Q4 2007 UAL Corporation Earnings Conference Call on Jan. 22. 2008

FINAL TRANSCRIPT

UAUA - Q4 2007 UAL Corporation Earnings Conference Call

Event Date/Time: Jan. 22. 2008 / 11:00AM ET

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CORPORATE PARTICIPANTS Katherine Michaels UAL Corporation Glenn Tilton UAL Corporation - Chairman, President and CEO Jake Brace UAL Corporation - CFO John Tague UAL Corporation - CFO Revenue Officer Pete McDonald UAL Corporation - COO

CONFERENCE CALL PARTICIPANTS Mike Lindenberg Merrill Lynch - Analyst Frank Boroch Bear Stearns - Analyst William Green Morgan Stanley - Analyst Ray Neidi Clayton Securities - Analyst Daniel McKenzie unidentified - Analyst James Baker JP Morgan - Analyst Bob McDudo Avibdake - Analyst

PRESENTATION Operator Good morning and welcome on the UAL Corporation earnings conference call for the fourth quarter of 2007. My name is Latasha and I will be your conference facilitator today. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Katherine Michaels, please go ahead, ma'am.

Katherine Michaels - UAL Corporation Thank you, Latasha. The earnings announcement was released earlier this morning and is available at our website at www.united.com\ir. Let me point out that the statements in the press release and those made during today's conference call may contain various forward-looking statements which represent the company's expectations or beliefs concerning future events. All forward-looking statements are based on information currently available to the company. statements are based on information currently available to the company. A number of factors could cause actual results to differ materially from our expectations. Please refer for our press release, form 10-K and other reports filed with the SEC for a more thorough description of these factors.

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During the course of our call today, we will be discussing several non-GAAP financial measures. While we do not have any special items in the fourth quarter of 2007, our full year results for 2007 include a number of special items related to our bankruptcy that increased revenue by $45 million and decreased operating expenses by $44 million. In 2006, we also had a number of one-time items, including special items related to our bankruptcy that reduced operating expenses by $36 million and a severance charge of $22 million recorded as a non-operating expense as well as reorganization items associated with our exit from bankruptcy of $23 billion. As Glenn, Jake and John walk you through our financial results, they will be excluding these items unless otherwise noted.

While not a special item, the change in the Mileage Plus expiration policy from 36 to 18 months, as well as the deferred revenue accounting we adopted for the program in 2006, effect our revenue numbers throughout the year. In the fourth quarter, we recognized $121 million of non-cash revenue from the change in the mileage expiration policy. As we mentioned in our prequarter end guidance, $55 million of that related to our normal quarterly amortization this year while $66 million reflected the fact that we actually recorded higher mileage breakage than we had estimated in previous quarters when the Mileage Plus miles expired for the first time under the new policy on December 31, of 2007. This benefit was partially offset by the effect of the change to deferred revenue accounting from the previous incremental cost method. This lowered revenue for the quarter by $61 million. Net-net, the impact for the quarter versus the incremental cost method was an increase in passenger revenue of $60 million. On a year-over-year basis, these changes resulted in fourth quarter consolidated passenger revenue increasing by $155 million.

You can find more information about all of these items as well as a reconciliation of non-GAAP financial measures in the tables at the end of our earnings release. We have also included a new disclosure on the table, to provide greater clarity on the Mileage Plus accounting effect. And now I would like to turn the call over to Glen Tilton, UAL's Chairman, President and CEO.

Glenn Tilton - UAL Corporation - Chairman, President and CEO Thanks very much, Kathy and good morning and welcome to everyone on the call. Joining me and participating on the call today are Jake Brace, our Chief Financial Officer, John Tague, our CFO revenue officer and Pete McDonald, Chief Operating Officer. Graham Atkinson, Chief Customer Officer, is also with us this morning and Graham is available to take questions.

Earlier today we reported our fourth quarter and full year 2007 results which we think demonstrates a step change in how we are running this company. Focused on improving our core revenue and delivering value for all of our stake holders. We reported a pretax profit of $606 million for 2007, our highest full year profitability since 1999 when notably oil averaged about $20 a barrel. A far cry from the $95 a barrel prices we saw during the quarter. Year-over-year our pretax income increased by $665 million over 2006 and employee shared directly in that value, having earned some $110 million in profit sharing. Our revenue performance for the year, building on the momentum of the second and third quarters was among the best in the industry. We're also very disciplined in how we are deploying capacity, aggressively managing our assets so they produce the best possible return for the company. With load factors near historical high levels, we clearly have a willingness at United to forego a little traffic in favor of better yield. The numbers tell the story.

