United Airlines - Earnings Call - Q2 2020
July 22, 2020
Transcript
Speaker 0
Good morning, and welcome to United Airlines Holdings Earnings Conference Call for the 2020. My name is Brandon, and I'll be your conference facilitator today. Following the initial remarks from management, we will open the lines for questions. This call is being recorded and is copyrighted. Please note that no portion of the call may be recorded, transcribed or rebroadcast without the company's permission.
Your participation implies your consent to our recording of this call. If you do not agree with these terms, simply drop off the line. I will now turn the presentation over to your host for today's call, Christina Munoz, Director of Investor Relations. Please go ahead.
Speaker 1
Thank you, operator. Good morning, everyone, and welcome to United's second quarter twenty twenty earnings conference call. Yesterday, we issued our earnings release, which is available on our website at ir.united.com. Information in yesterday's release and the remarks made during this conference call may contain forward looking statements, which represent the company's current expectations or beliefs concerning future events and financial performance. All forward looking statements are based upon information currently available to the company.
A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release, Form 10 ks and 10 Q and other reports filed with the SEC by United Airlines Holdings and United Airlines for a more thorough description of these factors. Also, during the course of our call, we will discuss several non GAAP financial measures. For a reconciliation of these non GAAP measures to the most directly comparable GAAP measures, please refer to the tables at the end of our earnings release. Joining us on the call today to discuss our results and outlook are Chief Executive Officer, Scott Kirby President, Brett Hart Executive Vice President and Chief Commercial Officer, Andrew Nozella and Executive Vice President and and Chief Financial Officer, Jerry Laderman.
In addition, we have other members of the executive team on
Speaker 2
the line available to assist with Q
Speaker 1
and A. And now I'd like to turn the call over to Scott.
Speaker 3
Thanks, Christina, and thank you all for joining our call today. This obviously is not the environment that I expected for my first call as CEO, but I have to say that I've never been more proud than I am of the team at United, and I want to thank everyone for their leadership, support and dedication to the company that we all love during what is the most difficult time any of us experienced both for our airline and our families. Our frontline hasn't allowed dramatic reduction in our schedules or headlines about potential furloughs or new mask requirements to interfere with their commitment to taking care of our customers and each other. In fact, our customer satisfaction scores in June improved nearly 30 points year over year. There's just no better evidence of our determined commitment to care for our customers and keep them safe.
It's what being united together is all about. And Brett will talk in some more detail about how our core four values have informed our industry leading commitment to the safety of our customers and employees. The 2020 was historic for the airline industry for all the wrong reasons. At the April, we saw the sharpest, deepest drop in demand in history, far worse than nineeleven or the Great Recession or any other stress test scenario that anyone had modeled. And near the end of the quarter, just as optimism about a recovery was beginning to build, we watched demand fade once again as COVID-nineteen spiked in the Sunbelt.
But when we make it through this crisis, and I've never been more confident that we will make it through this crisis, I think we'll look back on the 2020 as an extraordinary three month period filled with achievements that weren't even sure were possible when we started back in April. We can't control the course of the pandemic, though we are doing our part to help by leading with safety. And the United team has been doing an exceptional job of controlling what we can and generating what we expect will be the best or in this case, least bad financial results of any of our network Some of the achievements this quarter included the fastest, most realistic and accurate assessment of the demand environment, completing the largest debt financing in the history of the airline business backed by our loyalty program, dramatically reducing our cost structure and implementing a variety of industry leading measures designed to protect our customers and employees from the spread of the coronavirus. While some of you have noted that previous strength, including our high exposure to international and business demand, would create larger headwinds for United, those of you who've joined these calls before will not be surprised to hear that our no excuses philosophy is not suspended just because times are tough.
In fact, that philosophy is more important than ever in times of adversity and it has served us well because in spite of what could have been easily explainable excuses, the United team pulled together to overcome them and we expect to deliver the best financial results for the network carrier. As Andrew and Jerry will discuss in more detail, we expect that our realistic, smart and opportunistic commercial strategy backed by a dynamic and thriving cargo business combined with other dramatic cost cutting across our company resulted in United's losses and daily cash burn being lower than either of our network competitors in the second quarter. And that's important because as we've discussed before, minimizing the depth of the hole we dig in this crisis is critical to preparing United to thrive on the other side. I look forward to the day when we're past the pandemic and can stop talking about cash burn. But the country, the world and aviation are where we are right now.
I remain confident that the virus will be defeated and when it is, I'm very bullish about our future because I believe the current headwinds related to international and business travel will once again return to being important and unique strategic advantage for United Airlines. And if we can produce leading financial results, even with these larger headwinds right now, just imagine what we'll do in a healthier operating environment. My recap of the second quarter would not be complete if I didn't mention how conversations about confronting systemic racism reverberated through our society, including here at United, like never before. As a company, we'll have much more to say and more importantly do on this topic in the future. But for now, let me reiterate that I'm personally committed to using the influence and visibility of my new role at United to put our values, especially our commitment to equity and inclusion into action.
Now if you've doubted just how busy Q2 was for United, let me remind you that we also named Brett Hart as our new President. Brett's been a trusted colleague, valued advisor and a good friend since I joined United almost four years ago. He's been a widely respected leader at United for much longer than that. It's my honor to introduce him as my partner for the first time on an earnings call in his new role as our President. Brett, over to you.
Speaker 4
Thanks Scott for that kind introduction. I also appreciate your long term commitment to action on diversity, equity, and inclusion. And I'm excited about how our partnership can bring about meaningful and lasting change at United and in the communities we serve. Let me begin by saying how proud I am of what our team has accomplished over the last few months in the face of near zero demand for air travel back in April. While we have a long road ahead of us, we believe the $16,100,000,000 of liquidity we have raised since the start of the crisis and our dramatic reduction in cash burn have set us up to not only survive this crisis, but to emerge in a position of strength during the recovery.
