Good morning, and welcome to United Airlines Holdings' Earnings Conference Call for the Second Quarter 2022. My name is Hilda, and I'll be your conference facilitator today. Following the initial remarks from Management, we will open the lines for questions. [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, Kristina Munoz, Director of Investor Relations. Please go ahead.

Thank you, Hilda. Good morning, everyone, and welcome to United's second quarter 2022 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 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 our Chief Executive Officer, Scott Kirby; President, Brett Hart; Executive Vice President and Chief Operating Officer, Toby Enqvist; Executive Vice President and Chief Commercial Officer, Andrew Nocella; and Executive Vice President and Chief Financial Officer, Gerald Laderman. In addition, we have other members of the executive team on the line available to assess the Q&A. And with that I'll hand it over to Scott.

Thanks, Christina. Good morning, everyone. And thanks for joining our call today. I'd like to start by thanking our employees for navigating an unprecedented return of customers this quarter, as well as managing through challenges seen around the world, the infrastructure that supports global aviation. It's great to return to profitability for the first time since the start of the pandemic and despite the legitimate worries about rising fuel prices and the growing risk of a slowdown or recession, we expect continuing improvement revenue, earnings and margin going forward. We're still short of our pre pandemic margins, and we remain focused on first getting back to 2019 levels of profitability, and then on achieving our 2023 and 2026 United net adjusted pretax margin targets. During 2Q very strong clouds emerge, will drive the narrative around United and our industry for the next six to 18 months. And here at United, we're prepared for the risks they pose. First, we've seen industry wide constraints that have created significant operational disruptions, and impose constraints on the industry's ability to grow. Second, sharply elevated fuel prices. And third, the growing likelihood of an economic slowdown or recession. First, to address the challenges posed by commercial aviation ecosystem that is straining to handle the number of planes operating today, we've elected to keep the United Airlines smaller and overstaffed in order to give us more buffer against these external constraints that we just can't control. We'll also continue to prioritize reliability by overstaffing until the entire aviation infrastructure returns to normal. What it means, that there will be cost pressures until that catches up and we can return to traditional utilization and staffing. The second macro trend is of course, fuel price. At current fuel prices, United fuel bill would be $9 billion higher…

Thank you, Scott. I want to start by thanking the entire United team for their hard work the past few months. We are pleased to see how the recovery has taken hold and progress made in our International business, as border and testing requirements began to loosen up. As Scott mentioned, through weather and air traffic constraints have severely impacted the entire industry over the last few months. However, because the -- because of the United teams unwavering hard work, we were able to return to 2019 levels of operational performance in the second quarter for most of our network, with the exception of Newark. While June completion was the most challenging since 2019, our mainline operation was ranked number one among legacy peers for the quarter. The good news is the biggest constraint we have seen it united congestion at Newark has improved. But we’ll need to operate at lower utilization and higher staffing levels until the broader aviation infrastructure improves. United continues to collaborate with the U.S. Department of Transportation on the operational disruptions and challenges impacting the aviation industry and our customers. By having an active partnership with the government, and FAA, we hope to address the main drivers of these challenges and find solutions together. We've seen early signs of progress and are grateful for the partnership and leadership the FAA has demonstrated. Late last month we received a waiver to proactively reduce our schedule in Newark, to ease operational disruption for our customers. Also, our on-time, partner performance and Newark has improved significantly, nearly 14 points month over month so far. As we continue to manage the infrastructure challenges that face the aviation industry in the broader economy, we're strategically maintaining higher staffing levels, and we'll need to operate at lower utilization. We continue to adjust our near term capacity plans to fly the most reliable schedule we can. Finally, we are hiring to support a larger operation so that our including United team members can receive proper classroom and on job training and advance of when they are needed, as we plan to grow scheduled towards our long-term goals. The pilot shortage continues to impact broader airline industry. United remains dedicated to hiring at least 200 pilots a month. And with our International routes, wide body aircraft and higher career -- and high career earning potential, we are confident, United is the best place for pilots to build a career. In closing, I want to extend my most sincere gratitude to the entire team at United for their hard work this quarter. Our employees are truly the good that leads the way for our airline. And now I'd like to hand the call over to my colleague, friend and our new Chief Operating Officer, Toby Enqvist.

Thank you, Brett, for that kind introduction. After working for this great airline for over 25 years, and most recently as a Chief Customer Officer, the thing that customers value the most have not changed. We need to get them to their destination safely and on time. Hence, running a reliable operation is critical to our success. And with the recent wave of industry-wide operational disruptions across the globe, it was the innovative tools, such as the ConnectionSaver and Agent on Demand from our team that helped moderate the stress, not only for our customers but for our employees as well. We will continue to innovate to make data-driven decisions to improve efficiency and reliability of our operation in the future. At United, we've been preparing for this bounce back in demand for some time. We were the only airline that signed a letter of agreement with our pilots in the fall of 2020 to ensure that when demand returns, and it has, in a more meaningful way than we could have ever imagined, we'd be ready. For example, today, we have 10% more pilots available for blocked hours versus prior to the pandemic. Further, we broke ground on 12 new simulator bays to support the amount of pilots

Your conference will resume shortly. Please stand by.

