Good morning, and welcome to United Airlines Holdings' Earnings Conference Call for the First Quarter 2020. My name's Brandon, and I'll be your conference facilitator today. [Operator Instructions]. 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, Michael Leskinen, Vice President of Corporate Development and Investor Relations. Please go ahead, sir.

Thank you, Brandon. Good morning, everyone, and welcome to United's First Quarter 2020 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-K 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, which is available on our website. Joining us on the call today to discuss our results and outlook, our Chief Executive Officer, Oscar Munoz; President, Scott Kirby; and Executive Vice President and Chief Financial Officer, Gerry Laderman. In addition, we have other members of the executive team on the line available to assist with Q&A. And now, I'd like to turn the call over to Oscar.

Thanks, Mike, and my thanks to all of you for joining us today. While somewhat unorthodox, I think this events of our days have forced us to do this, but appreciate you joining us. As the outbreak in response to the COVID-19 crisis that has clearly impacted, not only every company, but every sector of our economy and certainly, nearly every aspect of our daily life. And while in that regard, United is no exception, I do believe -- firmly believe that our teams response has proven exceptional. That's true of our management team who put United in the vanguard of responding to this crisis, taking early and aggressive action to mitigate the financial impact to our business, to protect the health of our customers and employees and to help accelerate a consensus amongst policymakers in D.C. or what you saw labeled as the CARES Act. I also believe the actions of our employees, the grace under extraordinary pressure, has been nothing less than exceptional. They have taken care of our customers and kept us flying and importantly, flying safe. They've also been out in front, working to use the incredible capabilities of our airline to support the communities we serve in the fight against COVID-19. Though our service is somewhat curtailed, our commitment to being of service is in full view. Some examples, we've operated more than 130 repatriation flights, bringing in more than 18,500 Americans home who were stranded abroad. We've also flown over more than 800 cargo-only flights worldwide, bringing more than 28 million pounds of a variety of cargo goods, such as food, healthcare-related items and supplies to destinations worldwide. You can see why we're also proud to be part of this United family. Unfortunately, during this time, we are all facing uncertainty. Still, there are…

Thank you, Oscar, and thank you to the amazing people of United Airlines for the incredible job they're doing despite the unprecedented challenges we're facing. We're proud to be serving the nation right now as an essential service. Many of the people we're carrying are traveling for critical reasons. Over the last several weeks, as a country, we've come to better appreciate how much we rely on farmworkers, grocery store workers, delivery drivers and, of course, healthcare workers. I'm proud the country now also better understands just how important our customer service agent, technician, store clerk, router, load planners, ramp workers, flight attendants, caterers, dispatchers and pilots are to our economy and our customers. While in May, we're flying 90% fewer flights than we expected, and flying at very low load factors. Without the commitment and professionalism of our people in these extraordinary circumstances, we couldn't fly the people who need to travel now. For example, we've flown, free of charge, hundreds of medical professionals who have volunteered to travel to communities struggling to treat an influx of COVID-19 patients. In other cases, it's simply a customer urgently trying to get home to see a critically ill loved one. In a normal environment, we're proud to say that we are about uniting people and connecting the world. In a world of social distancing that may seem less relevant. But it's actually even more important because most of the people who are traveling now need to travel. Before I begin, I also want to say a huge thank you to Oscar. He came to United in a difficult time and brought together the employees to show what being united together really means. Under his leadership, we saw strong operational performance, a renewed focus on the customer and a return to growth…