Throughout this crisis, we have never lost sight of the fact that the very first pillar of our core four is and always will be safety. With this guiding principle, we have introduced a number of industry leading safety measures to do our part to prevent the spread of the coronavirus and to protect our employees and customers, including requiring all flight attendants and passengers to wear masks, asking all passengers to complete a health assessment during check-in, offering customers the option to change flights for free if their flight is expected to be at least 70% full and partnering with Clorox and the Cleveland Clinic, just to name a few. Along with our unwavering commitment to safety, from the very outset of the pandemic, our former CEO and current Chairman Oscar Munoz and Scott made it clear that our number one priority was to preserve as many United jobs as possible for the long term. To this end, very early in the crisis, we began efforts to reduce our non labor expenses and eliminate any discretionary or non essential project spend. I want to thank our over 26,000 team members who have all contributed to reducing our expenses through early separation program, voluntary unpaid leave programs, or reduced work schedule.
Our voluntary separation and retirement programs are almost closed and so far over 6,000 employees have opted to participate. At a time of unprecedented uncertainty, these contributions by our employees were one of the most meaningful actions that could be taken. Unfortunately, this crisis has lasted longer and become worse than most experts anticipated. And so these efforts, while meaningful and appreciated, simply are not enough and only get us a small step of the way there. We are left to make some of the most difficult decisions in the history of United Airlines, specifically on the size of our workforce.
On October 1, we are planning to be a smaller team and airline in response to the depressed demand environment. Transparency and candor in a situation like this where no one is at fault is the most core four thing we can do for our team. We have been in active communication with our unions to identify voluntary programs that could mitigate furloughs. In this uncertain world, giving our United team members a choice as much as we can is an important element of our strategy. These voluntary programs will be balanced offers, which reduce labor costs while providing flexibility to our team and to United so that when demand returns and it will return, we have the jobs and the people ready to go and can avoid as many involuntary furloughs as possible.
While this unprecedented health crisis has changed the way we operate, it hasn't changed the commitment our employees have to running a great airline. As part of the leadership team, we will continue our promise to do everything in our power to preserve as many jobs as we can for the people of United. With that, I'll turn it over to Andrew to discuss the revenue environment. Andrew?
Speaker 5
Thanks, Brett. The second quarter was clearly the most difficult quarter in United's history. We acted quickly and decisively to confront demand changes. In fact, our change in total revenue in the quarter of down 87% wind up being consistent with our total capacity being down 88%. Our network peers flew more capacity than United and we believe our careful management of capacity, pricing and cargo during the quarter is the primary driver of our good results relative to our network peers in terms of absolute losses and cash burn.
We feel as good as we can about these relative results. In a world of limited demand, driving our cash burn down is absolutely a function of the amount of capacity we offer. We clearly have a long way to go as we navigate COVID-nineteen, but we got off to a relatively good start. At the start of the pandemic, many feared our outsized exposure to business traffic, international traffic and our coastal hubs would have been of a drag on performance relative to other network carriers. But this was not the case as we made smart decisions about capacity.
We'll not be focusing on market share during the worst financial crisis the industry has ever faced. Instead, our focus is on ending cash burn and returning United to profitability. As we look towards an eventual recovery, international demand will be slower to recover than domestic. When international demand does recover, we believe United's postal gateway hub will recover quicker than others, a benefit of having the best U. S.
Gateways to start with. Orders are up around the world now and international revenue is low. We believe that United that we have already felt the worst of the international passenger revenue decline impact. Borders will open someday and we believe United is well positioned to experience the fastest international revenue growth when they do. Corporate traffic, which was down 96% in June, will also be slower to come back than leisure, but we believe it will.
We are social creatures. Video technology has proved as a reasonable temporary measure, but we do not expect it to replace meeting in person over the long term. In fact, we have a hypothesis that more work from home employees may drive increased business travel over the medium term as some people trade their commutes by cars with less frequent commuting by airplane from a remote location. In the short term, we will make appropriate adjustments to our network to reflect less business traffic by putting a higher proportion of our capacity into leisure and visiting family and relative markets. We expect the recovery in demand to be jagged.
Everyone has a view what the recovery will look like, but we'll not pretend to be able to predict the path of the virus. We do expect that demand recovery, which stalled in recent weeks, will begin to recover again when new cases start to fall, quarantines are lifted and borders are reopened. However, we continue to believe a full recovery is contingent upon effective therapeutic and a vaccine. Our best guess is demand as measured by revenue will recover over time to be down approximately 50% and then plateau at that level until a vaccine is widely distributed. We discovered how disruptive the virus would be to demand very early on in this pandemic and we use those learnings to shape our near term capacity decisions.
For April and May, we reduced capacity approximately 85%. We also temporarily reduced our average seats per departure in May and June by 23%, which lowered our trip costs, helping us conserve cash while the CARES Act payroll support program supported the salaries of the United team. In each of our Mid Continent hubs, we came up with an entirely new schedule while maintaining the comprehensive network and sufficient connectivity. Domestic PRASM in Q2 was down by 47%. We did see steady progress throughout the quarter as our schedule changes were implemented and demand began a slow but steady rebound.
Domestic PRASM performance in June improved to be down only 15%, reflecting an improved demand outlook even as we were deploying multiple actions to minimize flights operating above 70% load factors. We upgaged 66 flights per day in June, restricted inventory in flights booked above 70% and blocked certain seats from sale. While we have very high confidence in the safety on board aircraft, we continue to deploy multiple actions to manage high load factor flights to increase customer confidence. Our approach for international wide body long haul flying has been to leverage our cargo capabilities to partially offset declines in passenger revenues. For the quarter, international ASMs were down 92, but we maintained passenger service throughout the crisis to Australia, Japan, Brazil and multiple points in Europe, even with increasingly restrictive border policies.
We also operated over 3,800 all cargo charter flights in the quarter, which contributed to our over 36% improvement in cargo revenue in the quarter, while our competitors saw the cargo revenue declines. The United Cargo team clearly hit a home run-in the quarter and Cargo is on track to have another great quarter. Recent uptick in COVID cases in late June and early July have temporary stalled demand improvements we were seeing in June. Third quarter domestic capacity is expected to be down at least 55%. Domestic RASM results for United in July and August will clearly not be as good as late June given industry dynamics, stall demand and our own capacity increases.
