United Airlines Holdings, Inc. (NASDAQ:UAL) Bernstein's 40th Annual Strategic Decisions Conference May 29, 2024 11:00 AM ET

Company Participants

Kristina Munoz - Director, Investor Relations
Scott Kirby - Chief Executive Officer

Conference Call Participants

David Vernon - Bernstein

David Vernon

All right. We are coming up to the top of the hour. So I want to welcome you all to Bernstein's 40th Annual Strategic Decisions Conference. We are delighted today to be joined by Scott Kirby, United Airlines and the Investor Relations team. We are going to get started here in just a minute. We're going to start off with some of the forward-looking disclaimers that we normally do. I'd remind you all that we will take some questions from the audience through the pigeonhole application. If you want to go ahead and put anything through there or promote or demote any of the questions that might be in there that's kind of our new index card methodology for collecting audience questions.

And with that, I will turn it over to you for the forward-looking.

Kristina Munoz

Thanks, Dave. Information in today's release and the remarks made during this conference may contain forward-looking statements, which represent the company's current expectations or beliefs concerning future events and financial performance. Often, forward-looking statements are based upon information currently available to the company and please refer to our SEC filings for any further details.

David Vernon

All right. Now that you have all been appropriately forewarned, we can kick it off. Scott, thank you so much for making time for us and supporting the conference. I'd like to welcome you back. And maybe you can kick us off with some earlier remarks about the state of United Airlines and maybe whether or not it's all over.

Scott Kirby

Well, thanks for having me. It's good to be back here again. I want to start by welcoming my son, Sean, who's joined me at another conference and just sitting up here with me. I'm sure there's a lot of smart people in the room, but I think Sean is probably the smartest in the room.

So it's also great to travel with your 10 year old son. Everyone should do it. And I'm not saying that just because it would be good for airline revenues. It really does make business travel a lot better. At United, look, we'll get to Q&A, but we feel really, really good about how things are setting up.

In the last four years, like I think back to what we thought was going to happen in March of 2020, it has played out both for United and for each and every one of our competitors, almost exactly like we thought. And it's an industry now that there are two airlines that are probably going to be close to 100% of the profitability in the U.S. airline industry this year, when all is said and done that are different in ways that are structural, permanent and irreversible and I'll look forward to talking about why all those things are true.

It is a different industry. The pandemic was a once in history opportunity to change and restructure that happened. I'm really proud of the United team, what they're doing out there every day. This is no longer, I've talked about it for the last four years, it's no longer hypothetical. This is now past tense. This has happened. You see it in the results. A lot of reasons to think that there's a lot of upside ahead for United and for the industry for that matter. But we feel really good about where we are and that things have shaken out almost exactly like we thought they would.

Question-and-Answer Session

Q - David Vernon

Okay. So, one of the things that did come out in the last 24 hours is that one of your peers has noted weakness in the domestic markets. Is that also something you're seeing? Or are you guys not seeing that? Or are there some other offsets that are maybe happening to help smooth that transition?

Scott Kirby

Well, I'm going to use this to talk more broadly about what has happened. Well, I think for them, that was just a forecast issue not weakness, it's a forecast issue. But when I say the industry has been restructured, I highlighted that for let me tell you more what I mean. And I'll expand on some of the comments I made on the last earnings call. I'll start with saying a pretty good way to think about the customers in the airline industry is in three groups, not perfect but it's a good approximation.

There are premium travelers, they typically fly international, they buy first class that's a reasonable chunk of the market. There are what I call domestic road warriors. These are typically small business travelers, owners who mostly fly domestically to see their customers and clients. They care a lot about flexibility that's probably number one on their list of concerns. And then there are price sensitive customers, infrequent customers, typically leisure but infrequent customers who travel not a lot.

What has happened as we've come out of the pandemic is United had a moat around our business that was breached in two places, and we've now repaired those two breaches. And so now we have a solid moat around the business. And that moat is, we have the best customer service, the best proposition for customers. And when I say it's permanent, it's structural and it's irreversible, let me kind of go through each one of those segments and explain why.

For premium, if you want to cater to premium, you got to have a big international network, you got to be able to fly to places like Tahiti, Cape Town, Dubrovnik, Paris to get customers places for the frequent -- it makes the frequent flyer program infinitely better if you can get them to places like that instead of just to domestic destinations. It just makes our frequent flyer programs better.

You combine it with clubs and lie-flat business class and all the other amenities we have and that's what the moat around the business has always been, and that always appealed to premium customers. But the change has really been less about that. There's been that, we've dramatically improved in that and there's two airlines that are sort of top of class in that regard. But that second group, domestic road warriors that was always Southwest's bread and butter.

And I already talked about what those customers care about is flexibility and this is not a criticism of Southwest, they do a great job, they have for 50 years, they do a great job. But the number one advantage that Southwest had for those 50 years was no change fees. Nobody recognized or very -- I guess I recognized it, but most people didn't recognize it, no one there recognized it.

