3 or 4 years is that we can drive best-in-class execution, be it in our B2B selling effort or the way we manage capacity or the way we price and manage our inventories and we are not done yet. We have a very significant suite of initiatives that Glenn alluded to to improve that performance further and we reject the idea, some would say that revenues happened to us as opposed to our accountability to deliver a best-in-class performance.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Hi, Ted, in the question about the 250 initiatives, there were some apparent confusion that we had 250 strategic initiatives that were akin to Mileage Plus or to the MRO. When in fact, in the 250, whether they be capital intensive in the $4 billion or not, a good many of them belong to John and his revenue team and they are all intended to drive improved performance against the current performance, which you rightly say is better than peers.

Ted Reed - TheStreet.com

I just, I might have lost and no why itís so much ñ why itís so much better though, there arenít any real secrets, are you like holding out tickets longer and you will manage in there, is there something like that?

John P. Tague - Executive Vice President and Chief Revenue Officer

Well, I might just fuse the fact that there arenít any secrets, but if there were I certainly would share that what you, Ted.

Ted Reed - TheStreet.com

All right. [inaudible].

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Yes, nice try, Ted.

Ted Reed - TheStreet.com

All right. Thank you.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

You bet. Bye-bye.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Kelly Yamanouchi of Denver Post. Please proceed.

Kelly Yamanouchi - Denver Post

Hi. I wanted to ask a couple of questions about your planned domestic capacity reduction. Iím wondering in terms of maintaining the quality of your schedule, are you going to be able to prevent pulling out of any routes and how doesÖ how do your domestic capacity reductions affect your international feed as you are increasing your international capacity?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Yeah, thanks, Kelly. We donít expect anything noticeable from a customer perspective relative to the current exceptional quality of our schedule domestically. So, I would say it will be invisible from that perspective and in fact, as weíve reduced ASM spend in the U.S. over the last several years, weíve actually added new destinations and new routes quite consistently. Weíre very happy with the relationship between our domestic feed and the international system. We think sometimes that ñ itís an issue, but itís a bit of a red herring to support an unprofitable level of service domestically under a belief that itís essential to your international profitability, while true generally on the margins, we do not believe it is true.

Kelly Yamanouchi - Denver Post

I see. Okay. And Iím also wondering if you plan to announce any more major international markets for 2008, we havenít already?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Well, weíve announced a number of markets, the daily to Kuwait between now and the end of the year, Los Angeles to Frankfort as Glenn mentioned, the new China service. And then I would expect that we will have additional announcements forthcoming, some of which may impact Denver.

Kelly Yamanouchi - Denver Post

Okay. When would that be?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Shortly.

Kelly Yamanouchi - Denver Post

Okay. Will it be London?

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Thank you, Kelly.

Kelly Yamanouchi - Denver Post

All right. Thank you.

Operator

Thank you very much, maíam. Ladies and gentlemen, your next question comes from the line of John Pletz of Crainís Chicago Business. Please proceed.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Hi, John.

John Pletz - Crainís Chicago Business

Hi, there. Just another question on international capacity growth, sort of mentioning, I guess, specific routes. Is it likely to be split between various hubs or is it going to be focused on one side of the country or the other?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

No, weíve continued to grow our international presence in San Francisco, Chicago, and Dulles and we evaluate opportunities as they come about in each of those regions. I donít think that we have any sort of a directional bias other than the economics, they all present good opportunities for us going forward.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

I think an example there, John, would be the fact that we were delighted to get San Francisco-Guangzhou, we were disappointed not to get LA-Shanghai. We are pleased to have LA-Frankfurt.

John Pletz - Crainís Chicago Business

Okay. Anything regarding Dulles in terms of running out things there?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Iím sorry. Could you?

John Pletz - Crainís Chicago Business

In terms of whatís happening on the East Coast, trying to just figure out what basis where think you might be underserved or you see opportunity in terms of departure points for international?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

I think the thing to understand about Dulles that John can elaborate on is Dulles has been a very rewarding international hub for us to develop contrary to some of the expectations during the restructuring.

John P. Tague - Executive Vice President and Chief Revenue Officer

So, I think as we alluded on the last call, Dulles is really performing extremely well for us. And I would say that is a uniform comment across virtually every route internationally in Dulles. So, weíre very encouraged about that region being the real deal in terms of a genuine large-scale international hub on the East Coast over time. Weíll obviously have to tackle some facilities issues as we move through this. But weíre very encouraged by the potential there.

John Pletz - Crainís Chicago Business

Thanks.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Laura Mandaro of MarketWatch. Please proceed.

Laura Mandaro - MarketWatch

Hi there.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Hi, Laura.

Laura Mandaro ñ MarketWatch

Hi. From the conference call, it sounded like you are further along talking to possible buyers for the maintenance business than you would be for the Mileage Plus. Do you have that right and are you talking to interested buyers of the Mileage Plus or you are not there yet?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Hi, this is Jake.

Laura Mandaro ñ MarketWatch

Yeah.

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Weíre talking, as I said, to people on the MRO business. We have not developed a P&L for the Mileage business yet, so we donít really have anything to talk to people about. Having said that, there are people that are ringing my phone wanting to talk about it, but we have not engaged in any discussions, because we think it obviously makes sense to develop a P&L and define what the business is before beginning to talk to anyone about it seriously. But, weíve had some inbound interest.

Laura Mandaro ñ MarketWatch

Right. If I could just follow up a little detail there, so is there a P&L for the MRO business already orÖ and can you just--?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Yes, the MRO business has a P&L and it hasÖ weíve identified all the assets that go with the business and definition of the business and the contract, if you will, between the airline and the maintenance business and thatís is what we are talking to the strategics and the private equity firms about.

Laura Mandaro ñ MarketWatch

Right. Is that publiclyÖ you make that available on?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

No, we didn't.

Laura Mandaro ñ MarketWatch

You donít at all. Can you give us some--?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

No, itís not. So, we produced that information and itís not broken out of our financial statements and we have not made it public.

Laura Mandaro ñ MarketWatch

Okay. And then so on theÖ you are saying you are working and getting a P&L for the maintenanceÖ the Mileage business. Would thatÖ and you are leaning towards disclosing now, would that just be sort of a footnote if it were to be disclosed in the financial statements or can you give us--?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

I think there are a lot of ways you could disclose it in the financial statements.

Laura Mandaro ñ MarketWatch

Okay.

Frederic F. Brace - Executive Vice President and Chief Financial Officer

We havenít gotten that far to determine whether we are going to do that or not, and as I said, we are biased in favor of it.

Laura Mandaro ñ MarketWatch

Okay. Okay, good. Were you the one who answered the first question from Bloomberg or was that Glenn? Iím sorry, I canít identify about United Express and the--?

Frederic F. Brace - Executive Vice President and Chief Financial Officer

That was me.

Laura Mandaro ñ MarketWatch

Okay, thanks very much.

Frederic F. Brace - Executive Vice President and Chief Financial Officer

Okay.

Operator

Thank you very much, maíam. And that concludes our Q&A session for today and also concludes our presentation. I want to thank you gain for your patience during our little technical issue there in the middle. You may now disconnect your lines. Have a good day.

Glenn F. Tilton - Chairman, President and Chief Executive Officer

Thank you, Bill.

Operator

Thank you.

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