United's August schedule is already adjusted downward the other week given recent changes in demand and our September schedule is still not finalized. Domestic load factors in the coming weeks are expected to average just below half full, a reduction from the 57% we saw in June. In the event customers are booked on flights that are above 70%, we will continue to let them know in advance and offer an alternative flight at no additional fee if they'd like to make a change. We expect that passenger revenue in the third quarter will fall approximately 83% versus Q2 of down 93.5%, with consolidated capacity expected to be down approximately 65%. Just a few weeks ago, prior to the case spike, we'd expected revenues in the quarter to be down less than 80%.
With the end of the payroll support program, our marginal costs will increase later this year and that will impact how much incremental capacity we can add in most post summer, if any. However, given a look at industry dynamics, we expect to have the most conservative deployment of third quarter capacity of anyone. My update on past earnings calls reported on United's progress on array of commercial and customer initiatives. We can't be sure that every aspect of our past commercial and commercial plans will be relevant in the future. While our team is agile and we're ready to respond to an ever changing world.
We've proven that over the past few years and we'll prove it again over the next few. Thanks to the entire United team. Your dedication in these difficult times will allow us to come out of this period strong. And with that, I will turn it over to Gerry. Thanks.
Speaker 6
Thanks, Andrew. For the 2020, we reported a pretax loss of $2,000,000,000 and an adjusted pretax loss of $3,200,000,000 These results represent how this global pandemic continues to materially disrupt our business in unprecedented ways and therefore requires unprecedented responses to ensure we come out of the crisis as strong as possible. Since the start of the crisis, we focused on aggressive cost cutting to minimize our daily cash burn and aggressively pursued opportunities to bolster our liquidity position. Since March, we have raised a total of $16,100,000,000 of additional liquidity, largely through debt offerings, stock issuances and the CARES Act Payroll Support Program grant and loan. Included in our capital raising actions was the truly first of its kind debt financing using program, which brought in $6,800,000,000 in liquidity.
Working with Goldman Sachs, our lead underwriter, we were able to formulate an innovative structure that allowed us to unlock some of the inherent value in the program. We were able to achieve our key objective of raising a substantial amount of liquidity at attractive interest rates in a manner which doesn't impair our flexibility to use MileagePlus to support our business going forward. I certainly appreciate comments made by one of my peers recently, who recognized that this structure will serve as a model for the use of loyalty programs to raise liquidity by the industry in the future. We continue to target over $18,000,000,000 in available liquidity by the end of the third quarter. We believe this level of liquidity will position us to manage continues to depress demand far into 2021 and even beyond depending on the pace of recovery.
While we view this as enough liquidity, should we desire to raise additional liquidity, we have at least $9,000,000,000 of available collateral value, excluding both MileagePlus and the collateral we expect to hold available for CARES Act loan and this additional collateral we can borrow again subject, of course, to market conditions. Having built up a substantial cash cushion, we will continue to make every effort to preserve our liquidity until we are out of the crisis. Through the hard work of our employees across the business, we reduced our second quarter average daily cash burn to $40,000,000 including approximately $3,000,000 of principal payments and severance expenses, ending up at the low end of our original second quarter guidance range. Over the last three months, we have reduced our total operating expenses, excluding special charges, by 54% and eliminated all sources of discretionary spend. What is left is simply what is absolutely needed to operate the airline and nothing more.
We also significantly reduced our adjusted capital expenditures since the crisis began and have paused all investments that didn't have an immediate return. In fact, we now expect our 2020 adjusted capital expenditures to be approximately 3,700,000,000 down from our previous guidance of less than $4,500,000,000 and of course, down from the $7,000,000,000 we originally forecasted before the crisis. We continue to take delivery of new aircraft only when financing is available, and we've come to an agreement with Boeing that we will not be taking delivery of any new aircraft in 2022. Our team is working tirelessly to examine how we can further variabilize our cost structure to ensure that we come out as a stronger industry player once the pandemic ends. One area we do continue to look at is our overall fleet.
We currently have close to 600 aircraft temporarily grounded. While
Speaker 3
we
Speaker 6
do not have anything specific to announce on aircraft retirements at this time, our priority is to remain agile. Looking ahead to the third quarter, we expect our average daily cash burn in the third quarter to be approximately $25,000,000 with $6,000,000 representing debt principal payments and severance expenses. This cash burn estimate assumes passenger revenue is down around 83% for the quarter. As we look to the fourth quarter and next year, nobody has good visibility on the pace of demand improvement. As a result, our primary focus will continue to be minimizing cash burn for the foreseeable future.
Unfortunately, this means that we will need to bring all of our costs in line with our reduced revenue, including labor costs. And this has led to the difficult but necessary decision to reduce the size of our workforce in the fourth quarter. We believe that when demand returns, based on the work the entire United team has accomplished in cutting costs to respond to the crisis, we will be in the best position to reach cash burn breakeven, which we expect will be in an environment where demand and capacity are down around 50%. We will let you all make your own forecast as to when that will happen. In closing, I will reiterate that there is still a tremendous amount of uncertainty ahead, but we believe that United is in a position of strength to manage through what we expect to be a jagged recovery.
And with that, I will turn it over to Christina to start the Q and A.
Speaker 1
Thank you, Jerry. We will now take questions from the analyst community. Please limit yourself to one question and if needed, one follow-up question. Brandon, please describe the procedure to ask a question.
Speaker 0
Thank you. And the question and answer session will be conducted electronically. And from Bernstein, we have David Vernon. Please go ahead.
Speaker 7
Hey, good morning. So I wanted to ask you about the headcount plans. Obviously, 6,000 employees that have signed up for the voluntary out is well below the numbers that have been commented on before in terms of reductions that might be required to right size the network. How should we be expecting this to play out over the course of the next couple months? I mean, the care loan closes off in September or the care provisions anyway.
