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Executives

Kathryn A. Mikells - VP of IR

Glenn F. Tilton - Chairman, President and CEO

Frederic F. Brace - EVP and CFO

John P. Tague - EVP and Chief Revenue Office

Analysts

Frank Boroch - Bear Stearns

Michael Linenberg - Merrill Lynch

William Green - Morgan Stanley

Mark Streeter - JPMorgan

Kevin Crissey - UBS

Ray Neidl - Calyon Securities

Daniel Mckenzie - Credit Suisse

William Mestoras - Broadpoint Capital

Julie Johnson - Chicago Tribune

Ted Reed - TheStreet.com

Kelly Yamanouchi - The Denver Post

Del Wilbur - The Washington Post

Lori Ranson - Air Transport Intelligence

UAL Corporation (UAUA) Q1 FY08 Earnings Call April 22, 2008 11:00 AM ET

Operator

Good morning and welcome to UAL Corporation's earnings conference call for the first quarter of 2008. My name is Rufus, and I will be your conference facilitator today. Following the prepared remarks from UAL's management, we'll open the lines for questions from analysts. At the end of the analysts 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. Miss Mikells, please go ahead, ma'am.

Kathryn A. Mikells - Vice President of Investor Relations

Thanks, Rufus. Welcome to UAL's first 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 information in the press release and information provided 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 for our press release, form 10-K and other reports filed with the SEC for a more thorough description of these factors.

Also during the course of our call, we will be discussing several non-GAAP financial measures. For a reconciliation of this non-GAAP numbers to GAAP financial measures, please refer to the tables at the end of our earnings release. While we do not have any special items in the first quarter of 2008, our prior year results included special items related to our bankruptcy that decreased operating expenses by $22 million. As Glenn, Jake and John walk you through our numbers to the quarter; they will be excluding these items unless otherwise noted.

While not a special item, the deferred revenue accounting we adopted for the Mileage Plus program in 2006, as well as the change in the mileage expiration policy from 36 to 18 months, we announced in early 2007, affected our revenue numbers for the quarter and the year-over-year comparison.

In the first quarter of 2008, the change to deferred revenue accounting decreased Mileage Plus revenues by $65 million. In comparison in the first quarter of 2007, the Company recognized $28 million in additional revenue from the change in expiration period, offset by $135 million decrease in consolidated passenger revenue driven by the change to deferred revenue accounting.

The net effect for the first quarter of 2007 was a decrease in revenues of $107 million, as compared to the revenues that we estimate we would have reported under our old accounting method. On a year-over-year basis, Mileage Plus accounting resulted in a $42 million increase to first quarter 2008 consolidated passenger revenue. You can find more information about all of these items in the tables at the end of our earnings release.

And now, I'd like to turn the call over to Glen Tilton, UAL's Chairman, President and CEO.

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

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

As Kathy said, earlier today we reported our first quarter 2008 results. An increase of $618 million in fuel expense over last year drove a first quarter loss of $537 million, $371 million higher than in 2007. This was obviously a very difficult and challenging quarter for us and for the industry.

That said, both our revenue performance and our non-fuel cost performance were solid this quarter, though certainly not enough to offset the extraordinary rise in fuel price. All the network carriers who have reported results so far have reported a quarterly loss and we have seen six carriers file for bankruptcy protection in the past month, four of whom have ceased operations. At United, we're taking the necessary steps to implement the substantial changes to become profitable over time and earn reasonable returns at these fuel prices.

Last week as all of you know Delta and Northwest announced their proposed merger citing fuel and the global competitive environment as key reasons for their decision. Consolidation is not a new topic to this industry or to United, nor is it the single answer to how we can be competitive in a dramatically changed marketplace. It's only one of the many changes to address the gap between where we stand today, and profitability and sustainability. And it's a necessary step toward our goal of being able to earn a margin and returns commensurate with the general US industry.

On the call today, we will talk about the additional work we are doing within the Company across every facet of the business to achieve that goal. We're taking steps to further reduce our costs, improve revenue and trim capital spending. To put the challenge into context, crude stays over $110 a barrel, our annual fuel bill will increase by well over $2 billion compared with last year when fuel averaged for us $72 a barrel.

Today, we are announcing additional measures to ensure we can compete in an environment driven by record fuel prices and a softening economy. We are further reducing our fleet, cutting capacity and eliminating marginal flying. We will be grounding a total of 30 of our most inefficient aircraft and are slimming down our operation accordingly by reducing our workforce by some 1,100 people including 500 salaried and management employees. We're also cutting our capital spending and other costs in a focused manner. Jake and John will be taking more about these actions momentarily.

As most of you know, we have no aircraft purchase commitments and do not plan to make any until they can earn a profit. It sufficiently justifies the capital expense rather than marginally adding to the profitability of the entire system. We'll continue to invest in safety and are making targeted investments in improving the customer experience.

Last fall, we introduced our new international first in business cabins and that rollout will continue. We also opened our Global Services and international first class lobby at O'Hare, which has been well received by our premium customers.

As in other industries, we are taking a number of steps to pass on the increases in our commodity cost aggressively implementing fair and fuel surcharge increases and we are executing our strategy to deliver new revenue strengths.

We will continue to build on this work charging customers for services they use and products they value by rewarding our best customers for their business and their loyalty. An example is the $25 fee for a second bag that we initiated, which we expect will generate over $175 million annually for United.

Since our announcement in February, four other carriers have matched the fee. We expect Economy Plus and Premium Cabin upsell to generate some $220 million this year. And all told, we expect that merchandising opportunities will generate $1 billion in revenue annually over the next few years. John will be talking more about the rollout of new initiatives to increase revenue.