It is the biggest advantage that they have and I can tell you stories of friends of mine, back in the days at America West in the 90s that flew Southwest because of no change fees, business travelers that needed flexibility. I mean, I've known it for a long time. It was the overwhelming factor that let them over index on close in travel for their whole career.

Not that they did anything wrong, but when we got competitive with change fees and the rest of the industry got competitive with change fees, it meant all the other stuff mattered. And so now, if you're a domestic road warrior, before you flew out to help us because of no change fees. But today, your choice, you have no change fees on any airline. So your choice then becomes about things like the frequent flyer program, the ability to upgrade to first class, the premium travel, that's why I say this is structural, it's permanent and it's irreversible, it's not a knock on Southwest, but we finally got competitive with that. And we have seen huge increase in close end market share in those kinds of markets as a result of eliminating change.

So we repaired that breach in the moat. The second breach in the moat was price was around price sensitive customers and ultra-low cost carriers built a better mousetrap than us, for customers that only cared about price that were willing to have the price disaggregated and get low headline prices. And we had to do two things to repair that breach. One, we had to create a viable competitive basic economy product, but secondly, we had to up gauge. The only way we could be profitable selling that basic economy product is we couldn't do it with 50 seat regional jets. We had to up gauge to bigger airplanes so that we had seats to sell and could do so profitably.

But because we repaired those two breaches, in our hubs, like no one can compete with us, like we just are winning and we're going to win in our hub. It is structural, it is permanent, it is irreversible it is irreversible in our seven hubs that we have a structural advantage, where we're going to win. And by the way, we aren't trying to go fight on turf where we don't have the high ground. We fight on turf where we have the high ground, but we're not going to fly, Nashville to Orlando and try to compete where we don't have the advantage. But in our hubs, we have the winning hand and we're going to play it. And that's why we're leading the industry in margins now, it's why our domestic RASM outperformance, that's the best metric to look at, has been so strong compared to everyone else. And that's only going to improve because it's structural. It's really that's a real point. This really is structural.

David Vernon

So you started off by saying that it wasn't that from your perspective it wasn't so much of a market issue as much as a forecasting issue in terms of the unit revenue weakness that your competitors are experiencing. Have you seen any sort of change in corporate travel or share in the recent couple of months that is over and above what you'd normally expect based on what you've been?

Scott Kirby

Well, I guess that's really a question about the distribution strategy. It is at American. And we think the distribution strategy change at American has had an impact. It's pretty small. If you looked at kind of the margin gap between Delta United on the one hand and American on the other, it's a single-digit percentage of that.

If I list, I'm not going to list the issues that I think are different and that make a difference but it wouldn't make the top five of the issues. Not that it's not an issue but it would not make the top five issues. And we saw market share shifts happening in competitive markets, but then we've seen it for years happening. This is long-term. This goes back a long way. We've seen it for years happening. It's not unique to America. We've seen it happening versus Southwest. We see it happening versus the ULCCs. We picked up market share really versus everyone. It's not about distribution, or if it is -- it's a small part of it.

David Vernon

And then maybe you think about the longer term, right? So I've been covering the airlines now since 2015, 2016, and I kind of came into it a point where people were getting very bullish on consolidation, this becoming a better industry. We got the blessing from Omaha for a short period of time there before the pandemic. When you think about those bigger picture structural themes, a lot of times when I'm talking to investors about airlines, they initially sort of the eyes roll into the back of the head and you're ready to like wait, I don't know what the supply demand commodity market. Like do you think those issues around the industry dynamic being better are still intact kind of post-COVID or?

Scott Kirby

Well, I think they're different. I think when I talk about the structurally better industry, what I mean is, I'll take one step back. Airlines can't fly places that they lose money. At our last board meeting, there's great data for airlines, so we can go do the route network P&L for everyone. They can do them for us too. We're plus or minus 1 margin point kind of by route.

And I look at everyone that's not Delta or United, and they have large chunks of their route network that lose money. I know where, I know how much, they can do the same for us. We make money in all seven of our hubs, we're pretty unique at that, less than some or in others, but we make them across the board. And that is a mathematical and economic inevitability that they're ultimately going to stop flying in places that lose money.

Like, they're not going to do in the short-term, I don't know what the catalyst is going to be -- they're going to. Airlines don't keep flying places. They tried to do it for a long time, people think strategic flying, I mean, I don't really get it but people think about strategic flying, they fly, but they eventually economic reality triumphs over hope, and that's what's going to drive the change.

And in the past cycles, you had everyone doing poorly and so everyone was in a similar boat and would shrink and things would rise and fall on the tide. There's one airline that wasn't, which is Southwest and they outperformed dramatically during that time.

The situation now, the analogy is -- it's Delta and United that are dramatically outperforming that are above the tide. And everyone else has loss making operations and they're going to have to close the loss making operation. That's going to happen. I don't know when, I'm not predicting it tomorrow, I'm not even predicting it in the medium-term, but it is going to happen. And that is going to be a much better industry for everyone, including them when they do it, but for United as well.