What can you tell us about sort of the scope of expected actions here and the timing on when these announcements might be made?
Speaker 3
David, good to talk to you. What I'd say is the 6,000 voluntary, first I'd like to thank everyone at United, all the 6,000 and there's another approximately 26,000 people who've taken temporary voluntary programs at United so far. So thank all of them for their selfless actions, and doing what they can to, help United and their fellow coworkers get through this. It's a testament to how much people care about this company and doing the right thing. Look, I think of it as there's 32,000 people so far who've raised their hand and taken a voluntary program.
We are still working with some of our other unions as well. So I expect if we get those deals done, we will have opportunity to have any more. But at least I think of it as that 32,000 number is probably the more relevant metric because some of those are temporary. And look, we know that there's going to be a recovery. And if we can keep people temporarily, maybe not on the payroll full time, but engaged, connected to the company, certified, trained and ready to bounce back because the recovery is going to be quick.
That's really important to us. We feel pretty good we feel really good actually about where we are in the voluntary program so far.
Speaker 7
And can you comment on I know these are difficult discussions, but as far as kind of the tone and the tenor and the relationship with labor, can you give us some feel for the status of the relationship there? Is this a is it competitive? Is it collaborative? Like how is the tone of the negotiations so far in terms of mitigating furlough actions and maybe getting some additional help from labor side to get through this?
Speaker 3
Look, I'm not going to comment on the specifics of negotiations, but I would say we've been transparent and honest with everyone from the beginning, including our employees and our labor union, and all of you. Foundation. And this is a situation where our interests are aligned. This is not a traditional kind of adversarial types of discussion. We all share the goal of getting through what we all know is a temporary crisis and getting to the other side.
We wish that there was going to be no pain to get through it, but we all now recognize, that this pandemic is deeper and is going to last longer than we would have hoped. And because of that, there is going to be some pain. And so the discussions are about how do we minimize that, in the most humane way jointly with our people. And I feel good I feel really good about where we are.
Speaker 0
From Evercore ISI, have Duane Pfennigwerth. Please go ahead.
Speaker 8
Hey, thanks. Just in terms of the cash burn improvement sequentially, maybe you could provide some detail there. Your capacity is up meaningfully and appreciate those capacity plans have a downward bias given changes in demand. But higher capacity up, call it 190%, which will drive higher variable costs, and yet demand feels like it's taken a bit of a step backwards. So is this a function of recovery you expect later in the quarter?
Is this cost driven? Or is this all working capital driven?
Speaker 6
It's Gerry. So the short answer is it's a combination of everything. And I think you're referring to our prior guidance, which had third quarter cash burn a little higher than what we're currently expecting. And I would say versus when we established that guidance, while demand has taken a turn, it's still a little higher than what we assumed back then. We're also doing a nice job on continuing on savings on costs, including well, cash costs.
So including in that would be some CapEx that we're saving. So it's sort of a combination of everything that has driven us to be able to refine our forecast and estimate a lower cash burn than we assumed a few months ago for the quarter.
Speaker 8
Okay. Thanks, Gerry. And then just for a follow-up. Appreciate the long term commentary about sort of plateauing it down 50% until we get a vaccine. But what is the path from down 83% to down 50%?
How do we get there? Is it you expect corporate to maybe perk up a little bit as we get beyond summer leisure? Or what is that path from down 83% to down 50% look like? How do we get there? Thanks for taking the questions.
Speaker 3
Duane, I'll try that. I don't think we know what the exact path will be. And we'll acknowledge that we don't know what the exact path will be. But what I would say is we've been reasonably accurate, very much center of the fairway and forecasting both the course of the pandemic and the impact of demand so far. And we expect it to be jagged like this.
For what it's worth, I also think that while we took a step back in the last few weeks, as Andrew said, that has plateaued. I think that we, as a country and a society, have learned some lessons about what we should do, particularly wearing masks. And that you will be more up from here. The kind of demand I think is going to come back, but one also I think it's important for people to understand and I said this earlier on TV today that an aircraft actually is a uniquely safe environment. And that is confusing to people because you hear all you hear about being in indoor spaces and the transmission of a virus.
But aircraft are designed to have airflow that goes from the ceiling down to the floor and out. That error is taken either 50% of the air that's coming back into the cabin has been refiltered through a HEPA grade filter and 50% is coming from the outside. And that combined with our mask policies and our cleaning policy makes an aircraft a uniquely safe environment. And so for people that are wanting to go on a business trip or on a vacation or to visit family and relative, one of the safest parts of their journey is going to be on an airplane. That's really important for us at United and for the industry.
To get back to that 50% level, I think we're going to have to get people understanding that flying somewhere instead of getting in a car and driving for thirteen hours, you're safer actually flying. And I very, very much believe that to be the case. And we're taking additional steps announced this week to make sure the whole travel process is safe, including in the airports or before the engines start on an airplane. All of that I think will allow a reasonable recovery in visiting family and relatives. A lot of other leisure travel is not going to get back to 100%.
My guess is, I think Disney World sounds like they're doing a great job, but it's not going be at 100% capacity. Business demand, I think, will start to come back. The small kind of group stuff will start to come back. But we're not going to have 180,000 people show up at Consumer Electronics in Las Vegas this January like they did last January. Those kind of meetings just aren't going happen.
Companies are not going to have their top 500 salespeople come in every year at the end of the year for a big party and a celebration until we're past the pandemic and there's a widely available vaccine. So you add all that up, I think we're going to be on a gradual trajectory from today's level of demand up to 50% where we'll plateau. And then I think there'll be a rapid recovery once we get to kind of a widespread vaccine. I'm not sure how long it takes to get to fifty percent, but that's a very expansive answer of how we get to fifty percent, why we think it will be fifty and what's important to get there.
Speaker 0
From Wolfe Research, we have Hunter Keay. Please go ahead.