Thank you, everyone. Sorry, we had some technical difficulties. We're going to start with Toby.

Thank you, Brett, for the kind introduction. After working for this trait airline for over 25 years and mostly as the Chief Customer Officer, the thing our customers value to most has not changed. We need to get them to their destination safely and on time. And so running a reliable operation is critical to our success. And the recent wave of industry-wide operational disruption across the globe, it was the innovative tools, such as ConnectionSaver and Agent on Demand from our team that helped moderate the stress not only for our customers, but for our employees as well. We will continue to innovate and make data-driven decisions to improve efficiency and reliability of our operations in the future. At United, we've been prepared for this bounce back in demand for some time. We were the only airline that signed a letter of agreement with our pilots in the fall of 2020 to ensure that when demand returns, and it has in a more meaningful way than we could have ever imagined we'd be ready. For example, today, we have 10% more pilots available for block hours versus prior to the pandemic. Further, we broke ground on 12 new simulator bays to support the amount of pilot training that we expect will be required in the near, medium and long term to meet our growth plan. We also began actively addressing our infrastructure well before demand started to come back. During COVID focus on the big airport infrastructure projects to support in the future. We completed or broke-ground on new projects at Newark, Chicago O'Hare, Houston and Denver. There are many other infrastructure constraints outside of our control, and we worked with those partners to get them returned to normal. Finally, July fourth weekend was our best completion in [indiscernible 0:16:03] zero performance for that reason since 2017. In partnership with the FAA, our Newark operation is significantly improving this month. As of July 15, we have seen a 78% reduction, which is the highest post-pandemic month in FAA capacity delivery, which means an additional 12,000 customers are on-site each and every day. The delays are less likely to impact the rest of our system. I look forward to being even more ingrained in the day-to-day operating of this airlines. And hopefully by the next time I'm on this call, the operational challenge that our whole industry faces today will be the rear view mirror. I'll now pass it on to Andrew to discuss our great revenue results.

Thanks, Toby. I'm pleased to report revenues accelerated in the quarter versus Q1. TRASM finished 24% higher with capacity down 15% versus Q2 '19. Top line revenues for June of $4.6 billion were 12% or above our previous best month ever on 14% less capacity. Q2 leisure demand was exceptionally strong, and we successfully revenue managed our capacity, largely compensating for higher fuel costs and inflationary pressures. Passenger yields were up 20%. Business demand continued to rebound into the quarter to 75% of 2Q '19 volume levels and 80% of revenues. Business demand continues to grow, but the rate of progress has slowed in the last few weeks from the growth we saw early in the quarter. With the economy potentially worsening, business travels recovery is something we'll be watching carefully. Cargo demand remained strong in Q2. Yields remained 107% above 2019 levels and total cargo revenue was up 95% versus '19. As we see, the industry pulls back up to normal passenger schedules, we expect cargo yields will decline in the future months, but remain solidly above 2019 levels. I want to also note that our cargo volumes remained strong and are only constrained by available space now being used by passenger luggage. If a drop-off in cargo revenues is an early sign of a recession, we don't see it. MileagePlus had a strong quarter with revenues up 23% versus 2Q '19. Our co-branded credit card broke just about every record you can think of in terms of spend, retention and new cards issued. Our ancillary and premium revenue streams are also doing great. Ancillary revenue per onboard passenger was up almost 30% versus '19. Additionally, our steep product revenues per passenger were almost up 40%. As I've mentioned before, premium leisure continues to be a bright spot with…

Thanks, Andrew, and good morning, everyone. First, I would like to add my thanks to the entire United team for achieving our first quarter of profitability since the start of the pandemic. For the second quarter of 2022, we reported pretax income of $459 million, $611 million on an adjusted basis. Our second quarter CASM-ex ended up 17% versus the second quarter of 2019, which was in line with our prior guidance despite capacity coming in lower than previously expected. But the cost story for the quarter was not about CASM-ex, it was about fuel and the ability of air industry while in the midst of recovering from the pandemic, to withstand record high fuel prices. The fuel price volatility was exacerbated by unusual pressure on jet fuel prices in certain geographic regions where we had limited opportunity to mitigate our exposure. For example, in April and May, the cost of jet fuel based on Newark harbor pricing was often several dollars higher per gallon than Gulf Coast jet fuel. Nonetheless, our strong unit revenue performance enabled us to offset most of the fuel pressure as we attained an adjusted operating margin in the second quarter of just over 8%. While lower than our May guidance of 10%, the difference is mostly due to approximately $150 million of incremental fuel expense for the quarter versus what we forecasted in May. Turning to our forward outlook. We currently expect CASM-ex to be up approximately 16% to 17% in the third quarter and capacity down 11%, both versus the third quarter of 2019. Our third quarter costs are impacted by the current operating environment. During the recovery period where supply chain issues, labor shortages and COVID variants create challenges throughout the economy we are mitigating the impact to our operation and our…

Thank you, Gerry. We will now take questions from the analyst community. Please limit yourself to one question and if needed, one follow-up question. Hilda, please describe the procedure to ask a question.