David Vernon

And is that just a function of the fact that you have more defensible territory to kind of reinvest in and improve the profitability of? Or like what's really changed in that competitive dynamic though? One could say, like, if an airline's flying out of Chicago and losing money today, they could eventually get the product right and get the equipment right and maybe improve that.

Scott Kirby

That's why I say this is irreversible. So take the product. Well, eight years ago, American Airlines was putting I'll just use that example, I'm not a criticism of them. American Airlines, I was President of America, and we were putting seatback entertainment system on every one of our airplanes. Everyone in America thought that was a stupid idea. The day after I left, they reversed it and they spent money to take it off the airplanes because it would save fuel burn reduce weight and save fuel burn. We put it on at United. We're putting it on every single airplane.

At United, big screens, Bluetooth. I flew on one yesterday. As I always do when I fly on one, I walk from back to front. Two-thirds of the customers on the airplane are watching movies. Our NPS scores on those airplanes are dramatically higher than others. Not only are NPS scores for in flight entertainment, but the food is better. The flight attendants are better. The gate agents are better. The TSA screening is better, when you fly with seatback entertainment. It's something that customers care about.

We believe that air travel at United is not a commodity and we've invested in it, and we've won large market share in those competitive markets, size of airplanes, like we got rid of 300 regional jets, replaced them with 200 mainland jets. That's what customers prefer. Like, those are decisions that would take you a decade to change and then there's dozens, hundreds of others that are similar, that are smaller in size and scale. It's not changeable, it's not reversible. This is done. This took eight years to get here. This has been happening, but it's over now.

David Vernon

Okay. And I guess within the backdrop, one of the things that has talked a lot about is this idea of premiumization or decommoditizing travel, however, you want to think about it, breaking up the fare ladder into different buckets, adding attributes, all that kind of stuff. How has that changed competition between airlines? And how has that changed your relationships with your customers?

Scott Kirby

So like I said, I'll go back to that moat. Like we always had a product and the product is a lot better on United today than it was pre pandemic. The biggest thing, by the way, is our people. They do a great job and I hear it from customers all the time, I see it on airplanes. Our flight attendants are the face of United, they do a wonderful job.

By the way, United, I think we're the only ones still doing this. We still give out the little towels that you can wipes that you can use. We don't do that because people are worried about the pandemic anymore. We do it because it creates a one-on-one, eye-to-eye contact with customers to get on there. That's why we do it. And those things matter. Our flight attendants do a great job. They like that they're people. They like that and they do a great job. Now I forgot what the question is. I get to bragging about flight attendants.

David Vernon

So the question is really around, like, the segmenting the cabin and really the changes we're looking at.

Scott Kirby

So what we've done is we always had that. So we were always would have been the most compelling from a product perspective, we were the most we were the most compelling opportunity, but we had the two breaches. If you care about flexibility, we had changed fees and one of our competitors didn't. If you cared about price, others had lower prices. And so we had to get competitive on those.

So it's less, it's more about we got we paired those two breaches, that's really what happened. We always had the high ground on the product and the service and the experience, but we had to repair those two breaches before we could win in those categories. And so now we can win in every category. And you can't just be one category and be successful. And in our hubs, we still aren't like we don't win in Dallas, We're not going to win in Atlanta. We're not going to win in Nashville against Southwest. But in our hubs, we just have the winning hand now across the board.

David Vernon

And I guess as you think about deploying capital going forward then, is it more about expanding your coverage area or monetizing the scaled network that you have?

Scott Kirby

Well, so for deploying capital, you went to a different place than I thought you would. For deploying capital, for us, we said on our last earnings call, we're going to do $79 billion of CapEx. By the way, we're doing that. I think that's the most that we -- I think that's the right level. It's about 100 narrow bodies a year, it's going to be about half Airbus, half Boeing.

That's the amount of aircraft I think that we can that consistency is important. It's hard when you're ramping up and ramping down. It makes it hard on the operation, particularly makes it hard on pilot training and we're going to be at that approximately 100 airplanes a year of narrow body. That means $7 billion to $9 billion of CapEx.

That means, by the way, that certainly on the current forecast, we're generating a lot of free cash flow even while we're doing that CapEx investment. And we're going to have an -- we're in several year accelerated growth phase, but that's going to stop. We're going to get our hubs to maturity and that's going to stop. And then there's going to be really big cash flow at United. But even in the near-term, and we'll say more about this when we do at Investor Day, but even in the near-term, we've essentially we have our balance sheet back to pre-pandemic levels. Our adjusted net debt is back to where it was pre-pandemic.

Our net leverage is basically back to where it was pre-pandemic. We do still have one piece of high cost debt, $1.8 billion of pandemic debt that's high cost, it becomes pre payable next month, so we will prepay that. But at that point, talking about capital allocation is a reasonable thing to do. Our priorities for capital allocation are invest in the business, but we're doing that. That $7 billion to $9 billion that's the most we can invest practically speaking, and we're going to continue to do it, but it's not going to go above that.