As I said our revenue performance for the quarter was once again among the best in the industry. Our strategy have improving yield rather than chasing marginal traffic to fill the last available seat, is working.

Total revenue is up 7.7% over the prior year's quarter despite lower load factors and flat capacity. We've lead the industry in capacity discipline in last quarter had announced a 3.5% to 4.5% reduction in domestic mainline capacity for the full-year 2008. As we announced this morning mainline domestic capacity will be down by about 9% year-over-year by the fourth quarter and that's on top of the 5% reduction in the fourth quarter of last year.

Our international markets continue to perform well yet are being outpaced for the first time by the domestic markets as a direct result of the action we've taken to reduce domestic capacity, to better match profitable demand and support necessary fair increases. As a company, we continue to strike a balance between our domestic and international network, and leverage the flexibility we have to move our assets accordingly. Setting aside fuel, our cost performance was also good. The mainline CASM excluding fuel up only 2.4%, despite flat capacity.

During our investor day in February, we discussed our five-year plan which provides a solid roadmap for the work we need to do, to continue to strengthen the performance of the Company and ensure that we have a clear line of sight to the performance of each business unit. In this extraordinary environment, we recognize the pace of change now needs to accelerate. And our actions announced today reflect just that.

Oil at over $110 a barrel does not alone make the case for consolidation in this industry. It simply makes it more compelling as does increased foreign competition and a softening economy. At United, we're well-positioned to participate to the benefit of all of our stakeholders and we're accelerating the work that will serve our customers and our shareholders well in any environment.

So with that, Jake, I'll turn the call over to you and you'll walk us through more of the numbers in detail.

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

Thank you, Glen and good morning everyone. In this challenging environment we continue to take the right steps to combat record fuel costs and a softer economy. Our focus on cash flow and the interest of our shareholders makes taking what were traditionally very difficult decisions for an airline to take, things like permanently grounding aircraft, in fact, very straight forward decisions.

In this seasonally weak first quarter, a mid fears of recession and speculation around declining demand, we again produced unique revenue results that were among the best in the industry. However, the industry as a whole failed to fully pass on rise in commodity cost to consumers and our revenue growth was not enough to offset the impact of fuel cost that were 50% higher than last year.

As a result our first quarter operating loss of $441 million was $327 million worse year-over-year. Pre-tax loss for the quarter was $542 million, $283 million worse than last year and we recorded a net loss of $537 million or $4.45 per share.

First quarter mainline RASM increased 8% year-over-year and excluding UAFC increased by 8.6%. Consolidated RASM, again, excluding UAFC increased by 8.5% while cargo and other revenue of $451 million was up approximately 4%. We saw a strong performance in cargo revenues which grew by approximately 30% reflecting a functioning marketplace were rise in commodity costs can be passed along to customers through fuel surcharges. Our performance was also aided by higher mail volumes and an improved traffic mix in foreign currency gains.

Turning to costs. Operating expenses increased nearly 15% in the first quarter as consolidated fuel expense increased by $618 million. Including hedging gains, average mainline jet fuel price for the quarter was $2.83 up from $1.89 a year ago and higher than our guidance due to a dip in the fuel forward curve on the last day of the quarter, which cause the unrealized hedging gains that we book for the quarter to be lower than we anticipated when we gave you guidance.

On an economic basis, the Company realized gains of $12 from the fuel hedges it had in place in the first quarter. But on an operating basis, we booked $9 million in realized gains and $32 million in unrealized gains during the quarter. If you like more details on our hedging gains, please see our press release.

As Glenn mentioned, we saw good non-fuel cost performance this quarter especially against the backdrop of flat capacity. Mainline CASM excluding fuel increased 2.4% year-over-year coming in below the low end of our prior guidance mainly due to timing issues.

Now, let me walk you through some of the expenses where we saw a significant year-over-year changes this quarter. Maintenance was up nearly 13% or $36 million due to a combination of higher maintenance volume and higher intensity of repairs. Purchase services were $48 or 16% higher mainly due to increased IT expenses for new applications in other technology, we are deploying to support our customers and employ initiative.

We also experienced higher over flight charge and other expenses related to increased international flying. And finally, we saw increased ground and cargo handling expense as rates increased and we saw higher mail volumes as I have mentioned earlier.

Salaries and related costs were down reflecting reduced accruals for profit sharing programs somewhat offset by higher contractual wage increases. Landing fees and other rent were down due to ongoing efforts to eliminate underutilized space at the airports. Distribution cost for the quarter were down 2%.

Over the last fours years, we have been at the forefront of establishing new fee arrangements with GDF companies as well as successfully migrating customers to lower cost channels. We believe there are more opportunities to lower sales and distribution cost further, and John and his team have an aggressive plan to do so.

Finally, other operating expenses rose 9% or $24 million due to higher glycol and passenger expenses related to the storms we saw in the early part of the quarter as well as higher hotel per diem cost.

Turning to below the line, we recorded total non-op expense of $101 million, 30% lower than the first quarter of 2007, the current level of interest expense reflects the progress we've made in strengthening the balance sheet by reducing debt and lowering financing cost.

We also benefited year-over-year from $34 million of non-cash expense that we recognized last year related to the refinancing and pay down of our credit facility. Excluding these financing related charges we saw our gross interest expense decline by $37 million year-over-year in that quarter.

Due to the strain of higher fuel cost, we generated negative operating cash flow of $80 million in the first quarter. Free cash flow, which we define as operating cash flow less capital expenditures came in at negative $181 million this quarter. As I have mentioned before, we are very focused on cash and I will discuss in a few minutes we are taking a number of steps to improve our cash flow.