Thanks, Scott, and thanks to all of you on the line today. For the first quarter of 2020, we reported a net loss of $1.7 billion, a net loss of $639 million on an adjusted basis. For those of you keeping track, this was the first quarterly loss of United since the first quarter of 2014. What began as a strong quarter, quickly deteriorated as the spread of COVID-19 disrupted travel as well as the lives of everyone around the world. As a result, my comments today will not be typical for an earnings call. There will come a day when metrics like EPS and margin growth or year-over-year unit revenue and cost comparisons will matter. Such metrics simply aren't relevant today. While many of us have worked through significant financial shocks and downturns in our industry, and for some of us multiple times, this is truly unprecedented. We saw revenues precipitously decline, starting in Asia in February and then declining across the rest of the world. By April, revenue was down 95% as compared to our expectations at the start of the year. Therefore, in the near term, and until the recovery really kicks in, maintaining sufficient liquidity and minimizing cash burn are the financial measures that matter most. We believe our ability to weather this storm will be measured by how nimbly and aggressively we cut costs and preserve cash. Addressing liquidity, we ended the first quarter with approximately $7.2 billion in liquidity. And as we start the month of May, we have about $9.6 billion in liquidity, including $2 billion available under our revolver. Our focus on liquidity started early. As Scott mentioned, as soon as it became apparent that we would be facing a worldwide spread of the virus, we took quick action to cut flying…

Thank you, Gerry. We will now take questions from the analyst community. [Operator Instructions]. Brandon, please describe the procedure to ask a question.

[Operator Instructions]. And from JPMorgan, we have Jamie Baker.

First question for Gerry. Early March, the unencumbered asset pool was around $20 billion. And that included loyalty, though, I'm not sure in what form. Can you give us an update on the size of the pool today and its composition?

Sure, Jamie. And actually, I think what I said back in March was over $20 billion. So look at it this way, there are different ways to look at collateral and the way we look at it may not be apples-to-apples with the way others have looked at it. But having said that, and excluding mileage plus, which we all know is a valuable asset, we have at least $10 billion in other available collateral value that we can use to continue to raise secured debt. This includes at least $8 billion in aircraft, spare engines, parts, simulators and equipment, and around $2 billion in routes that I would describe as sort of routes to slot constrained airports. Does not include those slots and gates and racks for less restricted airports that could be, actually, another source of additional liquidity.

And a quick follow-up before my second question. On the government loan negotiations, and I recognize you haven't decided whether you'll draw the loan, if you're approved. But have you decided yet what you would pledge as collateral? Or is that also still under discussion?

Jamie, I expect those discussions would begin shortly. And so I'm going to be limited in my comments about collateral because, clearly, there will be some portion of the collateral that I described and some of this value that we will put aside in case we want to take that loan. But I expect those discussions to start shortly.

Okay. Got it. And Scott, as it stands in terms of planning for the worst, some investors were disappointed when one of your competitors insisted that they're wed to their current hub structure. And look, I get it. It's a touchy subject. Nobody ever comes out and says, yes, we're going to close Memphis. But you said you're not going to jeopardize the airline by avoiding tough decisions. So isn't it reasonable for me to ask if there's at least a potential that United's post-crisis network looks different than it is today?

Well, Jamie, I'll try to answer the question even more broadly. I think, for sure, when we emerge from this, that United Airlines is going -- and the airline industry, is going to look different. And whether you talk about what you do for safety, the actions taken to reduce the spread of the virus. One of the things that is going to be different, I'm confident at United is, we're going to really change how the airline works in terms of efficiency and we're going to engineer costs permanently out of the system. And Linda Jojo is leading, as we go through this, one of the things we are still doing and investing in is technology efforts so that when we emerge, we're more efficient. We say to each other every day on our daily executive team call, that everything is on the table, about what we look like. We -- maybe differences in premium travel or maybe there won't be. But every single thing is on the table. And while we don't have any plans to close hubs, when you say everything is on the table, we mean everything. There are no sacred cows. Our responsibility to our employees, our customers and our shareholders is to make sure that United is here for the long-haul and provides as many good jobs as possible to our people. That is my #1 and overriding objective for everything that we do. And the decisions that we're going to make in the near-term about employee pay are much harder than decisions we would have to make about hub structures and route networks later in the future. And we will make the hard decisions that are required to make sure United survives, is successful and has the most good jobs possible for our people.

From Evercore, we have Duane Pfennigwerth.

Just with respect to the cash burn in the 2Q, the $40 million to $45 million, how low do you think you can take that into October and beyond? And what are the steps you're taking to get there?