Second is prepay, get our balance sheet into position and quickly pay off high cost debt. We'll have done that in June. And then that leaves you options for number three once you've done those two things.

David Vernon

Well, I was just sort of thinking about a more, I appreciate the balance sheet rundown, but I was thinking about it more in the context of, like, okay, what are we going to do next year? Are we going to go ahead and take more share from somebody in another market? Or are we going to figure out a way to enhance the experience within our existing footprint to extract more economic rent from this from the network we have?

Scott Kirby

Well, I'm definitely not going to use that word. But, we -- well, that's not the way I think about it. We're not trying -- we're not like out trying to take market share for someone. We're trying to create a great airline for customers. That results in market share, but we're trying to create a great airline for customers.

And primarily we do that but I actually think I have the easiest job of anyone at United, because I think of it as my only responsibility is to create an airline that our employees are proud of. Because if our employees are proud of the airline, they're going to want you to feel the same way when you fly, and they're going to take care of you. By the way, creating an airline they're proud of means doing things like investing in seatback entertainment because they're proud to have that system on. Customers tell them they like it, they're proud of it.

It means investing in the app, because they like being on an airplane and when the inevitable happens and there's weather like there was yesterday around the country and flights are delayed, the customers have so much information at their fingertips and they tell our flight attendants this is so much better than other airlines. It makes them feel proud, and doing things that make them proud, they deliver for customers. And so we're trying to do is constantly make a better airline for customers and that manifest the higher market share and higher profitability, but it's not market share is not the goal. Better customer experience is the goal.

David Vernon

And you mentioned before about this cycle being kind of different, right? From an outsider looking in perspective, it does feel like the lower cost carriers are having a lot more problems than the legacy airlines. Typically end of cycle, you would normally see the highest cost capacity having to recapitalize and move out. That's kind of been the history prior to 2015 or so.

We're hearing now that a lot of the ULCCs are having to change their strategy and move into different markets and trying to get out of the way. What's the driver of that change in industry dynamic from your perspective?

Scott Kirby

It's fundamentally a flawed business model. It's a tiny market niche for customers that are willing to accept that product. And it worked as long as the big airlines were crappy. But once we got to be good, it doesn't work. I can give you a longer answer, but I don't want to. But anyway, the business model just doesn't work. It does not work against a competent competitor. Well, I think it works against an incompetent competitor and we are now competent.

David Vernon

And has the development of that basic economy product kind of meeting that same customer that maybe wanted that price point value of that has that been a big part of that shift?

Scott Kirby

Sure. We had to do that to be competitive for that customer, but we also had to up gauge. We couldn't have basic economy on a 50 seat regional jet. We did big airplanes where we could afford to sell the seats and still be profitable at those kinds of prices. And we created that.

David Vernon

Let's talk a little bit about the revenue and the loyalty part of the airline investment case, right? Obviously, it's become a much more higher contribution component of it. How does that change how you think about running the airline?

Scott Kirby

I don't know the change. We've always had it, making sure there's a lot of first, there's a lot of opportunity in loyalty. At our Investor Day, we'll talk more about it. That goes way beyond just the traditional loyalty program. I mean, if anybody wants to be enterprise, you can dig around what United is doing. There are other companies that are doing what we're doing, but we have probably the best premium customer database, probably of anyone in the world.

And so doing good stuff with that is important. But the loyalty program continues to be a huge attribute for us. It's great for our customers. They aspire to earn miles and take the family on the dream vacation to Cape Town and we can uniquely offer them that. And it's good for customers. It's good for us. It's a huge part of what we do.

David Vernon

If you put that into some economic terms that investors can kind of understand, like what kind of contribution are you getting out of the loyalty program today? Where has it been in the past and that runway going forward?

Scott Kirby

So, we will share more of this at Investor Day, so I'm not going to do it today. I think we're going to -- I think we'll also start at some point breaking out the financials and reporting them, figuring out how to do that and what to say exactly, which will be good for investors, but I'm not going to predate it. But the goal that I gave to the team is, which I think we are on track to achieve and I think we'll achieve is to double the -- it's already good business with high EBITDA, double the EBITDA between 2019 and 2026, and I think we're going to do that.

David Vernon

Double the EBITDA dollar contribution?

Scott Kirby

Yes.

David Vernon

Okay. And as you think about the contribution of the loyalty program and the contribution you get from premium revenue tickets and stuff like that, like, how do you distinguish that? Like, how do you think about the buy up on the ticket price versus what you're getting out of the rewards program? Because you're kind of balancing that the two sources of revenue.

Scott Kirby

I guess, I don't think of them as in a conflict to have to balance. I mean, again, it just goes back to I think make things simple, like create an airline that customers want to fly. That means create a great frequent flyer program. That means create have a great premium product. That all goes together. But don't I don't ever really think of things as being in conflict with each other as really creating an airline that customers want to fly. And if we do that, I think the rest of it is taking care of itself.

David Vernon

And then if you think about the runway you have to add sort of premium real estate inside the cabin. Can you give us a sense of where you are in terms of maximizing the real estate footage that you might have on any?

