July 31, 2006 – Second Quarter Results

We announced our second quarter results earlier today, and important for those with a stake in our company, the results support the underlying strength of our company's turnaround. The numbers tell the story:

 

• Total revenues were up 16 percent to $5.1 billion and our unit revenue improved by 12 percent.
• Our costs came in better than we had expected during our first-quarter call, but in line with what I said they would at the Merrill Lynch conference; with mainline CASM, excluding fuel, special items and the one-time severance charge, up 1.5 percent.
• We generated nearly $700 million in operating cash flow, bringing our cash and short-term investment position to $5.1 billion.
• Operating margin was 5.5 percent, up from 1.5 percent from the second quarter of last year, again, excluding the severance expense and special items.
• And excluding those items, earnings per diluted share was $1.09, operating profit was $282 million and net profit was $141 million, despite an increase in fuel expense of some $344 million.

When we were at the Merrill Lynch conference some weeks ago, we talked to the analysts about the work we are doing to realize the benefits of our reorganization, and outlined our performance agenda: reducing our costs, optimizing revenue and improving the customer experience.

Today's results demonstrate the progress we are making against that agenda.  We posted earnings that beat analyst expectations … the result of strong revenue growth in a healthy revenue environment, improved cost performance … and a strong cash position.

While we are encouraged by the trend and the momentum we see within the organization, we are by no means satisfied.

To continue the momentum, we'll continue to focus on strengthening the core business, implementing the principles and techniques of continuous improvement as a means to standardize the work and reach higher levels of performance across the company. Hundreds of employees are already engaged in continuous improvement efforts both on the front line and in the back office, simultaneously improving safety, revenue and the customer experience through process changes that also drive down costs.

We are accelerating our cost reduction efforts, bringing portions of the savings we had announced for 2007 into 2006. Some of our reductions are ahead of schedule. We are essentially half way to our goal of reducing salaried and management headcount by 1,000 by year end. By Oct. 1, we will have rolled out reduced turn times at all of our hub stations, reducing costs and adding capacity.

We have also sharpened our focus on revenue, ensuring that we take advantage of the improved economic environment by deploying assets most effectively against opportunities. We are maximizing the revenue potential of our hub cities and Asia, shedding unprofitable routes and leveraging products such as Economy Plus to deliver more revenue.

We are also driving for long-term improvements to our customers’ experience from our airports to our aircraft. Our San Francisco station is testing better ways to move customers through the airport, and our first aircraft to feature our new international premium product will launch into the marketplace next year.

Today's earnings announcement follows the preliminary results we issued last week.  We announced those results to provide investors guidance ahead of our expected issuance to trust of convertible notes for the benefit of our employees.  As you may have read in NewsReal, many United employees will receive cash proceeds from the sale of those notes in the coming weeks.  The notes, which were approved by the bankruptcy court as part of our plan of reorganization, partially offset the retirement benefits that active employees lost when United's pension plans were terminated and replaced.

Now, I'll turn the call over to Jake, who will talk some more to us about our financial progress for the quarter.

Jake over to you.

Jake:

Thanks, Glenn. As Glenn discussed, our performance improved significantly from last year, in the areas that are key to our financial success — revenue, margin, cash and costs. Several analysts noted we surprised to the upside on all of these metrics.

Our results also put us in a position to be compared favorably to our network peers, as analysts did this week in reports following our preliminary results.

While we are making financial progress, we continue to focus further on margin improvement. Our operating margin jumped to 5.5 percent from 1.5 percent in the same quarter of 2005. While our operating margins were below those of our largest peers, we halved the gap between our margins and American’s and Continental’s since the first quarter.

Importantly, our operating cash flow was very strong this quarter – more than 20 percent higher than the same quarter in 2005. This cash generation power inherent in our financial structure is somewhat masked by non-cash, fresh-start and exit-related charges.

Our revenue improvement this quarter was solid, as we benefited from a favorable revenue environment, and the steps we’ve taken to drive higher revenue growth. As Glenn mentioned, revenue was up 16 percent, and both mainline and consolidated RASM grew 12 percent on the strength of a 10 percent increase in mainline yield and a 1.5 point improvement in load factor. These results are particularly strong, given our capacity growth in the second quarter.

Improving revenue going forward will require many incremental adjustments, some small, some large, that taken together are meaningful. Increasing Economy Plus upsell is one example of a step we are taking. In addition to looking at our products, we continue to optimize our route structure – improving economic performance while broadening our customer offering in key hubs. Last Friday, we announced plans to replace our current JFK-Tokyo service with new service from Washington to Tokyo, eliminating a route that was unprofitable for United while offering new service to our Washington customers.  We also sold our New York City–London route authority to Delta. Those two actions will enable us to reintroduce non-stop service to Taipei from a point of strength, our San Francisco gateway. 

On the expense side, we continue to work hard to control our costs. Mainline CASM increased 9 percent in the quarter, while mainline CASM excluding fuel, severance expense and special items increased 1.5 percent compared with the second quarter of 2005.  That was below the 3 to 4 percent increase we initially estimated.

The difference there is important to note. We beat our initial estimate by finding numerous small savings across the company. Added up, those savings were significant. That’s what continuous improvement is all about, eliminating unnecessary work, improving processes and ultimately reducing our costs.

Our cost performance is also hampered by the fresh start and exit-related charges I mentioned earlier. Excluding these non-cash items and the $22 million in severance costs, our non-fuel CASM for the second quarter dropped by 1.6 percent from the second quarter of 2005.

We also provided guidance on our costs for the third and fourth quarters. We estimate that, versus the same periods last year, mainline CASM excluding fuel and special charges will be 1.5 to 2.5 percent higher in the third quarter and flat to 0.9 percent higher in the fourth quarter. You can see that our year-over-year performance improved from the third quarter to the fourth quarter. That means we will have to accelerate our continuous improvement efforts as we approach year-end in order to make our numbers.  This isn’t something we can sit back and rely on the CI team to do for us.  This is something each of us is going to need to contribute to if we’re to be successful.

Our results today show that all of us working together can have an impact on our financial results.

Back to you Glenn.

Glenn:

Thanks, Jake.  We are encouraged – but we are not satisfied -- by the progress and momentum we demonstrated this quarter.  We had strong revenue growth, solid cost performance, a strong cash position. We have outlined and are delivering against a performance agenda to reduce our costs, optimize revenue and improve the customer experience.

That’s all for now.  I'll be talking to you again soon.  Until then, stay focused on our customers, and on one another…and stay united.