[Operator Instructions] We have a question from Mike Linenberg from Deutsche Bank. Please go ahead.

Good morning, everyone. Congrats on getting back to profitability. Scott, you sort of touched on the capacity change and maybe this is to you or to Andrew, but based on our math, it looked like you were going to probably be up about 20% under the previous plan from a year ago. And now it's at 8, 12 points, obviously, that's a lot and obviously, it's a sizable headwind for CASM. But can you give us a little bit more sort of drill down, is that maybe a slower improvement or increase in engage. Is that a more gradual restoration of bringing back 777s? Like, what's driving those changes, if you can just dig into that? Thanks

Hi, Mike, it's Andrew. Let me give it a shot here. As we looked out into the year, there are a couple of big buckets that are different and get us from the 20% that you are referring to, to where we're currently projecting. The first one is the change at United Express where we're simply flying dramatically fewer airplanes, and we're flying them at lower utilization. So that definitely lowered our ASMs. And think of that as 4 to 5 points in total. There is a -- as part of that 4 to 5 points, because that's really substantial, is the fact that United mainline aircraft have taken over flying on many of these shorter-haul routes and those shorter-haul routes simply produce less ASMs. So that explains, I think, one of the bigger buckets of the difference. The second significant bucket of difference is our assumptions about global long-haul flying and the recovery of our Asian network and our ability to overfly a Russian airspace. So relative to what we originally thought in terms of the recovery in Asia and our ability to overfly Russian air space. Think of it as another 3, potentially 4, points of different as we take the aircraft that we're flying in a very, very long route and now have them fly what are much shorter haul routes. They simply produce fewer ASMs, although a similar number of departures. Those are the 2 big buckets that represent a material difference there relative to what we expect in the second half of next year. So we do plan on flying the full airline in the second half of next year, but those two buckets materially change the structure of our ASM productivity. And it’s worth noting that we were going to get to this point on the RJs anyway. In the United Next plan. This is where we were going. So this is an acceleration. So it does not change our 2026 ASMs or CASM-ex or the productivity of the airline then. And the second thing that I think is really important, there are the certain parts of the Asia that have not come back, and we don't believe it will be coming back in the near future. While they had very low CASM, they also had lower RASM. And so while we look forward to bringing these routes back, we look forward to bringing them back in such a way that they come back at a higher margin. And in fact, if you look at our Asian performance and our TRASM performance in the quarter, you'll notice I think, exactly what we're doing. We think those are two moves, they don't change the endpoint at all, which is the critical part of the answer here, to where we'll be in 2026. The United Express part is an acceleration and the long-haul global route is just a deferral, given some of the geopolitical issues that we face today.

Okay. Great. And just a quick follow-up, just the pretax target for next year and CASM guide that assumes a pilot deal is done? Is that right or not? Thank you.

So our CASM numbers assume all the costs that we would expect for next year.

Okay, thanks.

Yes. It includes labor deals.

Great. Thanks, Scott. Thanks, Gerry.

Our next question comes from Helane Becker from Cowen. Please go ahead.

Thanks very much, operator. Hi, everybody. Thanks for the time. Could you talk a little bit about the new routes that you started, the leisure focused Atlantic routes and how they're performing relative to expectations and whether or not that part of the strategic plan to increase capacity in other markets like that will continue?

Helane, it's Andrew. Let me give that a try as well. We started this route at the beginning of this last season, and they're all new and they're all spin up. And one of the things I'll note is I think they all did incredibly well for their first few weeks of operation, including us never even flying to those destinations in the past, when you look at our RASM guide, TRASM guide for the next quarter, embedded in that is an acceleration of international RASM where we are spooling up and catching up, and it looked really good as we go into the third quarter. So we're pleased with how they're tracking. We wanted to try something a little bit different given where business traffic was heading in this summer, and we think it's going to be successful and we think you can see that based on our Q3 guide, where international RASM growth is accelerating.

Got it. Thank you. And then just on the Newark runway situation. How is that going relative to their plan and the construction at Terminal A that I think was also impacting operations. I'm not sure where they are relative to what they were -- when they were thinking they would be finished.