Scott Kirby

I don't think we're going to change any of our, we're already way ahead of the industry. One, we're in more premium markets. The largest we have hubs in the largest premium markets in the world, so we should have more premium, because we have hubs in New York, Dallas, Chicago, San Francisco, LA, like we're in the big premium markets. And so we've always had more.

We've got unique products like the High-J 767 that flies here out of New York to London that over half the real estate is business class, lie-flat business class seats, but we already have that. So mostly, I think our premium growth is going to be just as we take new aircraft -- the new aircraft have more premium on them. But it's not a seismic change coming because we spent a lot of years preparing for it. We've been since sort of 2017 putting more premium on airplanes. And that's to just like snap your fingers and say, Matt, more premium on airplanes, that's a multi-year. And we started it back in 2017, it's not bearing not realizing the benefits of it but we've been on this journey for a long time.

David Vernon

Okay. So within the back to the topic of sort of the loyalty programs and credit card and the co-brand cards, there is some push from a regulatory standpoint to attacking junk fees or whether it's the efforts to regulate the card transaction processing stuff. How do you think about the risks to those revenue streams from some of those?

Scott Kirby

So first, I think it would be bad policy and it's -- with well I'm sure with well intentioned, but it's misinformed. 84% of consumers have a loyalty card of some sort in their wallets and use them and they love them. People like getting their miles and taking a trip to Cape Town or getting their miles and getting a free sandwich or a free meal at Chipotle or whatever they do, whatever loyalty program they use. And those bills would eliminate loyalty program, would eliminate the credit card loyalty programs. They would eliminate it. So it's just -- it's bad policy. It also targets the wrong target.

If you look at small businesses that are paying high fees on interchange fees, the vast majority of their fees 60% to 70% of the fees are typically the intermediaries in between the credit card companies and the networks and the small merchant. So what they're doing is they're paying some company to install the readers and things and those companies are charging 400 or 500 basis points and just to provide the service, whereas the credit card company, the Visas, the Mastercards, the networks are charging 200 basis points, but for that 200 basis points, they give you security.

But just think about it. How many trillions of dollars of expenses are going through those networks and we don't hear about cyber issues. Like the security is amazing that those companies give you. They're giving you, when there's fraudulent activity on your card, someone steals your card and purchases it, you get your money back. And like they're providing a huge service for that. And so I don't think the bills will become law because they're, well, maybe well intentioned to buy some that are pushing them, they're bad policy. It's not what the consumers in the country want and so I don't think they're likely to pass.

David Vernon

And if we talk a little bit about supply constraints, so I think you were really local kind of through the pandemic around the pilot shortage and made a lot of investments around pilot training. Where are we kind of as an industry, as United in terms of staffing the airline and dealing with some of those hiring challenges?

Scott Kirby

At United, we never had an issue with staffing. We're at the top of the food chain, so pilots. It's remarkable actually, I got to the TKA, where we do our pilot training in Denver every month and talked to the new hire classes and asked where they came from, how many came from other big airlines. But we don't have a challenge hiring pilots. But I think largely the staff, the pilot shortage is mostly in the rearview mirror.

There's still a lot of churn at smaller airlines, so they still got to hire a lot because they churn out. But people can hire. There's other constraints, the air traffic control system's constraint, the vendors are constrained, but frankly, the biggest constraint is being able to make money with new routes. I mean, like a lot of airlines that are unable to get aircraft right now, it's the best thing going for them. Like they need more loss making routes, like they need another hole in the head. It's the best thing to happen to them is that they don't have airplanes that they have to fly.

It goes back to what I said earlier, like every airline that's not Delta or United has a big chunk of their network that loses money. In that world, you don't want more airplanes, you want less. And the constraint, there's still plenty of supply constraints right now. But the strain ultimately, even if those supply constraints went away, the constraint is economics now. You can't fly places and lose money.

David Vernon

So as you think about some of the supply constraints that aren't related to pilots, give me your top three in order of importance.

Scott Kirby

Boeing, Pratt. The GTF issue is probably worse than Boeing. Those are easier. But it's through that whole supply chain is there's challenges everywhere.

David Vernon

You didn't mention air traffic control.

Scott Kirby

You said supply. So I didn't air traffic control. Air traffic control is the biggest constraint.

David Vernon

For the industry?

Scott Kirby

I think. They're working on it. That's not I'm not trying to criticize them. Like, they're trying to come out of the pandemic and hire and the new FAA reauthorization bill is going to be good, but it's the biggest constraint.

David Vernon

And what should investors be thinking about in relation to that being a big constraint, specifically for United?

Scott Kirby

I don't think about it as an investor. It's at the top of my list of things to think about to be honest with you. I think it's going to ultimately get resolved. I think the DOT and FAA are committed to working to get it resolved. I think the issue is the, I think the industry is going to is moving towards a world where it coalesces around everyone flying places where they can be profitable. That's what's going to be a much better industry.

David Vernon

And you mentioned a second ago that you thought the gear turbofan was a bigger issue than some of the issues coming out of Boeing. Can you elaborate?