Speaker 9
Hi, everybody. Good morning. Thank you. So you had 196 wide bodies at year end 2019. Knowing what we know now, which admittedly isn't much, do you think you have more or less than 100 in the fleet at the 2023?
Speaker 5
Andrew? I guess I'll take that. Scott described how this is going to come back. And by the way, I think our international gateways are going to come back quicker. And I think international gateways naturally have a lot of freight that other gateways don't have, which you see in our numbers.
So the answer is more.
Speaker 9
More than 100. Okay, got it. And then thank you. If you fly the same amount of capacity in the fourth quarter as you do in the third quarter, can you generate more revenue in the fourth quarter than you do in the third quarter, knowing what you know now about like corporate and VFR mix and all that stuff?
Speaker 5
What I would say, Hunter, is we did a pretty good job of it in Q2. We've got a little bit ahead of ourselves in July, but that's really based on how demand changed and the pricing environment that we see out there. But I think the answer to your question is yes, because we're going to get better and better at forecasting this. And we're now getting results in that we're looking at every day about where we're making more and less money, both domestically and overseas, and we're refining the forecast. And we're tilting our capacity more towards what we'd say VFR market than leisure market, which is also going to help.
So I think as we optimize and refine the schedule, we can continue to push the numbers in the right direction.
Speaker 3
And Hunter, I want to take a minute to brag on the commercial team. Andrew, maybe not have been as direct it, United Airlines and our the whole company, but led by our commercial team has done a better job I think than any airline in the entire world at recognizing what the pandemic has meant for demand and taking advantage of opportunities where they present themselves, whether that was for passenger demand. Andrew mentioned some of the places internationally that we're the only airline flying. Our cargo team led by Jan Krems, 36% increase in cargo. I mean who would have ever thought we could do something like that?
And I know some of the stuff that they're working on that is creative And I have confidence that the United team uniquely is going to be able to find opportunities to more appropriately match capacity to demand, but also to uniquely outperform by finding the pockets of demand where there is real opportunity.
Speaker 0
And from Vertical Research Partners, we have Daryl Genovese. Please go ahead.
Speaker 10
Hi, thanks for the time everybody. Can you guys just give us a sense, your OpEx was down 54% in the second quarter. Can you just give us a sense of how that number paced intra quarter? And then to that end, us a sense of how you're thinking about the Q4 cash burn either in your 50% revenue scenario or in the scenario where nothing gets better like the framework that you gave with Q1 results?
Speaker 6
Jerry? Yes. For the third quarter, I would say that number is going to be around down 45%, just given where we are with capacity. Too early to tell going forward until we sort of set capacity beyond the third quarter, but it gives you kind of a sense of where we are.
Speaker 10
Okay. And then I guess, Gary, just on the nature of the CapEx change, is this driven by United? Or is this more related to slippage on the MAX recertification? And does the $700,000,000 that you're taking out of 2020 now show up in 2021? Thank you.
Speaker 6
The answer is no. The 700,000,000 does not show up in 2021. It's really three things. It's the impact of our agreement to move aircraft out of 2022. So instead of taking a fair number of MAXs in 2022, we're now committed to taking zero.
That has an impact on pre delivery deposits. There are also a couple of aircraft or some number of aircraft that were in the capital expenditure forecast that were Embraer 175,000,000 later this year that we now expect will be taken by a regional partner. So that's out of our CapEx. And then there is also just a little bit of other work done. So that's what brought the number down.
I would point out that of that $3,700,000,000 we're now forecasting for the year, about $1,000,000,000 of that is actually the present value of aircraft lease expense. We're taking a fair number of these new aircraft under operating leases that we are accounting as CapEx the present value of those leases. That's about $1,000,000,000 If you back that out and you remember that $2,000,000,000 of CapEx was spent in the first quarter. So excluding the leases, our CapEx for the last nine months of the year is down to about $700,000,000
Speaker 0
And from JPMorgan, have Jamie Baker. Please go ahead.
Speaker 11
Hey, good morning, everybody. Jerry, can you give us some more clarity on the air traffic liability right now in terms of its composition? And whether there's been any appreciable increase in refund requests following the flattening demand in the quarantine here in my home state?
Speaker 5
Hi, Jamie, it's Andrew. It's just shy of $5,000,000,000 but interesting stats are what's coming in as first new revenue and what's coming in as redemption of ETCs and other instruments like that. And it's about two thirds new revenue and one third redemption of previous tickets. Refunds, as we get further and further into the pandemic, less and less of the booking curve was booked obviously in the past. That's affecting us now.
So the refund rates are coming down. And those numbers, I think, are all kind of moving in the right direction. But roughly a two third, one third split and just shy of 5,000,000,000 right now for ATL.
Speaker 11
Okay, perfect. Second question and probably for Jerry. Now that loyalty has been successfully monetized, can you share the collateral that you've pledged or believe you will pledge in the event that you draw a treasury loan? And also what the remaining unencumbered asset pool looks like should you draw that loan?
Speaker 6
Sure. I expect that we would use as collateral for the CARES Act loan if we choose to take it and draw down on it available route slots and gates. And so I mentioned that the remaining collateral, not counting MileagePlus or the pool of routes that we're going to hold available for U. S. Treasury, is at least $9,000,000,000 And that's a combination of remaining routes, hard assets, equipment and the like as well as equity in assets that are encumbered, but where there's availability of second lien.
I should point out that does not include some other assets that other airlines have actually used successfully as collateral. For example, the United brand itself has value. It does not include the brand. It does not include the value of the domestic hub network. Those are things that have real value.
We have not included those yet. But we do know that since other airlines have used those assets, that would be available on top of the $9,000,000,000 I just described.
Speaker 0
And from Cowen, we have Helane Becker.
Speaker 12
Thank you very much for the time. So I have two questions. My first question is, when you're looking at your bookings and people who are actually flying, I know, Scott, I think you said that there wasn't a lot of corporate travel. But are you seeing that your high value loyalty customers are flying? Or is it just more one off customers who may not be as tied to the airline because they're not loyal members of MileagePlus?