Our unrestricted cash and short-term investments declined to $2.9 billion in line with guidance reflecting both the $250 million shareholder distribution we made this quarter and $195 million in total on and off balance sheet debt reductions. We ended the quarter with total on and off balance sheet debt of $11.3 billion while our net debt currently spans at $8.4 billion.

Overall our liquidity position is strong with nearly $3 billion in cash and about $3 billion in unencumbered assets, which provides the ability to raise additional capital should we need to. We recognize the substantial challenges faced in the industry and are responding aggressively.

As Glenn mentioned the five-year plan we developed last year and shared with you at our Investor Day in February recognized that we would need to make substantial changes to the business to generate reasonable returns for shareholders. While the environment has become increasingly more difficult since that time the basic tenets of the plan still hold true.

We need to create value for all stakeholders and as stewards of your capital, we need to make investments where we can generate a good return but divest assets where we do not have that ability. We need to generate new sources of revenue and at the same time, we must control our costs.

Accordingly we have put into place an action plan that is focused not only on managing through these challenging times, but also seeks to put us in a position for a long-term success, which we define as delivering the returns you rightly expect of us.

Our immediate action plan is focused in the following five areas; One, sizing the business appropriately to reflect the current market reality both high fuel prices and a softer US economic environment; two, leveraging our capacity discipline to lead the industry in trying to pass on commodity costs to customers; three, developing new revenue streams; four, continuing to reduce non-fuel costs; and five, reducing our plan capital expenditures to improve free cash flow.

In a few moments, John will provide more color on the first three areas; reducing capacity, pricing actions and rolling out additional revenue initiative. Its clear that the overwhelming majority of higher fuel cost must be recouped through higher revenue.

We also have to eliminate cost everywhere we can without diminishing the customer experience. This includes eliminating fixed and variable cost from our system and we are doing just that. Our regional 2008 plan contemplated $200 million cost reduction program for the year. After a thorough review of all our planned expenses, we have committed to reduce in our non-fuel cost further. For 2008, we expect to achieve an incremental $200 in cost reductions for a total cost reduction program of $400 million and that's before any cost reductions related to changes in capacity.

Speaking of capacity, our fleet flexibility distinguishes us from some of our peers, while we had previously announced that we plan to reduce our mainline fleet by 15 to 20 aircrafts. Since that time, we've completed further analysis concluding that it makes sense to cut our mainline domestics fleet by a total of 30 aircraft.

We view these reductions as permanent and plan to eliminate the associated fixed cost from our system. This cost reduction as I mentioned is an addition to the $400 million program I mentioned a few minutes ago. The guidance I provide you later in the call includes all of the cost reductions I have just discussed. Finally as an employee benefit, the sale of some or all of these aircraft will also be positive for our liquidity.

As we reduced both our fleet and capacity, we must also size the rest of our operation to reflect this reduction. We intend to reduce our salaried and management workforce by 500 by the end of 2008 and reduce our represented workforce by another 600 for a total headcount reduction of 1,100 by yearend. These reductions were occurred through a combination of attrition, retirements and furloughs.

Our original plan for 2008 provided for $650 million in non-aircraft capital expenditures. In light of the current environment, we have revisited this plan and we'll be reducing our 2008 CapEx by $200 million this year to a full year plan of $450 million. The reduction comes from identifying specific capital projects that have longer term payback or are not critical in the short-term through execution of our strategy to be the leading carrier for premium travelers.

Accordingly, we will continue to invest in initiatives that are important to our customers such us our new international first and business class seat. Our revised capital plan for 2008 addresses the stark reality our industry faces, while at the same time continuing to move forward our long-term strategy.

On the operational side, while our operational performance in DOT rankings were affected by adverse weather and ATC we experienced in the first two months of the quarter, we expect DOT on-time arrival statistics to be significantly better in March. I'd like to thank my fellow employees for their hard work on behalf of our customers during a challenging weather and ATC environment.

As the new reliability initiatives that we are putting into place continue to roll out, we expect our performance metrics will continue to improve. Structural changes to the operating environment, such as the new O'Hare runway expected to open in November 2008 will help as well.

Now, let me turn it over to John to talk about revenue.

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

Thanks, Jake. As both Glenn and Jake mentioned, our revenue performance was again top-tier in the industry. The first quarter mainline PRASM up 8.7% year-over-year and consolidated PRASM up 8.3%. Our revenue strategy and the quality of execution are driving these results.

International markets continue to be strong in the first quarter, but we are outpaced for the first time in quite a while by domestic unit revenue growth. Mainline domestic PRASM was up 11.1% driven by a strong yield performance, increasing 13.2% with our domestic capacity down 6.4%. These improvements in domestic performance take on a much greater importance in the face of moderating international performance, although this moderation is off a very strong base and significant industry capacity growth. Against this backdrop, we need to continue to take aggressive actions to maintain our domestic performance.

We came in slightly below our earlier guidance as the holiday period performed below our expectations. International PRASM was up 5.5% year-over-year, a strong performance especially in light of capacity growth of 9.6%. We are starting to see the impact of industry growth internationally with PRASM gains year-over-year still strong, but decelerating relative to the second half of 2007. Pacific PRASM growth was 6.1% and Atlantic PRASM grew 2.2% despite an 18.3% increase in capacity year-over-year.

Our consolidated results were driven by an 11.6% increase in yield partially offset by a drop of 2.4 points in load factor. Similarly, our mainline results were driven by a yield improvement of 11.8% year-over-year on a 2.3 point decline in load factor. While our revenue performance is clearly among the best in the industry, it was not strong enough to offset the sharp increase in the cost of fuel.