Scott Kirby

Well, I mean, just how many airplanes are grounded from GTF engines, and I'm not sure if, when it gets fixed.

David Vernon

What does that mean for you with the decision earlier to kind of go with the GTF and now having split the feet a little bit?

Scott Kirby

No. We split the -- the new airplanes that we're leasing are Leap engines because of that. That's why we want Leap engines.

David Vernon

Does that have cost consequences that you're worried about?

Scott Kirby

Not really. Engines, unlike aircraft engines, having two engine types, if you have large fleets is not a big deal. Aircraft types the reason aircraft types are different than engines is pilot training is different. A pilot can fly a 737, but not an A320. But you can a pilot can fly aircraft A320 is a Leap engine or a geared turbofan engine without any issues. The issue is pilot training. So aircraft complexity is hard, engine complexity is not.

David Vernon

Okay. And then if we step back for a second around sort of this idea of decommoditizing the industry. Still a little bit dependent on supply and demand.

Scott Kirby

Yes.

David Vernon

How durable do you think earnings are going to be sort of through the next cycles, as you think about the industry being more -- having a larger basket of price points? Does that insulate you from some of the historical sort of margin volatility?

Scott Kirby

We're going to still be cyclical. We are cyclical and so we'll have an impact. But I think, we'll be going into it structurally at higher margins and in a better position. And so I think we'll do better in a recession or cyclical. We also, we have a more diverse at United, we have a more diverse revenue stream now. And so one segment is weak, others can make up for it. And so that diversity will help us in a relative sense.

David Vernon

Just to loyalty program?

Scott Kirby

Well, in terms of loyalty program, but also in terms of appeal to cost conscious, price sensitive customers or to the domestic road warriors. I mean, we have a more diverse revenue set. We used to be really focused on the premium customer to the -- not to the exclusion of the others but with big hurdles, with breaches in our moat with hurdles to those customers and eliminating those hurdles just it gives us more resilience because we have more diversity of revenue.

David Vernon

And is it right to think that cyclicality that's still part of the business is going to be dampened in some way because of those factors? Or do we know yet?

Scott Kirby

In fairness, I guess we don't know. I think it will, but I'm certainly not wishing for a recession. But I guess, we'll see, when we go through it. But even when we've hit turbulence recently, like I think what you see is two airlines that still continue to perform pretty well when others hit turbulence. And I think that's probably a good indicator for what happens in a recession, but we'll wait and see for sure.

David Vernon

So a couple of years ago, you guys had come out with UnitedLex strategy, ton of capacity growth, ton of aircraft deliveries. We've had to tamper the growth of that because of some of those delivery delays. How is that impacting your margin progression over that strategy? Or is it impacting it?

Scott Kirby

I don't think it's really impacting it much. It's at the margin no pun intended, issue. And I think frankly, we're better off at 100 aircraft a year. We were kind of already marching towards something like this before the MAX 9 issue happened in January. Our struggle was like we were trying to get Boeing to stop building us Max 10s, because we didn't know if or when they would get certified. And we were having a really hard time doing that.

The MAX 9 incident in Alaska gave us the ability to get that contract restructured. We turned them all into MAX 9s. We have a lot more certainty on what is going to happen. And I think getting to that kind of 100 a year, it will be plus or minus 10 based on but we're going to be pretty close.

And so like this year, we're carrying quite a bit of extra costs, because we were supposed to have a lot more airplanes a lot more airplanes than we have, and we planned for it, even though we thought we might anyway, we planned for it and we hired for it. I think getting to that certainty, we'll have better cost structure, we'll have more consistency, it will be good for our operation, better for the FAA, like everything about it will be better. And I don't think it really impacts our margin. We'd be even that number of aircraft, we're going to be, call it, 50 airplanes short this year. That's a couple of percentage of capacity points like that's not driving a huge difference at United.

David Vernon

But is there a productivity drag created for that if you'd like staff out the maintenance operation to have that many more aircraft?

Scott Kirby

Yes, we have right now, we're carrying extra costs. That's just my point. Like by the time we get into next year, those excess costs that we're carrying right now will have gone away. It'll be a tailwind for us from a cost structure perspective.

David Vernon

And you touched on this earlier, but obviously, the CapEx profile comes down a little bit, taking the fewer aircraft. What are the plans for the excess cash?

Scott Kirby

Well, I already talked about it.

David Vernon

Well, as far as kind of shareholder return. We didn't quite get into sort of a dividend.

Scott Kirby

Well, I'm not ready to make an announcement yet. We got to pay off the high cost debt, $1.8 billion, but that comes due or that becomes prepayable here next month. But then we have the flexibility for that.

David Vernon

And as you think about kind of you and the board's discussions around what that would look like, is it more on the dividend side, more on the buyback side?

Scott Kirby

Well, certainly trading at 5x earnings, I can't imagine that it would be anything but that it would be a dividend.

David Vernon

That's helpful.

Scott Kirby

I mean, 15x earnings is different. Five is pretty easy.