Well, I'll let Toby correct me if I miss something wrong here. But the runway construction is going to take one of the runways out of service for a few weeks in September. It's a big chunk. We're going to take 200 flights a day out during that time in September. So that's a reasonable chunk of our capacity. Obviously, the cost basically all stay in place when you do that. And we have our fingers crossed that while it's been delayed several times that there won't be any more delays for the new terminal, which is a beautiful new terminal. It's going to be great for our customers when it's done. But that airport is already got 10 pounds in a 5-pound bag and trying to do it with one fewer terminal is a nightmare. And so hopefully, it will be on schedule for the fourth quarter.

That’s perfect. Thank you.

The next question comes from Andrew Didora from Bank of America. Please go ahead.

Good morning, everyone. So Andrew, I think you mentioned in your prepared remarks, maybe some softer corporate bookings of late. How do you think the operational difficulties across the industry influence the way corporates are traveling or booking right now? I guess, you or Scott, have you had any conversations with your big corporate clients concerned about the dynamic that's on right now?

We have. And I can tell you there's a level of frustration out there, particularly with the London Heathrow situation, where we have a large amount of -- 22 flights per day at London Heathrow. And this is clearly having some level of impact on bookings. That being said, our bookings are still off the chart good, growing across the Atlantic, and our RASMs are accelerating. So we look forward to get this getting resolved but I think it's having a negative impact on the return to business in the short run, those headlines are just really disturbing to read. And we at United are taking the appropriate action to make sure that we can get our customers to where they want to be on time and safely obviously. And we hope that these airports quickly catch up.

Got it. And just on your corporate business. Sorry if I missed this in your prepared remarks, how much recovered was it in 2Q? And sort of what are your expectations as we head into 3Q and the back half of the year?

It was 80% on volume and 75 -- sorry, 75% on volume, 80% on revenue. And while it is still improving, the rate of improvement has slowed for domestic, the rate of improvement for international still looks really good, even with the headlines about London Heathrow. So we're really excited, obviously, about the international network and how it's going to perform in the quarter. So again, it is frustrating. And as I said in my prepared remarks, we weren't counting on to reach our target some type of heroic change in the current trajectory in September. While I do think there's some upside there for a bigger rebounded business based on the feedback we've gotten when the kids go back to school, again, our TRASM outlook does not count on a significant change. We're assuming it's going to be slow at this point.

That’s great. Thank you.

Our next question comes from Savi Syth from Raymond James. Please go ahead.

Hey, good morning. Thank you. You mentioned regional shortfall is one of the factors impacting the 2023 outlook, though maybe not really different versus 2026. And I think we've all been expecting labor inflation, but recently, one of your competitors provided kind of very large pay increase that essentially eliminates the kind of the historical pay gap between regional and mainline pilots, which I thought was an important component of making the economics on those routes to work with those kind of small aircraft. I was kind of curious what your view was on the impact of this, assuming the rest of the regional industry also follows suit?

Savi, I'll say that this is a big change but a change that we anticipated. So RJ ASMs used to be 7 point-something 7.5%, I think, of our ASMs. As we head to 2026, think of it as 3.5% to 4% of ASM because the economics of this business were going to change. We didn't know exactly how and when it would happen, but now we know. And so we -- I think we've prepared for this. We've planned for this and we're not going to be reliant on RJs as much as it used to because the economic profile of the aircraft has materially changed. And that means service to small communities is going to be different. Here at United, it means more mainline aircraft with lower scheduled depth, and we think that's a profit maximizing opportunity. And we also think that our customers in those markets are going to appreciate the mainline aircraft at the end of the day. So we're on plan, but the size and scope of RJ operations and their profitability will have changed and the smaller community’s ability to offer -- have differential yields that can support these high cost structures will be stressed and strained to the point where we don't think it makes sense to fly as many RJs in the future as we did in the past. So this is a shift. We think it's a permanent shift. This is not a temporary cost increase for RJs. This is a permanent cost increase for RJs.

That's helpful, Andrew. And if I might follow up, just much of the United next plan is really kind of a lot about up gauging. And I guess -- but do you have enough kind of small and narrow body aircraft then to address that regional market? Or do you have the right fleet mix to address it?

As we looked at our fleet mix and we can always make a change to it, and we look at the profitability by aircraft type and what we need to do to hit our financial targets, we will simply have a different shaped network in 2026 than we did in 2018 or 2019. And again, service to small communities will have less frequency, but bigger aircraft. And we think that is the profit maximizing opportunity. And so we are not anxious to jump into a 120-seat narrow-body to fill this gap at this point. Obviously, we can change our mind at any time. But at this point in time, we think the MAX 10 and the 321 are the way to maximize our profitability, and we will make the appropriate adjustments to our network to make sure we can do that. And there may be some cities, and we've already shut down 17 or 18 because of lack of RJs that we can't fly to. It's an unfortunate outcome of where we are, but that is what the outlook looks like at this point.

Got it. Thank you.

The next question comes from Jamie Baker from JPMorgan. Please go ahead.