As Jake discussed earlier, we have developed a comprehensive action plan to combat rising fuel cost. A primary part of that plan is to continue our capacity discipline and right size the business for the profitable demand in today's market reality.

We simply cannot fly capacity that does not contribute. With that in mind, we are revising our 2008 capacity plans further downward with the bulk of the reductions occurring at the end of this summer. Our plan is to reduce mainline domestic capacity for the fourth quarter by a further 7 points from our previous expectations for about a 9 points year-over-year reduction.

For the full year, we expect mainline capacity will be down between 6% and 7%. Our capacity cuts were all significant will, however, be insufficient if the industry as a whole does not behave rationally.

In addition to the domestic reductions, we are also scaling back our international growth rate. As I mentioned earlier, given a significant capacity increase as we see in international markets, we believe it is prudent at this time to reduce our growth of that where the economics are just not strong enough to offset these higher fuel costs.

To that end, we have requested the Department of Transportation to allow us to defer flying the new route that we were awarded between San Francisco and Guangzhou for one year. Our winter schedule will reflect further adjustments.

While we continue to grow internationally, our international capacity growth for the fourth quarter will be reduced from our prior expectation of up to 5 points to approximately 1%. For the full year, we expect international capacity will be up approximately 3.5% to 4.5%.

While capacity reductions and pricing discipline will clearly help, we recognize that we also need to create new sources of revenue, better matching service delivery to what customer's value and we'll pay for it. We are developing new revenue source through the unbundling of our product and introducing new merchandising initiatives.

Earlier this year, we announced a new $25 check bag fee that will go into effect in the second quarter. We estimated that this initiative would be worth approximately $100 million annually. We have now seen other carriers match this initiative, and we have also broadened the scope of the fee to include all economy tickets and not just refundable ones.

Because of these changes, we now estimate that the fee will be worth over $175 million on an annual run rate basis. But given the magnitude of the challenge, the second bag fee is just the tip of the iceberg. We need to go deeper and to go farther to achieve long-term profitability. At United, that is just what we are doing; taking measured risk to manage the business to reach our goal of an average industry return overtime. That includes the possibility of further unbundling, such as seat assignments.

While there are some technology and channeled issues we have to work out, we are working to resolve those so that we can be in a position to make the right decision. At this time, we do not have a rollout date for this initiative.

As we've discussed, Economy Plus and Premium Cabin upsell initiatives are on track to deliver $220 million this year. We are also on track to complete Phase 1 product launches in the latter half of 2008 relative to our merchandising efforts. Revenue expectations for these travel enhancement options in 2008 are modest given the late year introduction. We are, however, setting a revenue goal of $100 million for these new travel enhancements in 2009. At a steady state, in a few years, we believe the annual run rate for these enhancement products and services can reach $400 million.

You may have seen on Friday, we adjusted our ticket change fee from $100 to $150. This is part of a basket of fee changes that will deliver $250 million to $350 million of annual run rate value.

As we look to 2009, all the new merchandising and revenue initiatives and enhancements we have introduced over the last three months will bring in about $600 million in fresh revenue, revenue that we did not have before.

$175 million from the second bag fee that we led the industry in introducing, $250 million to $300 from adjusting general fees, $100 million from the introduction of new product enhancements and $50 million increase year-over-year in 2009 to what we expect from E Plus and Premium Cabin upsell.

Additionally, we continue to exercise leadership in fair and fuel surcharge initiatives. To put that in context, United has led 18 of the approximately 45 broad-based fair and fuel surcharge actions that have occurred in the domestic marketplace since October of 2007. Further, we are also leading a drive to reintroduce Saturday night stays, providing much needed segmentation.

While we continue to look for ways to cut costs, this does not detract from our commitment to be the carrier-of-choice for premium customers. We are maintaining the quality of our schedule for our business customers despite the reduction in domestic capacity. We also continue to invest in products and services that are important to our customers, including the rollout of our very popular international premium and first class lie-flat seats.

In the first quarter, we completed two key international terminal moves, joining all the star carriers in the New Beijing Terminal 3 and moving our operations to a new terminal in Singapore on the same day. These terminal moves provide state-of-the-art facilities and faster connections for our customer through our star partners.

Our goal is not simply to finding that revenue to breakeven at $100 or even at $110. Our goal is to generate a return for our shareholders irrespective of the price of fuel. In short, we cannot treat high oil prices as the fleeting problem. We have to adjust our business model overtime to become profitable in this environment.

We need to pull every lever that is available to us, be it capacity discipline, fare increases, fuel surcharges, ancillary revenue generation or something as basic as returning pricing segmentation to the marketplace.

Moving to our revenue outlook, we expect continued unit revenue growth in the second quarter, albeit not at the levels that we've achieved over the last few quarters.

Now, I'll turn the call back over to Jake.

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

Thanks, John. Moving to guidance, John covered some of those, so let me go through it again.

For the second quarter, we expect mainline North American capacity to be down 4.5% to 5.5%, while international capacity is expected to be up 3.5% to 4.5%. Overall, second quarter mainline capacity is expected to be down 1% to 2%. Express capacity is expected to be down 0.5% to up 0.5%, resulting in second quarter consolidated capacity being down 1% to 2%.

While our capacity reduction will continue throughout the year, the greatest reductions will come in the fourth quarter of 2008. For the fourth quarter, we expect mainline domestic capacity to be down about 9% and international capacity to be up about 1%. Total mainline capacity is expected to be down 5% in the fourth quarter, while consolidated capacity is expected to be down about 4%.