David Vernon

Okay. And then one of the things that you've talked a lot about is this investment in the service and the onboard product and bringing flight attendants into Chicago to kind of get them.

Scott Kirby

Backstage.

David Vernon

Just sort of onboard with the program. Can you talk about where that cultural transformation is? Because when you got to United, I think the business is in a little bit of a different spot.

Scott Kirby

Look, I said earlier that I have the easiest job at anyone at United, because my job is to create an airline that they're proud of, and I think we've done that. Like I get on airplanes like we still have issues, not perfect. Like we have contract negotiations going on, that's always a little hard. But our people know the vision. They buy into the vision. We want to be the biggest, we want to be the best airline in the history of aviation. They know it, they all they're on board with it, they believe in it. They also know that we are a team. I think of us as a team. I care immensely about our employees doing what's right for them. They all know it. They may disagree with on some things, and they'll tell me that sometimes, but they all know it, that I'm with them and that I want to I’m going to create an airline that never again has a furlough that is an airline that they can come here to work when they're 25, and they can work for 40 years if they want to and have a great career, support a family. They know that we're in it to make it great for them. I mean they agree with everything we do, they don't.

But we're on the same team and they're proud, they want to win. I tell them I want to me, I want when they get on crew vans, I want other airline employees to be jealous of them. They told me that happens, when they go out to their kids or their grandkids' soccer games or baseball games. I wanted to want to put their United swag on because they're proud of it, and they want their neighbors and friends to know they work for United. And we're creating that culture.

I think we've created that culture and I am 100% committed to keeping it and making it the biggest best airline in the history of aviation, one that they're proud of. Because when they are, they deliver for customers, and that's why our financials are good because of what they're doing.

David Vernon

And have you seen that sort of translate into net promoter scores as you've been going through that that transformation journey. Can you tell us how that's?

Scott Kirby

Massively. Our NPS scores from pre-pandemic to today are up something like 40 points. Huge change. By the way, all this fits together. Like when I talk about all this, the improvement in how employees feel about the airline, translating into improved NPS scores and translating into improved market share, translating into improved financials like this is a flywheel. It works and it's working.

David Vernon

So the question here around sort of Boeing versus Airbus in the order book and obviously, the delays in the MAX 10 switching to the MAX 9. As you think about the backlogs on Airbus, do you think you're going to have the ability to get that 100 aircraft a year?

Scott Kirby

Yes. Well, one, we've already got it done. We already had deals to take us out for the next several years. A big difference between Boeing and Airbus, too, is Boeing sells aircraft to lessors at a premium, meaning it's hard for an airline like United to lease a Boeing airplane because the economics don't work.

Airbus sells them for same kind of price, so a lot more airplanes to aircraft lessors, which means then it's just a financing decision. And so we can lease an airplane for an Airbus aircraft for the same kind of economics that we can buy them. And we can do that a lot more short-term, so we do that a lot more flexibility, a lot more optionality to do that short-term. And with where United is, like we're sort of the premier airline around the globe to lease airplanes to.

So if we want more Airbus airplanes instead of having to make a big capital commitment that goes a decade out into the future, we can be much more flexible about leasing airplane. Much harder to do that with Boeing, because they have a different philosophy on selling into the leasing market. But I feel really good about where we are with aircraft on both.

They're both great airplanes. I think at Boeing, as much as they've been challenged, they still be good airplanes and they're going to be there for us, and they're going to get through this and they're going to get it turned around. And similarly, Airbus builds good airplanes. Frankly, I'm more worried about the engine side of the business than I am though. I'm not worried about it, but there's more challenges in the engine side. There's less high profile, so not in the media as much.

David Vernon

And as you think about the 100 aircraft coming in, is there going to be a shift in sort of financing strategy? Or are you going to be taking them all as ownership? Or are you taking them that [inaudible]?

Scott Kirby

We've done more, we've leased more airplanes and Mike Leskinen, our Chief Financial Officer, brings a more open book to it. I kind of was always anti lease airplanes and he took a lot of convincing with me to go through the economics, and Vinci sort of the economics, and especially if you do your weighted average cost of capital when our stock is trading. If our stock is trading at 15x, I think we'd buy all of our airplanes or be biased to buy all of our airplanes. When we're trading at 5x and our [wack] is where it is, like, makes more sense to makes a lot of sense at least to lease at least some airplanes. Hard to say.

David Vernon

And as you think about the investment opportunities outside of aircraft, right? Obviously, the industry has put a ton of money into airports, put a ton of money into the customer experience. Can you talk about some of your priorities outside of the fleet, in terms of where you want to put capital to work to accelerate the strategy?

Scott Kirby

Well, we're doing those kind of you're going to always do airport investment. That's sort of like aircraft. You have to do it. We're doing a lot of terminal A at New York. It's awesome. I flew into there yesterday. It's great. But opportunities like that are going to always be there. We're doing a big project in Houston for Terminal B that's going to be really, really nice. It's going to be done soon. We're doing a project in Dallas that's going to sort of double our international capacity for new gates and Dallas is supposed to be done by the summer of 2026. So those kind of projects are going to always be out there.