Good morning, everybody. Andrew, just continuing on Savi's topic. Was scope relief initially envisioned as part of United Next?

The United Next in our plan never had more than 255 76-seat RJs in it.

Okay. So I guess that would explain why there was no change in scope as part of the TA, right?

We're after what we need and we collaborate to get to the right answer. And we -- I'm going to say, as a team, we figured this out a number of years ago, and we got it right.

Okay. Yes. No. Cool. Okay. No, I just wanted to double check that. Second question for Gerry. Cutting planned growth and actually reducing capacity are 2 different things. Obviously, I'm not suggesting that United should be shrinking in the current environment. But my question is whether the operational strains, the training pipeline, simulator -- all the pressures that exist right now, does that make it harder or easier to actually reduce capacity if there was some need to do so, if that makes sense?

Those are temporary issues and -- the key for us is ensuring that we have full utilization of all the aircraft on-premises. So any aircraft that we have, we want to fly the appropriate amount of hours. So really reducing capacity is all about the fleet mix. And as we said before, we have plenty of flexibility there. If Andrew decides he doesn't want as many aircraft flying. We will look at the retirement of the oldest aircraft, and we'll look at the flexibility we have on adjusting the delivery schedule and share it that way.

Well, let me ask the question slightly differently, if I may. If you think in the past, the level of economic strain that had to be applied to an airline before they decided to reduce capacity. Where does that bar rest today relative to where it was in the past? It seems higher to me, but I'd like to hear what you have to say.

Jamie, I'll try I'd like to try on this. I just think the trend is more physical constraint. I mean Andrew sort of hinted at and said it in his capacity for us and everyone else in the industry is not so much about trying to maximize next quarter's profitability or margin. It's -- we'd be more profitable if we were flying more right now. It's about physical constraints. The physical constraint on being able to fly are the current constraints. They happen to, at the moment, aligned with what everyone is worried about on fuel prices and the economy, but the physical constraints are the factor.

Got it. Okay, thanks for the color gentlemen. Take care.

The next question comes from David Vernon from Bernstein. Please go ahead.

Good morning, guys. So Andrew, you mentioned you were encouraged by what you're seeing in bookings in 3Q. Can you talk a little bit more about how that's shaking up? Areas of strength or weakness and anything out of the ordinary relative to what you might normally see in the September quarter?

Sure. We're almost two-thirds through the booking curve here for the quarter. So we have a lot of visibility into what we're looking at. And I think the first, the biggest thing I would say is we do see the acceleration on our international network across the board, which is great to see. Second, I'll really point out Asia. Asia is leading the way. I think we're bringing that back in a way that it comes back more profitable than where we were in 2019. And for me, that's absolutely critical to close in the margin gap that we had historically had, international versus domestic, by bringing back Asia equal to the rest of it or, in fact, maybe even better. The other thing I would tell you, as we go into September, which I think everybody is looking towards is this pivotal moment where we switch from less leisure-focused demand to more business-focused demand. As we go into the September month, I can tell you all of our curves are better than they were for July and August and even June. So as we approach September, we approach it better booked with better yields. And so we remain really bullish and optimistic. And we gave you, I think, a really fantastic TRASM guide for the quarter that September is shaping up really well on that. Obviously, we have a long way to go. But what I can tell you is the leading indicators right now are, I think, really positive. The only place where we see lower yields in the quarter are in a cargo division, and that's simply a reflection of a lot more wide-body capacity coming back into the marketplace, causing a little bit lower yield in that environment, but still substantially higher than where we were in 2019 by many times. So hopefully, that gives you some color, but really good, great and fantastic momentum from a TRASM perspective as we head into this quarter, in my opinion.

All right. Thank you for that. And then, Gerry, as we're taking down sort of CapEx expectations or at least shifting some of the targets to when capacity comes into for the United Next, is it going to have an impact on the timing of CapEx across the plan? Or are you guys going to keep the fleet plan kind of as is?

No. We're going to keep everything as is now. Having said that, as everybody knows, we don't have necessarily 100% confidence in the aircraft delivery schedule, which is the bulk of the CapEx. So I would expect -- my opinion is we're not going to take as many aircraft this year, some shift to next year, some of next year shift to the following year. So you'll see some of that. But everything else is on track. We need to make those investments now because the airline is going to be as big as we expected in the time frame that we laid out.

Alright. Thank you.

The next question comes from Christopher Stathoulopoulos from Susquehanna International Group. Please go ahead.

Good morning. Scott, you sounded fairly confident in your ASM guide for next year. And -- the guide assuming here a slowdown? And of the domestic up gauging that you outlined last year in your plan, how much of that is realistically achievable in a recession. And should we assume any of the points, I think it was 2 points from new routes and frequency that those really are ultimately a moving target here or derivative of what happens with the economy. Thank you.