All of these reductions follow on the heals of capacity reductions we made in the fourth quarter of 2007 when mainline domestic capacity was down 5% year-over-year and both mainline and consolidated capacity were down 1%.

For the full year of 2008, we expect mainline capacity to be down 1.5% to 2.5% and consolidated capacity to be down 1% to 2%. We retain the ability to further reduce capacity if necessary as we have a large number of unencumbered aircraft as well as some they come up for lease renewal this year.

We estimate that mainline CASM, excluding fuel and special charges, will be up 3% to 3.5% in the second quarter and up between 1.5% and 2.5% for the full year, reflecting the cost reductions discussed earlier in the call as well as the capacity reduction I just walked you through. As you will note, our full year cost guidance remained essentially unchanged from prior guidance despite the significant capacity decrease.

We are focused on controlling our unit cost, but obliviously this becomes more difficult as we cut capacity. You can find our fuel and hedge position guidance in our earnings release.

And now with this, we are ready to open up the call to questions.

Question And Answer

Operator

Thank you, 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]. Please limit yourself to one question, and if needed, one follow-up question. [Operator Instructions]

And for our first question, we go to Frank Boroch with Bear Stearns.

Frank Boroch - Bear Stearns

Good morning. Jake, you talked about the $3 billion or so in unencumbered assets. Is that something you could use to, do you think the market is open to tapping that in order to address credit facility or other needs at this time?

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

Well, Frank, that $3 billion is good, hard collateral, it's aircraft, it's engines, it's spare parts, it's things like that. So it's good collateral. The credit markets are obviously challenged right now. Some days are better than others. But we believe that that collateral can be used in a way to enhance our liquidity or potentially if needed to raise some liquidity out there in the marketplace. Now, any day you don't really know what's going on in the credit markets. You guys can probably tell better than I do, but again that's good solid collateral.

Frank Boroch - Bear Stearns

And, Glen, maybe get your latest thoughts on the latest news of industry consolidation?

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

I think, Frank, that the point that I made is, industry consolidation is now in my mind a component of the action plan that we just outlined for you. I think the industry needs as John said to pull every lever available to it to deal with this issue of escalating fuel price. Be it a bubble or not because it's our current reality. And the benefits of consolidation and the synergies that would accrue to the participating companies there, Frank, are just a part of the solution.

Frank Boroch - Bear Stearns

Okay. Great. Thanks, guys.

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

Thanks Frank.

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

Thank you, Frank.

Operator

We go next to Mike Linenberg with Merrill Lynch.

Michael Linenberg - Merrill Lynch

Yeah. Good morning, all. Hey, just with respect to, and maybe this follows up some of what Frank said; I mean your stocks off like 35% today and I think there is concerns about whether or not you know be in violation of a covenant. Can you talk about… I think you have one covenant on your bank debt and sort of where that is?

I mean, are you actively engaged in negotiations on that front to address that in light of where fuel prices are on? And I think if we extrapolate current level fuel prices out over the next couple of quarters. It looks like that not just you but the whole industry will have an issue in meeting the various covenant some. Whatever you can say in that front would be helpful. Thanks.

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

Yeah. We have two covenants. One is a minimum cash covenant, that we're all above and the other is a fixed charge coverage ratio, which we are also well above. Obviously, with this recent spike in fuel prices and the softening economy, the trajectory of our covenant coverage is downward, is really very definite, difficult to predict whether we'll an issue or not because we are taking this actions to try and combat the higher fuel cost and have to see what the effects of those actions are. We're not currently in negotiations to amend that covenant because we're quite comfortably above there right now.

Michael Linenberg - Merrill Lynch

Okay. That's it. Thank you.

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

Okay.

Operator

We go next to William Green with Morgan Stanley.

William Green - Morgan Stanley

Jake, if I can just follow-up on Mike's question there. In the event of consolidation, does that change any of the covenants?

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

No. There are no triggers in the covenant that relate to consolidation.

William Green - Morgan Stanley

Okay. And then, when you think about the plan that you've outlined, what do you think that plan envisions for a fuel price? I mean, I understand kind of what the assumptions are, but I'm trying to get an understanding of have you really developed the plan that is sustainable at [$118] a barrel or do you have to set up this a couple of weeks ago. And so perhaps you are even lower and so how do you adjust if we don't stop this upward movement in the fuel price? What you do next?

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

Well. I think, this is an industry problem. This not a United issue. It is an industry issue. And this industry needs to recover the commodity cost that it pays. And we're taking responsible actions to put ourselves in the best position to recover those commodity cost, reduced capacity will help us gain some pricing power.

But, quite frankly, at these fuel prices operating the schedule that we are operating doesn't make sense and I'd suggest that the same thing applies not just to United Airline. So we don't have any aircraft in order and we don't have plans to buy any aircraft, in fact, we're divesting aircraft. Because in this sort of environment, you cannot generate a return for shareholders.

And so I think that there is a lot of uncertainty out there in the economy, a lot of uncertainty what's going on with fuel price. We're taking responsible actions to respond to it, but the industry as a whole needs to act responsibly. Because the only way as I mentioned that we're going to cover this high fuel price is through revenue and that's the way it should be.

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

So we can take, John here. We had a conservative base capacity plan for the year. We adjusted that in the fourth quarter call. We are adjusting here again today. We're clearly assessing the level of industry action as well as what the economic signals are particularly going into the fall. And I think it's likely going to require further adjustment on an industry level and I think we have a strong reputation and being willing to take down most decisions and make them. And you should expect that from us in the future.