Speaker 5
Aileen, it's Andrew. Actually the good news on that front is we are seeing an ever increasing rate of our premier members in the ThroughComplier program flying again, maybe not for business, but for personal reasons. So they're getting back on airplane. Obviously, if you go way back to April, that number was incredibly low, but we are seeing really nice progress in that front. So it's all moving in the right direction.
Is it back to where it was before the crisis in terms of percentages? We do have a higher percentage of non members on board than we used to. But that number to me looks like it's recovering very nicely as people get more comfortable flying on airplanes.
Speaker 12
And I'm wondering if you're able to convert some of those non members to members?
Speaker 5
We always work at that and also to get them to hold our credit card obviously, which has done extraordinarily well during the crisis as well. Our credit card situation is completely divorced at this point from our passenger revenue situation. So that's going well. But we will continue to work to convert them, But it definitely is a different makeup of passengers as we look back in time. But as we look forward in time, it seems to be moving back towards normal.
But again, won't be achieved until I think there's a vaccine.
Speaker 0
From Stifel, we have Joseph DeNardi. Please go ahead.
Speaker 3
Thanks. Good morning.
Speaker 8
Scott, is Luke's compensation, his budget for talent and the level of investment into MileagePlus consistent with it being a $25,000,000,000 asset?
Speaker 3
I'm not going to talk about Luke's compensation on a public call. But Luke and his team have done a truly phenomenal job. Not just what they've done, what they and Mike Leskinen and the whole finance and legal teams did on getting the Mice Plus Holdings deal done. But Luke went through a great negotiation, collaborative negotiation with Chase, which we announced like literally two days before the Italy news. So really good timing on our renewed deal with Chase.
And Andrew said, that's been a partnership that's working really well. And Luke is a great asset in his whole team for United. We make sure they get the resources they need to keep growing this business and we also appreciate the partnership with JPMorgan Chase, who invests a lot in also growing this partnership.
Speaker 8
How do you use the organizational structure and the commercial agreement you've established between the airline and program to build a competitive advantage relative to your peers, more appropriately allocate capital and then maybe most importantly improve the profitability of the core airlines so it earns an adequate return on capital post COVID?
Speaker 3
Well, I'll let Andrew add to this if he wants. I'm not really 100% sure what you're getting at. But what I would say is we were already kind of working down a road to more appropriately, at least internally, split out the financials and understand the real economics of the car, core airline. They do go together. They're not separable the sense that you can have one without the other.
They mutually support each other in a positive and a good way. But we accelerated that effort obviously as we went through the pandemic And I don't know what all the answers are going to be yet, but I think that separation and that even clearer delineation will create new opportunities for Luke, Andrew and their teams to push on the nonairline side, which will also help the airline side. So it's a symbiotic relationship. Andrew, do you have anything to add?
Speaker 5
The only thing I would add is that the transparency that others now see, we always saw internally and we always recognize enormous value there and we'll continue to push it. And Luke is the right guy for the job and has a lot of creative ideas. We've seen that over the last year and we'll see even more of it going forward. And I'm sure he'll be talking about his compensation with me right after this call. So thanks a lot.
Speaker 3
He's texting me as we speak, by the way.
Speaker 0
And from Raymond James, we have Savi Syth. Please go ahead.
Speaker 2
Hey, good morning. Just on the average daily cash burn, was wondering if you could help me kind of walk through as you get from 3Q to 4Q, what some of the key components do? I understand a portion of that is tied to variable, so what revenue does. If you kind of take away that component, I think in the last call, there was kind of a discussion on maybe that coming down about $20,000,000 from the level that we saw back just on some of the costs coming out. But I was wondering if you could help me understand just how that progresses.
Speaker 3
Savi, I'll at least try and I probably won't give you the answer you want, which is I'll start by saying you know, I think it's not correct to try to disaggregate the various, components, whether it's cost, capacity, demand, as separate variables because they're not independent variables, they're combined. And what we think will happen moving from the third quarter into the fourth quarter is we'll continue to make progress on costs, which will be a little bit of a tailwind. And we think the net effect of capacity and our cost efficiency, the net effect of capacity and demand is going to continue to get better. We don't know that. Nobody can really give you an accurate forecast.
Flexible. But if we just had to guess, if I had to guess on what cash burn was going to be for the fourth quarter, I would guess it's going to average in the 15,000,000 to $20,000,000 range. A little bit of that at cost, but mostly about an improving demand environment and an improving demand environment relative to the amount of capacity you have to deploy to generate the demand. But if demand is stronger, there'll be more capacity and therefore more cost. If demand is weaker, there'll be less capacity and less cost.
But actually I have a higher degree of confidence in our ability to forecast maybe even too strong a word, but have an expectation of cash burn than I do the other variable. And if I had to make a bet today, I'd bet somewhere in the 15,000,000 to $20,000,000 range for the fourth quarter.
Speaker 2
That makes sense and super helpful. Just on the CapEx side and maybe for Gerry, just 2021, 2022, based on what you've kind of thinking today, how does that level look like from a kind of gross CapEx standpoint? And I'm guessing from a cash CapEx, it's very small then.
Speaker 6
Yes. So in any given year, cash CapEx, when you take into account aircraft financing, is always going to be pretty small relative to the total number since most of our CapEx has historically been for new aircraft, and those are always financed. 2022 is just too far out to speculate right now. I can tell you though that for the next few years, CapEx is going to be lower than what historically has been because we have other priorities as we come out of this crisis, principally restoring our balance sheet before we make significant investments. For next year, because we still have aircraft where the metal was effectively being cut when this crisis started, we will take delivery of.
It's still going to be a couple of billion dollars. Dollars 2,000,000,000 ish is our target right now, and we'll have more clarity on that over the next few months.
Speaker 0
From Credit Suisse, we have Joe Caiado. First,
Speaker 13
a quick question for Gerry. Just a clarification, actually. Do you still have the ability to borrow more against MileagePlus? Or is that exhausted as source of collateral? And can you talk about the relative attractiveness of doing more of that versus taking the federal loan that you're approved for?