Yes. I'll try. I'm not sure I'll get the question -- I understand the question exactly. And then Andrew can correct me as well or you can tell us if we didn't answer the question. The -- I think the risk to our capacity guide for next year is Boeing delivery primarily. And so we'll see. But we have attempted on this call, I think, to rip the Band-Aid off on what we think is realistic about capacity for the next 18 months and get to a baseline that we're going to hit. But we are clearly exposed to Boeing delivery delays. I think the point that is perhaps we haven't explained as well and some of it's getting lost in all of this is a huge -- there's so many moving parts in capacity and CASM-ex. But a big part of it is two things that Andrew talked about. We have a lot less long-haul flying to Asia, which lowers our stage length, and that is very low CASM flying. It's also low RASM flying. And the other thing is mainland airplanes are now flying shorter haul, which means lower utilization routes that used to be flown by jet. That also has an increase in CASM. So a lot of it is happening is just the mainline airplanes are being used differently. They're not flying to Asia and they're not flying short-haul routes. They are very high CASM. They also happen to be very high RASM. You see that lead across the industry, 8 or 9 quarters in a row on TRASM. Part of that is we're proud of what we're doing, but part of that is just the change in how the airplanes are flying in stage link. So, some of what's going on here is that switch, which we expected to happen, as Andrew said, over a longer period of time to sort of gradually come in between now and 2026, but now it's happening immediately. And that's a big headwind to CASM, and it's a big tailwind to RASM. I think you see that reflected in our margin results. If you strip out things like differences in fuels or refineries, our results are at least amongst the best, if not the best kind of relative to 2019, our acceleration quarter-to-quarter is -- your kind of -- if you look past the headline RASM or headline single statistic, I think you see what's most important to us is the margin development and that happening. But a lot of it is because of what is just the airplanes are being used differently in the moment into 2023 than we originally expected.

Okay. Great color. Thank you. And so Scott or Gerry, second question. In a recession, what are the 3 or 5 data points you want on your desk every morning? Is it cash sales, cancellations? I'm just curious what those are and then versus -- or how they compare to what you look at every morning currently. Thank you.

I can start. I just looked at Andrew's expression. That tells me what I need to know.

Look, I'll give you an answer that you're not going to like, which is I look mostly at the same thing. Right now, the thing I look most at is what's happening operationally to us because we are focused on the long term. We're going to have recessions, they're going to happen. They end. And I'm glad that Gerry has built us up a great set of liquidity and balance sheet. I'm glad we're paying down debt. But we're just nowhere close to like looking at those kinds of metrics. And because of that, we are saying -- but we will stay focused on the long term. We're not going to yank the airline back and forth. That's how you screw up because of what's going to happen in the next six months. And for us, by far, by far, by far, our number one priority is running a great operation. Look, I'm really proud of the team. To be clear, we were better in every operating metric that I look at than our legacy competitors, but that was in a tough environment. And it's hard on our team and you can -- newspapers, it's hard on aviation. While our team did prepare for it and I think we've done a great job. And it's not good enough just to be better than the others. We've got an even higher standard that we want for customers. And so, the number one metric, I don't only look at in the morning, I now look at it five or six times a day, is our operating metrics and how we're doing and how we're setting up for the future there.

Great. Thank you.

Our next question comes from Sheila Kahyaoglu from Jefferies. Please go ahead.

Good morning, guys. Thank you so much. You've talked about 2023 pretax margin guidance being maintained at 9% with the implied TRASM to decelerate by 8 points versus the current levels to keep that guidance. That's still well above 2019 level. So can you maybe provide a little bit of color about how you're thinking about that, about the industry supply-demand environment in 2023?

I'll give it a try. There's just -- there is a lot of uncertainty in my opinion, about industry capacity next year. And I fully expect that we're going to hit our number. We've looked at it carefully. But I also fully expect that the rest of the industry won't. I don't even know what the numbers are for the rest of the industry at this point. In the normal year, we would know, we would have an educated guess. But I think it's going to be a relatively small number. And again, as I said in my opening comments, when I look at GDP, where that's going to be, where I look at our capacity is going to be and where I look at OA capacity, it likely will be, again, highly speculative at this point because I just think that whatever most airlines are saying they think they're going to achieve next year is probably significantly less than that number. We've ripped the Band-Aid off this, Scott eloquently just said. And I'm just not sure others have, but we'll wait and see. So we do think that the GDP ASM numbers match up to what we just described as the appropriate numbers to get to the TRASM outlook.

Cool. And then I just wanted to follow up on the 777, just to clarify, as they come back in, how does that change your incremental capacity? And does that have any impact on the cost structure?