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

Bill, I would add. We wouldn't want to leave you with the impression that this is a static plan that we have drawn a line under. We'll continue to pursue other opportunities for us to both improve our revenue performance, right size the company and reduce cost. This is simply the plan at it's current stage that we wanted to report to you today.

William Green - Morgan Stanley

Okay. Maybe I just have one last quick follow-up here. It's on the American Airlines maintenance issues, Frontier bankruptcy, ATA bankruptcy. Is that I assume all in your guidance for the second quarter, the benefits of that, because I assume you did see some.

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

We did see some benefits from that. We obviously don't provide specific revenue guidance, but if we had, it would have been in there.

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

Yes, so relative to the recent American action, we expect that we probably picked up about $10 million of revenues, so not substantial. We're not seeing material lingering effects from that.

Obviously, Frontier continues to operate as scheduled as they previously operated, and we're getting a moderate benefit in the Hawaii marketplace from the reduction in capacity there, but I don't think it not at a level that really causes us to significantly adjust our outlook.

William Green - Morgan Stanley

Okay. Thanks for the help

Operator

We go next to Jamie Baker with JPMorgan.

Mark Streeter - JPMorgan

Hi. It's actually Mark Streeter here with Jamie. Jake, I'm wondering if you can follow-up a little bit on the questions on the bank facility. And there seems to be a lot of confusion on the definitions of how that covenant is calculated. So, a lot of people I think this morning looked at your numbers and ran their own back-of-the-envelope calculations and came up with a level that was below that 1.0.

So, can you maybe just help us understand what some of the adjustments are? I know there are some adjustments to how you calculate EBITDA, given fresh start and so forth. I think that might be helpful.

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

Yes, those adjustments, I would caution that the calculation cannot be done from publicly available data, because there are a number of adjustments as you said. We haven't publicly disclosed that calculation. We are in compliance with the covenant. We are comfortably above the covenant right now as I've said earlier with the current fuel environment.

And the revenue environment, our trajectory is downward, but I, sitting here today, can't honestly tell you what the projected compliance with that covenant might be at the end of the year, because we don't know what's going to happen to revenue; we don't know what's going to have the effectiveness. But we are comfortably above the covenant. If we have some news on that, we'll obviously update you.

Mark Streeter - JPMorgan

Great. And then can you just walk us through… as you said, the trajectory is going the wrong way and as I think as Mike asked this question, everyone has to deal with these covenant issues, perhaps over the next couple of quarters here. What is your game plan? What are the options?

You can obviously repay the debt if you'd like. You can raise that against the unencumbered assets. Can you just tell us what you're sort of thinking about as you run your own contingency planning for how you're going to fund the company going forward?

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

Well, the first thing we're going to do is we're going to run the airline responsibly. And we're going to reduce capacity as we have, and we're going to do our best to pass on higher commodity costs, and that's going to be our main focus.

As it relates to the credit facility, as I said, we have $3 million in unencumbered assets, and we're not going to… we haven't began any negotiations with the group yet. And we're not going to begin on this call to have those negotiations, but I think you can imagine the alternatives.

We have about $1.3 billion or so outstanding on that. We have a revolver in place that's not fully drawn. We have about $1.3 outstandings. And obviously, there is a whole range of options we have. We continue to be focused on our strategic plan and doing things like separating the maintenance business and separating the mileage business.

Both of those obliviously have large asset values attached to them as well. So, we are very focused on running the airline well. We are focused on our strategic plan and running the business for the shareholders.

Mark Streeter - JPMorgan

Thanks, Jake.

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

You are welcome.

Operator

Our next question, we go to Kevin Crissey with UBS.

Kevin Crissey - UBS

Hi everybody.

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

Hi Kevin.

Kevin Crissey - UBS

Jake, you said that you had more capacity available to be taken over the encumbered aircraft. Is that what you said?

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

Yes. We have approximately 70 encumbered aircraft that after we reduce the fleet by the 30 that we'd discuss.

Kevin Crissey - UBS

Why not just go ahead and take a drastic impact, drastic capacity cut? And then if you were to go back down… okay, may be you have given up a little on the revenue side. Why choose this level and why wait to see what's going to happen and just do it?

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

John here, Kevin. So, I think, you know… look, the picture is very different obliviously between now and Labor Day. A lot much more of this capacity is obliviously going to perform expectably between now and Labor Day.

We still have time to make our final decision post Labor Day. And as I said to you we are going to look at the facts and be prepared to make subsequent cuts if appropriate, but we've run our numbers and we can't find cuts beyond this that really makes sense between now and Labor Day.

We're already evaluating the possibility of moving some of that forward. So as Glenn mentioned, this is very dynamic. We have a strong will to act here, demonstrating history I think of being responsible, and you should assume that work is ongoing and there will be new facts in the future as we hit some of these deadline.

Kevin Crissey - UBS

Thank you very much.

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

Thank you.

Operator

We go next to Ray Neidl with Calyon Securities.

Ray Neidl - Calyon Securities

Yeah, Jake in your quest to cut cost, could you comment on what you might be doing if anything with your regional partners? Are the contracts locked in or is there any flexibility there, might there be a buyout of some of those contacts?

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

Yeah, Ray, we have some flexibility under some of those contracts and we're obviously working on reducing our cost everywhere. I don't want to comment on any specific activities underway but we remain in discussion with our regional partners and look for various ways to reduce costs.

Ray Neidl - Calyon Securities

Okay. Jake, could you give an update on the status on looking at maybe spinning off or selling off your MRO or frequent flyer program?