So thanks, Duane. If we get to October, what I'm about to describe, I hope and pray, we won't have to do. But we already have a plan on the shelf for -- if we get to October, we know what we are going to do -- approximately, what we're going to do to get our cash burn at a worst case, down $20 million -- down to $20 million per day. So we will go from the -- something south of $40 million in the third quarter to something around $20 million in the fourth quarter. And that again, assumes a continuing 0 revenue environment. I hope that we don't have to do that. I hope that everyone that's forecasting a recovery is right, and we don't have to do that. Because doing that will be extremely painful for our people and our employees. Most of the difference between where we are in the third quarter and where we would go to in the fourth quarter is employees because we have already -- all nonemployee expenses have already been cut beyond to the bone. And the difference between that third quarter number and that fourth quarter number is really about employees. And it will be agony to make those decisions, and it will be incredibly painful for our people. But we won't agonize over making the decisions because as I've said before, and I'll keep repeating, our responsibility is to make sure we have a strong future here at United. And the way I look at it is 3 years from now, 5 years from now, how do we have a secure future for United and have the most great jobs available for people? And if we have to make short-term sacrifices, and if we get to the fourth quarter and demand is 0, we will have to make short-term sacrifices. We will do that, and we will get our cash burn down to $20 million per day, which obviously gives us an extremely long runway to make sure that we come out on the other side and emerge a great United Airlines, together.

And just for a follow-up, Gerry, you gave us some of the pieces, but can you tell us where 2021 capital spending stands today, relative to the less than $4.5 billion this year?

That's an area we're still working on. But I can tell you that the exercise we've gone through this year to reduce capital spend continues into next year. So we are not going to be increasing capital spend to any degree from where we're going to get to as we hit our numbers for everything we've reduced this year.

From UBS, we have Myles Walton.

Oscar or Scott, I was hoping you could get to your perspective on the customer safety perception and something like blocking the middle seat or spacing departures in the terminal for purposes of creating space and waiting lounges and the like. How impactful do you think that will be to your business' recovery in, say, the fourth quarter and into next year? I know, Scott, you're sharing a realistic scenario or a pessimistic potential scenario, but in a more baseline recovery scenario, are these safety measures you're putting in place, do you think they'll still be in place at the end of this year and beginning of next? And how impactful will that be to your recovery?

Myles, this is Oscar. Let me take a first shot at, and Scott has some views on that as well. I think the safety procedures that we're all following, first and foremost, will be followed by the entire industry. We've proven that we can do that together and proven to be safe. How long they last, will be a determinant of the situation and the general sort of trust that people have in flying. But it goes well beyond all the things that we're going to be doing. I think Scott has an interesting -- a good perspective on how demand will come. So maybe, Scott, I'll give that over to you.

Sure, Oscar. Look, I think it's too early to know specifically what will happen. I think it's almost certain that our, not just airlines, but our society will be different. A month ago, we were afraid if we saw somebody walking down the streets here in the United States with a mask on. Now we're afraid if they're not. And I don't know how permanent all those changes will be. But things will be different, even once we recover and we start to return to normality. While I don't yet know exactly what that means for airlines. What I am confident of is airlines are, I think, actually the leading industry in the world when it comes to safety. I alluded to this in my opening remarks, airlines will get this part right on safety. And we're already taking the lead and doing incredible things, not just at United. I'm proud of what we're doing at United. But I'm also encouraged to see what other airlines are doing. And so we will make sure it is safe to travel on aircraft. The real issue for us about demand, however, is going to be that people feel safe and have some freedom to travel. Disney World needs to be open. Taking my kids to Disneyland is something I do every year and love it. But Disneyland needs to be opened. And cafes and museums in Paris need to be open before people are going to go back. And conventions need to be open and running. So it's not just about airlines. I'm confident that airlines will get our portion of the safety correct, and we'll do that effectively. But we're going to need a broader confidence across the whole range of society before demand can return to normal.