Speaker 6
Yes. So we were able to, as you may remember, in that transaction, upsize the transaction from what we originally went to the market with, which basically used up the availability of the first lien capacity. The way that deal is structured, though, because it is amortizing starting in year three, As it amortizes, we're able to reborrow against that collateral. So it becomes a facility, if we want, that we can continue to borrow against in the future.
Speaker 13
Got it. Okay. Second question, just a quick one for Andrew. Cargo revenue, clearly a bright spot. Good job pivoting to go capture that in the second quarter.
Can you just talk about the outlook for that in the third quarter and what's of a sustainable run rate? Do you sort of have to pivot back away from cargo as you add back more passenger service? Just your thoughts there. Well,
Speaker 5
first, what I would say is that we did have an advantage in that cargo tends to go to and from our hub. So we have a well established network with our people and our distributors and that just was really humming. I would say and the other thing I'll point out is that our cargo revenue in the second quarter and the first month was actually kind of flattish. So you can just imagine what May and June look like. They were just really off the charts.
Cargo revenue does come in rather close to departure time. So it's a little bit more difficult to predict, but we expect it to have another great quarter. And really as long as the global fleet of wide bodies is not flying like it normally is industry wide, We think cargo is going to be pretty strong in terms of the yield production, which it is and our ability to do cargo only charters. But again, big thanks to our team. And again, really this is one of the advantages of our hub system because cargo wants to go from our gateways to around the world and so we can easily take advantage of it and we did.
So expect more of that in the third quarter, whether it's at the levels of 2Q, I think it's a little bit early to tell, but it definitely will outperform year over year based on what we're seeing here in July already.
Speaker 0
From Goldman Sachs, have Catherine O'Brien. Please go ahead.
Speaker 14
Hey, good morning, everyone. Thanks so much for your time. One quick clarification for Gerry first. On the down 45% recent cost, is that all in adjusted operating cost or is there something else?
Speaker 6
Yes. That's all in ex Specials. Yes.
Speaker 14
Okay, great. And so it sounds like it's maybe too early to nail down 4Q costs given the uncertainty around demand and capacity outlook. But how should we think about costs sequentially from that down 45% level you're expecting in 3Q? If we just assume capacity stays level with August as you're currently expecting, I'm assuming the changes to your labor force will be you'll be forced to make to potentially drive those costs lower in 4Q versus 3Q? Or are there other cost buckets that you've cut spending temporarily that maybe come back and offset that labor impact?
Thanks.
Speaker 6
Katy, actually, I'm not focused so much on those cost numbers as I am on cash burn. So I think in terms of cash burn more than anything else. But to try to answer your question, would say that with your assumptions, I would say that costs are going to be about the same as what we're seeing now. So basically, that decline is flat going to the fourth quarter. The two things I would mention, by the way, about the fourth quarter on cash burn, we do have, in addition to our normal debt amortization, dollars 300,000,000 maturity in the quarter.
So principal payments in the fourth quarter will be higher than, for instance, in the third quarter. And of course, there would be some onetime costs as we rightsize the labor force that we'll also have in the fourth quarter.
Speaker 0
From Deutsche Bank, we have Michael Linenberg.
Speaker 15
Yes. Hey, good morning, everyone. Just two quick ones here. Jerry, the $15,200,000,000 liquidity as of July 20, does that include the last PSP installment? I think that's like $500,000,000 or so.
Is that in that number?
Speaker 6
No. That typically would come at the end of the month. Great.
Speaker 15
And then just my second question, and this is probably to Andrew. When you look at some of the IATA data, they talk about tickets purchased within three days. I think for the month of May, it was over 40%. A year ago, it was probably closer to like 15% to 18%. Are you guys seeing numbers that are similar, at least maybe in May or June?
And are those numbers starting to normalize? Or are they still very high close in? And I'm sure that's obviously having some impact on your ability to plan. If you can just provide some color on that.
Speaker 5
Mike. I would say forecasting is a little bit more challenging these days than normal. We definitely saw very high closed end demand in May, in particular, and early June, which frankly was nice to see, got the load factors and revenue moving in the right direction. I will say that tapered off a bit as the quarantine hit in New York City and then Chicago and elsewhere and borders got even more restrictive. So I don't know where it is on the realm of normalcy, but it was very high in May and early, early June.
It's lower now that these events have happened. And once things start to get back on the road to recovery, I do expect that the booking curve will have moved closer in. And all of that's to say, it's really difficult to predict revenue at this point and get the capacity equation optimized like we'd like to. But I think we're going get better and better at it as we go forward. But that's kind of where we are.
So that is what we're seeing, what I ought to have told you, and I think that's consistent, although in recent weeks that's changed.
Speaker 0
From Barclays, we have Matthew Wisniewski. Please go ahead.
Speaker 16
Hi, thanks for taking my question. Just wanted to come back to the fleet real quickly. I appreciate the flexibility on making a decision, but is there a point in time
Speaker 3
you can you would need
Speaker 16
to make a decision? Or essentially, how long can you push off deferring kind of making a decision on delaying or retiring an aircraft type?
Speaker 5
Maybe I'll start and Jerry can add on. But it's difficult to predict the virus path. We've put a lot of aircraft into some type of storage, whether it be temporary long term storage or short term storage. And we are moving aircraft in and out of storage based on maintenance cycles and engine time and all kinds of things. So when we went into this, we didn't have a plan to necessarily retire any fleet size.
And we're going to hesitate to make final decisions on that until we kind of better understand the length and duration of the situation to be honest. So there are a token number of very, very old 7x7s that had Pratt and Whitney engines on them. Those aircraft have definitely been permanently retired because they were part of our retirement plan. But we are definitely trying to keep our powder dry the rest of the fleet until we have better visibility of what's going on. But more importantly, we're using that fleet really effectively with green time for both airframe and engine to make sure that we do what's right for cash burn and long term requirements to fleet.