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

Yeah, I don't have a lot to update on the frequent flyer program. We continue to make progress there as we… in our effort to separate the business we've got a separate P&L for the business that we are examining internally and as I think I said, more recently road testing the relationship between the airline and the mileage company. So not a lot to update there that that to the extend that we would have more to talk about would be something that we'll be talking about in the summer or the early fall.

The MRO, as I'm sure you know, we had a change in the union representing our mechanics from AMFA to the Teamsters. So while we had some long discussions with the AMFA leadership about the MRO subject, we've only just begun those discussions with the Teamsters. So the change in leadership obviously would slow us down a bit there because we have to begin discussions that we literally been having for several years with AMFA leadership. We need to start with the Teamsters and they've only been on property here for a few weeks.

Ray Neidl - Calyon Securities

Okay. And finally, the aircraft that you are taking out of the fleet, either leased or owned, will it be grounded sold overseas, will it come back to haunt you with somebody else?

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

Our intent is that, again, they'd be permanent. We haven't totally decided which aircraft they are. So we have a possibility of either selling them if they are owned aircraft or just not renewing the leased, if you will, on leased aircraft. So we have better ability to control the destiny of the owned aircraft and traditionally those have been sold for use overseas. With the leased aircraft, as I mentioned we don't we really control the destiny of that aircraft.

But I think most of the aircrafts that were talking about… there is all 737s and they are old and they are oldest aircraft and they are least fuel efficient aircraft, and they are total efficient air craft. And the places for those aircraft tend to be deployed, tend to be overseas.

Ray Neidl - Calyon Securities

Great. Thank you, Jake.

Operator

Our next question comes from Dan Mckenzie with Credit Suisse.

Daniel Mckenzie - Credit Suisse

Yeah. Hi. Thanks. So far, we had one stock per stock M&A deal that did not include incremental liquidity as part of the announcement and given the covenant concern, what is your sense about how likely and how available is this capital to recapitalize this part of any potential M&A announcement?

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

I can't comment on what happened in the other M&A announcement that was rumored to have additional capital and then showed up without capital. We have not commented on our M&A situation as it were and whether or not that would include outside capital. But I think that there is a strong case to be made, that if we are consolidating the business that is a proposition that there are people who would be interested in investing in a newly consolidated industry, obviously against the backdrop of $118 fuel. It's a more challenging investment. But that's something that we're going to think about hard as we look at consolidation opportunities if they occur.

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

Dan, I would suggest that back to the earlier discussion, that if you take the plans that we're discussing today, capacity discipline as a principle rather than a synergy take the focus on cost management that we're discussing today. Again, the plan with respect to the value of each one of the businesses within the two portfolios that might consolidate.

And if you took our plan and our discussion, relative to that value that needs to be identified and unlocked and you layered it over a consolidating scenario. I think you have an attractive investment proposition seen through the lens of the discussion that we're having about our own opportunities, which I don't think has yet made it to the back of the proverbial envelope.

Daniel Mckenzie - Credit Suisse

Okay. Good. I appreciate that. Thanks a lot.

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

You bet.

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

Thanks Dan.

Operator

We will go next to Chris Cuomo with Goldman Sachs.

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

Hi, Chris. Are you there?

Operator

Mr. Cuomo, please check your mute button. Hearing no response we will move on to Bill... one moment please.

We'll go next to Bill Mestoras [ph] with Broadpoint Capital.

William Mestoras - Broadpoint Capital

Thank you. Jake, how are the covenants in your credit card processing agreement different from your bank credit agreement? Or are they substantially the same just in terms of fixed charge, unrestricted cash covenants?

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

They are different. They are less stripped in both cases. We have two agreements that are not public, and I'm not going to disclose them here. But I can say that in both cases, they are less stripped, if you will, than our bank facility.

William Mestoras - Broadpoint Capital

Okay. And the credit card processing agreement, the exploration on that is--.

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

I don't know at the top of my head. It's several years. We put it in place right when we exit from bankruptcy. I don't recall. I think we put it in place a five-year agreement, but I'm not sure.

William Mestoras - Broadpoint Capital

Okay. And the current holdback on that is, if you are at liberty to disclose.

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

I am not. But you can see… I will tell you it's several $100 million. It makes up not the largest proportion of our unencumbered or restricted cash, I should say, but somewhere approaching that. It's right around 300.

William Mestoras - Broadpoint Capital

Okay. Thank you.

Operator

And ladies and gentlemen, this does conclude the analyst and investor portion of our call today. Before we take questions from the media, I would like to turn the call back to Mr. Tilton for closing remarks.

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

Thank you. I'd like to close really the questions, and it gave us the opportunity to speak to my closing remarks. We are going to take the plan that we have, shared with you. We are going to recognize that it needs to be dynamic, given the changing circumstances in the marketplace.

We are going to continue to challenge that plan as we go forward. The opportunities that we have within the company to improve the performance of the company that we shared with you at Investor Day remained with us, and they will only be magnified in the context of consolidation if in fact that would happen with this company and any other.

So with that, I'll turn the call back over to Katherine for any final comments and then we'll conclude the call.

Kathryn A. Mikells - Vice President of Investor Relations

Thanks, Glenn. As you have heard today, clearly the company has taken significant action in terms of the change towards tactical plan for 2008. We've got a solid roadmap ahead of us, and we're all here at United vigorously advancing those actions.

And now, I'm going to hand it back to the Operator. We're ready to take question from the media.

Operator

[Operator Instructions] And for our first question, we go to Julie Johnson with the Chicago Tribune.

Julie Johnson - Chicago Tribune

Hi, guys. Hi, good morning.

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

Good morning.