And just one clarification for Gerry, do you have the retirements that you're planning in order to rationalize the fleet this year, next?

No. As you know, we have a lot of parked aircraft. Those are, in our view, right now, temporarily parked. And until we see what's needed to run the operation, we're not going to make any firm decisions on those.

From Wolfe Research, we have Hunter Keay.

A couple of questions for Scott. I know the focus here is on the near term, obviously, but what's the primary driver of the plan to dig out of this debt pile after things stabilize? Is it 0 CapEx? Is it a cost play? I just basically want to hear your pitch for what you would say to long-term investors who care about the balance sheet?

Yes. That's a good question, Hunter. And first, I'd start with -- while we keep acknowledging that we don't know when the crisis will end and then we can begin the recovery. What we do know is we can minimize the depth of the hole. We can keep from digging the debt hole. We can keep it as shallow as possible. And that is about minimizing cash burn. So right now, we are focused on minimizing the cash burn. If you just look at our numbers with where we are today, we're clearly leading the industry. You look at where we think we can be, even in a 0 demand environment, again, we hope there's not a 0 demand environment. But even in a 0 demand environment, in the fourth quarter and into 2021, I think we'll be leading the industry at minimizing the depth of that hole. Once the recovery starts, however, we'll also -- we are going to be cautious about putting capacity back and beginning the recovery because there is certainly the possibility that there will be false starts, there's a second wave. We're not going to jump in with both feet once we see the first green shoots. We're going to be cautious. And we're going to work really hard to get back to cash flow breakeven, to get our cash burn down to 0 as the first step and continue to be cautious. Our priorities, I think, will be -- we're clearly going to want to have more liquidity available, more cash than we had coming into the crisis. Next, will be to pay down our high cost -- it'll be to pay down our debt and those will be ahead of any -- both come #1 or #2, before we start reinvesting in capital and then shareholder returns are kind of going to be at the back of that. We don't know when that'll happen. But the biggest thing we can do right now is minimize how deep the hole is, and that gives us the best chance to dig out the most quickly, once the recovery ultimately begins. And look, one thing we can all be confident about is there will be a recovery. This is something -- the virus will be defeated. There will be recovery. We just don't know when. And so we're taking the actions we can to minimize cash burn today, which will set us up better for a recovery when it begins.

Great. And then I realize that this issue -- the credit card holdback issue doesn't matter with bookings down 100%, but what kind of conversations are you having with your processors now about when bookings start-up again, but with people booking travel way out in the future with a sort of a potentially shaky recovery. I'm curious about how you're mitigating that holdback risk and how the conversations you're having with the processors going about how you're going to handle that?

Hunter, it's Gerry. So as we've disclosed for years, the holdbacks are based on our liquidity tests. And actually, if you look back on any of our disclosures for years, with our liquidity in the $5 billion to $6 billion range where it had been, even at that level, we've said that's significantly above the threshold before holdbacks kick in. And so as liquidity levels even above that, we're even further away from those thresholds where we have an issue.

From Vertical Research Partners, we have Darryl Genovesi.

Could you guys provide some color on working capital. It looks like the air traffic liability grew about $500 million in the quarter, which was an upside surprise. And so I guess I was wondering, a, if you could provide kind of a cadence of how things went intra-quarter by month or any way that you think makes sense? And then also where you're trending relative to your 0 net bookings assumption for Q2?

Sure. It's Gerry. Keep in mind, ATL, for us, typically, builds through the first 5 months of the year. So January, February, March, you would have expected it to continue to build. In fact, in January and February, we saw that build. Rough numbers, January was a little over $600 million. February, around $500 million. But then March, which should have continued that flip and was negative by about $650 million. So we ended March, while we were up because it didn't offset all of February -- January and February, where we should have been in a normal year in March was, I don't know, $1.5 billion higher than where we ended up. So when you look at it that way, you can understand why there was a small increase, a lot smaller than we thought. And April, we don't have a precise number for April yet, but it's significantly smaller than March. And the way to look at second quarter, based on kind of our assumption on kind of 0 net bookings, a couple of hundred million a month sort of burn off in ATL would be the way to look at second quarter.