The biggest sort of discretionary investment that we make is technology. I think we are a leader. I mean, you can see it in the app, if you use our app versus others, it's the best airline app in the world. But there's a lot of other technology that is very unique. If I was talking about discretionary investment, it's the place that we over index on is technology. We're doing a lot with AI. Right now, that's the place we over index.

David Vernon

And what about onboard Wi-Fi?

Scott Kirby

More to come.

David Vernon

More to come?

Scott Kirby

Yes.

David Vernon

You're going to keep me waiting for investor now.

Scott Kirby

I'll keep waiting until we have a deal done. Probably not Investor Day.

David Vernon

All right. And then what other parts of the like, if you were to think about the critical path that you think is going to unlock additional value on that technology side, If you kind of dig into that. Like, obviously not interested in understanding what the coding and all of this. But so as you think about, the pain points that you see that technology can address.

Scott Kirby

So a few things. One, there's a whole bunch of opportunities to just run the operation better, kind of behind the scenes but really important to how the customer experience winds up showing. One of the important things to do is get off mainframe. We still got green screen stuff. We still got Fortran.

We've been working on it for several years. We have a path to get off of the mainframe. The reason to get off the mainframe isn't per se to improve it, but it's the only way you can ever improve it. You want to recode Fortran, like first you got to go find people that know Fortran and this is massively complicated and it's almost impossible to do. All of it is around trying to improve the customer experience. I'll give you a couple of examples.

If there's a weather delay and you need to get rebooked on a flight, it used to be a 40 -- about a 40 step process for a gate agent to figure out how to rebook you and only a gate agent or someone could do it. We now have, we call it the easy book button that will, with one click, push the button, rebook you and give you all the options. You just pick an option off of a screen and that's the one you get and take that means customers can take care of themselves without waiting in long customer service lines, like it's a better experience for everyone to do something like that.

The other thing that I have been on a mission to do my entire career, and I think we're going to finally we're better than anyone in the world at this, is tell customers what's going on when there's a delay, when there's an issue. Be honest with them and tell them what's happening. Don't send them, these terrible emails of late arriving equipment, your flight is delayed, not explaining it at all, which is most of your life, or late arriving equipment, well, why the hell is it late? Or weather, like we had a situation in Chicago the other day where there was weather out over Lake Michigan and the arrivals were coming from the east, so you couldn't fly through it.

There was thunderstorm over Lake Michigan, couldn't fly through it. So the airport was effectively closed. But it was sunny at the airport. We're telling and by the way, I got diverted. I had a 13-hour travel day. I got diverted because the airport was closed, even though it was sunny in Chicago. And so customers will be saying, wait, it's sunny in Chicago. You're lying to me when you say it's weather. We started doing we just started this, so it's not happening everywhere yet, but it will be, sending them a map that shows their flight path.

It shows the weather radar map, like you have to fly through this, that's why. Like just telling people what's going on. What I've said to our team on this, and artificial intelligence is really helpful for this, by the way, is what I want to get to is a world where we're telling customers, pretend that I, Scott Kirby, have called the network operating center and I'm on a flight. I said, what's going on with my flight? What would you tell me? I want to tell every single one of our customers exactly what you would tell me. I think that kind of transparency goes a long, long way. But there are a whole bunch of stuff like that, but it's mostly around either running the operation better and an awful lot to make travel easier for customer.

I mean, look at our app, we're the only airline still have on the home screen if you fly United on the home screen. It's great. Like, you go to the airport, like, your plane is your inbound plane is 23 minutes away, and you can just see it on your Apple home screen. Like, it's awesome. Your bag, like, you land and like, here's where your bag is. It'll be at the you know, counter or it'll be at the carousel in 14 minutes. And like, you just know what's going on. So, anyway, lots of cool stuff.

David Vernon

Appreciate that. We're coming up to the end of our 50 minutes. I usually like to give you a chance to give investors a chance to or give investors your view on why United as a stock as we price this up?

Scott Kirby

So look, you've heard it today. I think the industry has fundamentally restructured. I don't -- I really don't I probably came across as a knock on the other day. I don't mean it that way, but the industry is fundamentally restructured. This is a journey that's eight years in the making at United. It is permanent, it is structural, it's irreversible. We're just we're unique, we're in a better place. I think the whole industry probably has margin growth, well not the whole industry, but the big four airlines have margin growth ahead. I think we have more than anyone and we're trading at 5x earnings. Like this is why you don't have to get everything right on.

You just have to not get everything wrong, I think to be successful. And a really good chance we're going to get close to every we won't get everything right, but we're going to get close to it right. It's hard for me to see many better opportunities.

David Vernon

All right. Well, track record so far has been pretty good. I want to thank you for coming out and supporting the conference. I always learn a lot from these conversations.

Scott Kirby

Thanks. Enjoyed being here. John, it's enjoyed it too. Everyone travels with your kids, see. That's the lesson.