So I hesitate to make a decision today to retire fleets when we just don't need to. So that's my perspective on where we are today. And Gerry, do you want to add anything to that?
Speaker 6
Yes. Let me just add a couple of things. One, even the Pratt powered 757s, which if you look at what our original expectation was on their retirement, it is probably likely that they're not going to come back. But even those aircraft would be available if there was a rapid recovery. Just expectations are those are the first to go.
And just in terms of the amount of time we have, we have plenty of time measured in years. Aircraft are being cared for properly stored and can be pulled out of the desert when and if we need them.
Speaker 16
Okay, great. That's helpful. Just other quick questions. Well, it's probably a little early to be talking about international traffic too much, but maybe you could quickly touch on kind of the conversations you're having with some of your international peers, if there's a concerted effort to be disciplined on capacity eventually or what that could look like when demand does return?
Speaker 3
Well, we're definitely not having that particular conversation because it would be illegal. But what we have been talking to people about is ways to get people flying again and to increase demand. And in fact, yesterday, United Airlines was proud to sign along with Lufthansa, IAG and American Airlines a letter that went to governments on both sides of the Atlantic asking that they consider allowing people to begin traveling back and forth between Europe and The U. S. If they get a negative COVID test as a way to start reopening borders and way to safely start reengaging in travel.
So our focus as we've talked internationally has been about how to get consumers flying again.
Speaker 0
Thank you. And we will now take questions from the media. And from Bloomberg, we have Justin Bachman. Please go ahead.
Speaker 7
Hi, thanks for the time today. This question is for Scott. Scott, I wanted to follow-up on your previous comments about the revenue recovery of about 50% and then a plateau ahead of any virus vaccine. What sort of timeframe do you think that would be? Does that anticipate going into middle or late next year for that level?
Speaker 3
Look, I'm not an expert on when a vaccine is going to be available and widely distributed. But I've been reading a lot about it. It seems pretty clear it's going to also require multiple vaccines. And when we talk about a vaccine, it needs to be a vaccine that's been tested, found to be effective, manufactured, distributed and given to a wide percentage of the population. So I think that's probably longer than what is in some of the media.
I certainly hope it's sooner but we'll let you go to other experts to find what it is. At United though, we're at least planning as a scenario that it takes until late next year before that really happens. And we hope it's better than that. Okay, thank you.
Speaker 0
From Reuters, have Tracy Ruzinski. Please go ahead.
Speaker 14
Hi, good morning. I wanted to ask about that state letter that you referenced that you and other airlines sent yesterday to the EU and the White House on a program to test passengers for COVID. Have you received any feedback from the respective governments on that? And how do you see international travel restrictions evolving in the coming months?
Speaker 3
Brett, do you want to say anything about anything that we know of what we've seen so far or heard if we have?
Speaker 4
Hi, this is Brett Hart. To date we don't have any formal responses, but we do expect to have productive discussions and we're hoping to in fact to be able to move forward in this policy. We think it's in everyone's best interest, obviously, various countries, including The United States. So we're hopeful. We have strong support across our industry, both in The U.
S. And outside of The U. S. And this is something that we think at the end of the day will benefit all of our collective countries and our industry. So we're hopeful.
Speaker 0
And from the Associated Press, have David Koenig. Please go ahead.
Speaker 17
Yes. Hi, Scott and company. Your press release today on the expanded basematch policy highlights the upgauging you've done to reduce the number of passengers per flight. And I just wondered if you're regretting not having started out by blocking some seats like some of your competitors because it seems like their policy would be easier to explain to customers. Any regrets on that?
Speaker 3
So look, we, as we said, have been taking significant actions to increase consumer confidence. And we ran, I think, a 35% load factor in the second quarter. We're projecting a 45% load factor in July. And importantly but that's about confidence. We have incredible confidence in the safety of the airplane.
But that's about consumer confidence. Importantly, and to that end, we are also notifying customers when we have a 70% load factor or higher and giving them the option to switch to another flight if they don't feel comfortable. And to date, fewer than 1% of our customers are taking us up on that. Earlier in the call, I talked about why an airplane is safe and we have high confidence in the safety of an aircraft. It is not the same as being in another indoor space.
It's not the same as being in a restaurant. It's not the same as being in an office building or even a hospital. Because the air comes in from the ceiling, it goes past the customer down to the floorboard, back into the ventilation system and then is either filtered through HEPA grade air filters or 50% of the air recirculated into the cabin is from the outside. And that is a uniquely safe environment that exists nowhere other than on an aircraft. And you combine that with our mask policies and our cleaning protocols and it really is one of the safe places you can be if you're going to leave your house.
And we have high, high confidence in that. Other steps that we take because we have high confidence in the safety, the other steps that we're taking are about consumers and getting consumers confident. And so that's why our policy has been what it has been. We've kept load factors low intentionally to help build confidence, help explain the story that aircraft are safe.
Speaker 0
And from New York Times, have Neeraj Chokshi. Please go ahead. Neeraj, your line is open.
Speaker 7
Hey, sorry about that. Thanks for taking this. I just wanted to ask about the mask policy. I guess I was curious to hear what how uptake on that has been? Can you guys say how many people have been barred from future flights?
How that's going?
Speaker 3
So the vast majority of our employees and customers already follow the mask policy because they recognize it's the right thing to do for the safety of everyone. And so we have very high compliance. The mask policy has been in place, we've carried in the millions of customers and we've had fewer than 30 that we have had to actually take action against. So The vast majority of people are compliant, agree, appreciate. It is a distinctly small minority that don't want to wear a mask.
We'll welcome them back when this is all over. Mean, masks aren't required, but they're not going be flying on United during the pandemic if they won't wear a mask.
Speaker 0
Thank you. And we'll now turn it back to Christina Munoz for closing remarks.
Speaker 1
Thanks to all for joining the call today. Please contact Investor Relations if you have any further questions, and we look forward to talk to you next quarter.
Speaker 0
Thank you. And ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.