Great. And then also, thanks for the color on the delivery expectations. Can you help us understand the quarterly CapEx or delivery gains for the rest of the year as it relates to what you gave us by aircraft? And then what you're kind of assuming for aircraft financing inflows in that $40 million to $45 million number?

So let me start with your last question first. So that $40 million to $45 million includes some inflows from the aircraft financing. Can't give you too much detail because then you could back into some numbers we don't like to share, like what we pay for aircraft. But keep in mind, with the sale-leaseback transaction we have, and you net out deposits and credits and whatnot, that does provide cash for us. All we have in the second and third quarter, well, probably all we have with the 787s. It's anybody's guess when the MAXs start. All those MAXs this year, if they do start, are also lease finance. So on sale-leaseback, they are a little bit cash positive as well. So as I said in my comments, the delivery of the aircraft is not a cash drain for us. And then in terms of CapEx, generally, we have probably about $600 million of non-aircraft CapEx for the rest of the year, split pretty evenly through the year. At least that's, I think, what you should use for your model. And that's where we are.

From Stifel, we have Joseph DeNardi.

Scott, I appreciate the tone of your prepared remarks. A couple of questions for Gerry. How are you approaching valuing the mileage plus asset? Is it EBITDA, free cash flow? Just how are you doing that? What do you think the programs were, ballpark? And how do you think the government is viewing it in terms of asset quality as collateral?

Joe, we're just going to rely on you for that. You're one of the experts on tackling mileage programs, aren't you? Look, there's tremendous value there. A number of different ways to value it. To the extent that serves as a source of liquidity for the government loan or any other transaction, you will take a look at it different ways. And there are different ways also to extract value on the asset as well. And the best way to look at that, you have loans against the business, you have prepaid miles and you have other ways. There is probably an aggregate cap for all that. And to the extent we choose to do it in more than one way, think of it as several buckets. And the more we have in one bucket, the less we have in another bucket. But together, we think there's significant liquidity we can extract from the program.

Okay. That's helpful. And then maybe just a question for Luc, if he's on the call. I don't know if maybe, Gerry, does a smaller fleet, a smaller United Airlines necessarily correspond with a smaller co-brand portfolio and lower spend on the other side of this? I'm just trying to understand, maybe, how Chase is looking at that dynamic, you guys getting smaller relative to kind of their willingness to stand behind you and what they might be willing from a presale standpoint.

It's Andrew talking. Having done this for a long, long time and growing airlines and shrinking airlines, I have found that, historically, that whether it be a 1- or 2- or 3-year reduction in size, which I've seen before, did not have a material impact on the size of the co-brand in my experience. So I expect that going forward, too. Obviously, there's a new set of conditions out there in the world, but I'm pretty optimistic, based on my previous experience, that it will not have an impact in the short to medium term.

From Raymond James, we have Savi Syth.

Just one question and one follow-up for me. On the question side, could you talk a little bit about -- once we kind of get beyond the survival mode and demand recovers, are there kind of strategic opportunities that you would have liked to pursue previously, but kind of given elevated demand or congestion in airports and things like that, that you couldn't implement, that you might be looking to implement?

Savi, look, I think there probably will be opportunities. I mean, certainly, there's going to be opportunity on restructuring the business. I alluded to some of the work that Linda and her team are already helping lead us through on what the business looks like. As to your question, it's certain that there are going to be possibilities, depending on how long this lasts and how long -- what the recovery looks like and what others do. At the moment, we are a little more focused on the near term -- a lot more focused on the near term. We'll look forward to the day where we can actually spend brainpower thinking about those opportunities. But we're a lot more focused on the near-term at the moment, to be honest with you.

We have no further questions at this time. We'll now turn it back to our speakers for closing.

Thanks to all for joining the call today. Please contact Investor Relations if you have any further questions, and we look forward to talking to you next quarter.

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.