Julie Johnson - Chicago Tribune

Glenn, I'm just wondering if you could give us a little color as to discussions with labor regarding consolidation. Has there any outreach? Have you made any effort to get some buying, to win some support for potential deals?

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

Julie, as you know, we have labor represented on our Board of Directors. So, ALPA and the IAM are members of our Board, and they have been involved in all of the discussions that we've had with our Board relative to this important issue for the company. So, that's first part of the answer.

And number two, we take the opportunity at the company to have a senior officer of the company brief the other unions at United on the discussions that take place at the Board subsequent to the board meeting.

So, our discussions have been really very transparent. And as a matter of fact, Julie, they continue to date. And we will actually have a discussion today with a labor group about the opportunity that we may have before us.

Julie Johnson - Chicago Tribune

Okay, interesting. Any potentially to revisit contracts ahead of this Section 6 negotiations and would consolidation potentially provide the opportunity for both sides to get down and hammer out some issues?

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

Early days, Julie, and really premature for us to be commenting on that now.

Julie Johnson - Chicago Tribune

Okay. Great. Thank you.

Operator

We go next to Ted Reed with TheStreet.com.

Ted Reed - TheStreet.com

Thank you. Good morning.

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

Hi, Ted.

Ted Reed - TheStreet.com

Hi. First of all, Glenn, about consolidation on the Delta and Northwest, they felt that there was a timetable due to the departure of the… coming to departure to Bush administration. Do you also feel there is a timetable here on?

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

Yeah, I think we are on a timetable, Ted, that may be better defined by $118 oil in any particular administration. And as I try to say in the call, if the case were compelling at the end of last year, it's more compelling today from an economic perspective. So, we are moving a pace, but not being driven by any particular calendar that emanates from Washington.

Ted Reed - TheStreet.com

Okay. And also, what happened to Delta and Northwest, is that what you expected to happen, is that what you were planning for?

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

I think, Ted, I don't know that it was you, but I think perhaps one of your colleagues described it as the worst kept secret in the history for quite some time.

Ted Reed - TheStreet.com

So you were expecting it?

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

That would be yes, Ted.

Ted Reed - TheStreet.com

All right. Thank you. One another thing for John; John you talked about, the industry needs to do more in capacity reductions, it's my impression from the calls I've been on the industry is being increasingly aggressive about capacity reductions. Do you feel that there is even more than can be done?

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

Well, I think we have seen some encouraging signs as off late. Although, you do still have some significant low cost carriers that have growth in their plan. And it's hard to imagine how you get that to work in this environment. Then I think equally is important, Ted, we're all going to have to do a reassessment depending upon how things progress over the next several months. So, without speaking about individual participants, I do believe that the aggregate industry result is inadequate.

Ted Reed - TheStreet.com

All right. Thank you.

Operator

We go next to Kelly Yamanouchi with The Denver Post.

Kelly Yamanouchi - The Denver Post

Hi, there. I'm wondering how Denver will be affected by the route cuts and job cuts and if there is a chance that you might cut the Denver-London route?

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

Well, we are consistently evaluating. As you know, we just started that. We always evaluate our international schedules. We've not made any decisions in that regard, Kelly. We're not releasing the specifics schedule at this time. It should be available out in the marketplace in the next four to six weeks, and so we're still finalizing those decisions. And however, as you suggest all of our hubs will see a reduction in capacity.

Kelly Yamanouchi - The Denver Post

I was also wondering if, you mentioned that that job reductions would be through layoff, retirements and furloughs, is it all three in both management and in the salaried groups.

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

This is Jake. Yes, we obviously haven't worked through all the details yet, but I'd expect that it would be through a combination of the three and both the salaried and management group as well as the represented group.

Kelly Yamanouchi - The Denver Post

Okay. Great. Thank you.

Operator

We will go next to Del Wilbur with The Washington Post

Del Wilbur - The Washington Post

Hey, guys. I was just wondering if you could give me a little bit more color on the fee that passengers and others can expect to see in coming months. I think, you talked about that a little bit. Is there's a little bit more what you guys are thinking about in the future?

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

Well. as I mention the change fee is a very good component, a big component of that estimate going from a $100 to $150, really not in a position to go through the remainder in part because there's probably 30 and we've not yet acted on some of those decisions. And it would be inappropriate for me to discuss it. But frankly, you can imagine if we have a fee, we evaluated raising it. And in both cases have determined in this environment is appropriate.

Del Wilbur - The Washington Post

Will there be like a fee for like if you want to choose, like I know you will offer Economy Plus, but like for window and aisle seats like US airways just did?

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

We've made no further decisions relative to charging precede assignments, although it is under evaluation. It was not included in our estimates today.

Del Wilbur - The Washington Post

Thank you very much.

Operator

Our next question comes from Lori Ranson with Air Transport Intelligence

Lori Ranson - Air Transport Intelligence

Good morning. Yes. I just wanted to know if you had a timeframe of when those 30 aircraft are going to exit the fleet. Will it be more towards the back half of the year? And my apologies I missed the first portion of the media Q&A. Did you say that there were going to be some discussions today regarding an opportunity in terms of consolidation with labor group?

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

What I said was the discussions that we regularly schedule around our Board call that include two particular labor group are ongoing including a discussion today. This simply brings the other groups up-to-date with what those who participate in the forward calls have already heard.

Lori Ranson - Air Transport Intelligence

Thank you. And then in terms of aircraft accessing the fleet?

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

We thought [ph] that after the summer basically.

Lori Ranson - Air Transport Intelligence

Thank you.

Operator

Thank you, ladies and gentlemen. This does conclude our call for today. You may disconnect your lines at this time. And we do appreciate your participation.

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