Well, I mean we've made a decision for the remainder of this year and the first half of next year that kind of overrides that. The 777, they're just part of the rest of the airline. They're -- there's a few of them not flying because they're waiting for their final maintenance retrofit to get back up in the air. But the bigger issue are the structural constraints that are applying to our business over the next few quarters. And that is causing us to underutilize all aircraft types. The 777 is just one of many at this point that are being underutilized. However, as we said, we are pointing towards June 1 of next year for the summer of 2023 to get these aircraft off-line and at full utilization. And that's what, as a team, we're 100% focused on. And that will deliver the 8%, assuming that Boeing also delivers the planes to us.

Sure. Thank you.

The next question comes from Duane Pfennigwerth from Evercore ISI. Please go ahead.

Thanks. Appreciate the question. Is it fair to say that the growth plan for next year is lower, but the capital plan is the same? I understand a lack of confidence around deliveries. But could we just set a mark for where you think total CapEx will be in 2023?

So -- the answer is yes. So aircraft deliveries are the dominant part of it. So non-aircraft, I would expect runs about the same as this year, in that sort of $1.5 billion. We haven't done our capital plan yet. But just based on what we're seeing and sort of what we know we spend, basically take aircraft deliveries and then add about $1.5 billion of non-aircraft.

And so the existing, what is it, $6.5 billion, $7 billion is the right way to think about it on the aircraft side?

No, it's higher than that. It's about $7 billion, $7.5 billion for next year. That is aircraft. Total aircraft is about $7 billion to $7.5 billion.

Okay. Thank you. And then just on other revenue, you have good growth there relative to '19 despite no change fees. And so can you just comment on what's what are the biggest drivers to other revenue growth? How much lack of change fees are you offsetting? And is there anything sort of nonrecurring about that?

I think the simple answer is we're offsetting all of the change fee loss, which is with all the ancillary fees we do, particularly luggage and seats. And seats have been obviously just a boom. And I give all the credit to our digital team and our app and how our marketing on those things, and we're accelerating on that front. So we're very excited about it. But the answer is, it's 100%. And it's not something that's going to change in Q3. In Q3, in terms of some of the other revenues, cargo, in particular, I think we already talked about the yield issue there. But our ancillary revenues look incredibly strong.

Okay. Thank you.

And at this moment, we will switch to take questions from the media. [Operator Instructions] We have a question from Alison Sider from The Wall Street Journal. Please go ahead.

Hi, thanks. You've been outspoken on the issues you're seeing with staffing and other issues at air traffic control. And they've been fairly strong pushing back against that. I guess, like, how is the relationship with the FAA right now? Like, is there any progress behind the scenes? Or is there any deterioration there?

So -- look, we certainly have had challenges. And by the way, like everyone in the economy has had challenges. So that's not a criticism. But it's really, really important. The airline cannot run without air traffic control staff. And -- but what I'd say is really encouraging. By far, our biggest issue issues have been, by far, by far. Newark was the most delayed airport in the country in 2016, 2017, 2018, 2019, it's structural. There's only two parallel runways, 79 operations per hour is all the airport is designed to handle and we schedule it more than that, it's a problem. The good news is the FAA was really responsive. When we pointed out the problems and the challenges, they, A, let us reduce the schedule right now by 50 flights per day, which we very much appreciate. It's led to huge improvement in performance at that hub and the ripples throughout the system. And secondly, they've really gone to extraordinary lengths to make sure the Newark air traffic control desk is staffed, including over time and having management employees best and do things. And I forget the exact number, but in the mid -- 70-something percent reduction in air traffic control delays so far in July compared to where it was just a couple of months ago. So they've been very, very responsive. That's all you can ask from any partner, including the government, and so we're appreciative of that. And we have our fingers crossed that, that is going to continue. This is a challenge that affects them that lets us and we can only solve it together and they are working together with us on the solutions.

Got it. So -- I mean, do you feel like that whatever staffing issues that they had been facing, some of those facilities have been addressed? Or is it still an ongoing issue?

Look, I think everyone is tight everywhere, not unique to them. Everyone is tight everywhere. But the fact that they're focused on it is really important. And the fact that they're willing to go to extraordinary links when they do have higher COVID say calls or something happen is really what is critical. The U.S. economy, broadly is probably not going to get to a place where we're staffed at comfortable levels for quite some time. But they're doing a good job of being responsive and that's the most we can hope for.

The next question comes from Mary Schlangenstein from Bloomberg News. Please go ahead.

I want to see if you could talk a little bit about what sort of supply chain issues you continue to face beyond any pilot shortages at the regional level. Are you still facing a lot of shortages of just basic equipment that you need on the planes every day, parts that you need every day? And if you see any indication of when those types of shortages might ease in the future?

It's Gerry. The answer is no, not really. Our supply chain teams have done a good job of preparing for that. We recognize where the times were going to be extended. And so we've done everything, particularly for anything essential for the operation to make sure that we were sort of ahead of the game on that.

And does that include provisioning supplies for aircraft? And what about like airport personnel that affects your operation on a daily basis?

Yes. Look -- and I'm probably not the best person to talk about this. But there are certain parts of the country where we all know there are more labor challenges than other parts. So I wouldn't tell you that every airport is fully staffed, but we've been managing, I think, pretty well through the process. At the margin, let's say, for food, we don't get necessarily everything we want all the time, and we've had to make some changes, maybe one cracker instead of another cracker, different type of cheese. But that's not affecting the operation at all.

We have a question from Leslie Josephs from CNBC. Please go ahead.

Thanks for taking my questions. I'm just curious how you're thinking about the network for the rest of the year and into 2023, just given some of the softness in the corporate sector, Apple and other big names lately. And also curious where things stand with pilot negotiations now that seems like the last year is kind of on ice. So curious how that's going and how labor relations just broadly are -- how you characterize those now. Thanks.

Leslie, from a network perspective, obviously, the schedules, I would use the word -- the term thinner. They will be thinner in the fourth quarter and early next year as we have the capacity that we have available to fly reliably. So it will be a little bit different. We are appointed still a little bit more leisure focused than we were in 2019. We also think that's appropriate until we see business return to 100%. And we also have the issues on regional jet flying from our express partners, as I said earlier, which are causing even thinner schedules in the smaller communities we serve. I don't think we have any more communities that we're going to have to see service to for the remainder of the year based on the current plan. Unfortunately, we've already had to remove many from our operation prior to today. So it is a bit different of a network, and it's not our run rate network, and it won't be our run rate network until next summer.

And on the pilot question, I'll say my more substantive answer for our employees and our pilots. But the short answer I think the important point is we created a unique partnership with our unions and have great relationships with our employees and people feel good about the company, where we're headed. We were the only want to do a deal with pilots during COVID. We got a deal done in four weeks of negotiations with our pilots, the first airline to even come close to something. It turns out that there are a few things in there that I think some -- that enough of the pilots didn't like that we and the union agreed we ought to fix those things. And so this is not something that's on ice. We're trying to quickly get this back and get it back out to the pilots.

Okay. And if I could just ask 1 follow-up, where the booking curve stands now for leisure and corporate travelers and how that compares to early in the pandemic or even 2019?

What I'd say is the booking curve today is very similar to the booking curve of 2019. They're really the same.

Okay.

The next question comes from Lori Aratani from the Washington Post. Please go ahead.

Hi, thank you. I know Alison already touched on this, but I wanted to talk -- I want to see if you could respond. I know that you've gotten some pushback from the FAA concerns you raised about their staffing and its impact on your operations. They're sort of saying it's not us. Yes, we have issues, but it's the airlines and the stats from the bureau transportation statistics seem to bear that out. So I'd like to hear your thoughts on that.

Well, first of all I'd say is all airlines are not created equal. When I've at least read their comments, they've been airline industry and airlines are not created equal. And we have staffed the airline out. We have 10% more pilots. Our issues -- what we've had to deal with has been different than what others have deal with. And I don't think -- I've never heard them dispute that. I think if there's anything that we did that I -- that we didn't mean to have it characterized the way it got characterized was when we sent a note to our employees talking about 75% of our delays were from air traffic control delays, which is true, but normally, it's 50% because of weather because weather is included in all of that. And so that's kind of what you expect. And so the difference between those two, it wasn't that 75% were air traffic control staffing delays and I don't think it read that way to our employees, but it certainly read that way to some people on the outside. And I actually apologized to Secretary who judge for that because that's not what we intended. But there was an incremental set of air traffic control delays. It was due to staffing. And we’ve read about it up and down the East Coast, not a secret to anyone. But the really good news is once we started talking about it, he gave the directive and he's personally keeping up with what's happening in those challenged areas of the country on the East Coast, and we've seen big improvement in July so far, even with like the issues that are Heathrow is a disaster. And with those kinds of issues, we're actually running a better airline than we did in 2019. So incredibly responsive and glad we had the open, honest conversation and appreciate the partnership and the ability to talk openly and honestly and move forward together.

Good. Do you see -- I know that you've said that they've been very responsive, and do you see this issue continuing though, for the rest of the year or into next year?

Well, look, I think the whole system is strained. I mean there's tight staffing everywhere. I mean, that's part of the -- that is the reason that we're pulling our capacity down and waiting to grow until the whole system catches up. It's not unique to the FAA. I mean, it's everything that touches -- I mean, almost everything in the whole economy, certainly, a big chunk of these that touch aviation are tight. And while you're theoretically scheduled, if it's a good weather day, and nobody calls in sick, that everything can work, there is weather and people do call in sick. And sometimes, the JetBridge breaks and the power goes out for 20 minutes and like stuff happens. And the system just doesn't have any buffer to deal with that. And that's -- at its core, that's why we pulled the schedule down to create more buffer, more resiliency for our customers.

Thank you. And now I would like to turn the call over to Kristina Munoz for closing remarks.

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

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