Annual main line passenger unit revenue increased year-over-year by some 7.1% for the year and by 13.1% for the fourth quarter. As a result of our actions, our international performance was strong for the year and for the quarter. Leveraging our network and our unmatched alliances as we continue to add new routes and grow this part of our business. During the quarter, we welcomed two significant partners to the Star Alliance. Air China and Shanghai Airlines. With five daily non-stops to China, and a sixth beginning in June when we launched San Francisco [Blon Jo] we provide the best service of any U.S. carrier serving mainline China and these new partners provide critical connectivity for our corporate customers to the important China market.

At the company we also took decisive action early in the year to turn around our domestic performance and that quickly produced results. By the second half of the year, our domestic performance was keeping pace with the strong results of our international network. In fact, revenue results in every region improved year-over-year. John will discuss later how we will build

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© 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. FINAL TRANSCRIPT Jan. 22. 2008 / 11:00AM, UAUA - Q4 2007 UAL Corporation Earnings Conference Call on this momentum next year. We maintain our focus on cost control, completing our $400 million cost savings program this year. We're taking significant steps to standardize our work across the company and to train our employees on how to use continuous improvement processes to approach their work differently and to challenge the status quo with the company.

Later in the call, Jake will talk some more about about how our plans for additional cost savings shape up this year. Our annual operating profit was about $948 million. More than twice last year's results. For the year, we generated operating cash flow of some $2.1 billion, a 37% increase and a $1.7 billion free cash flow result. We're investing in the business and we're reducing debt. We invested over $450 million in capital projects this year and launched our new international first and business class cabins, which debuted in the fourth quarter, making United competitive with the best international carriers and the only U.S. carrier with a truly lie flat business product. In 2007, we reduced our on and off balance sheet debt by $2.3 billion. We're also using a portion of our cash to provide returns for our shareholders and tomorrow we will pay out approximately $250 million to our shareholders in a special cash distribution.

As everyone on the call knows, oil hit $100 a barrel this quarter and our strong revenue performance alone was not enough to counter the impact of the sharp increase-- that sharp increase had on our margin, as our consolidated fuel costs increased by $359 million, more than 25% from a year ago period. Despite the challenges from higher fuel and severe weather in December, the worst in our history for the month of December, adjusted pretax profit in the fourth quarter was $7 million better than the fourth quarter of last year. We're improving our performance overall. With a very clear line of sight to the work ahead. Our five-year plan provides a road map for us at United to continue to differentiate ourselves with our best customers and enable further revenue premiums while maintaining competitive industry costs. We're executing against that plan, which enables us to create value for our customers, our employees, and our shareholders, and equips us to build on momentum into 2008, which undoubtedly will present a new set of challenges for the company. Like our customers, our investors have choices and we're doing the work to ensure that they chose United.

Before I hand the call over to Jake, I want to touch briefly on the topic of consolidation that has been the focus of much speculation and media coverage since our last call. Our position has not changed for some three years now. We believe the industry can benefit from constructive consolidation and the work we have done, improving the company, puts us in a very good position to participate in that consolidation as we see fit. As I said to our employees in a recorded message last week, the goal for our company is to make the right choice at the right time and we'll pursue the best option for our employees, for our investors and other key stake holders. While we know, here in the room, that the topic is of great interest in you, it would be inappropriate for us to comment any further then I already have and I trust you'll understand that. So I'll turn the call over to Jake now, who will walk us through more of the numbers in greater detail. Jake, over to you.

Jake Brace - UAL Corporation - CFO Thanks, Glenn, and good morning, everyone. We made great financial strides in 2007. We delivered revenue performance that was among the best in the industry. We produced solid cost performance, despite inflationary pressures and about a one point reduction in main line capacity. This performance drove strong gains in both profitability and cash flow which we used to delever the balance sheet and for the $250 million special cash distribution Glenn discussed. Our focus on strengthening the core operation led to significant year-over-year improvements across all of our profitability metrics in 2007.

Annual operating profit was $515 million better than the prior year and our operating margin more than doubled to 4.7%, despite fuel costs rising $260 million. Our full year pretax margin improved to 3.0% from a negative 0.3% in 2006. For the year, net income was $352 million, $417 million higher than a year ago. GAAP full year diluted earnings per share was $2.79. We faced a steep fuel increase in the fourth quarter, as Glenn mentioned, with our consolidated fuel costs up $359 million. This equates to more than seven points of margin headwind compared to the fourth quarter of 2006.

United led several fuel surcharge and fair increase attempts but as an industry we were unsuccessful in passing along the full effect of this commodity cost increase. We know the industry needs to pass on its commodity cost to consumers if we are to

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© 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. FINAL TRANSCRIPT Jan. 22. 2008 / 11:00AM, UAUA - Q4 2007 UAL Corporation Earnings Conference Call succeed in realizing a return to shareholders and we at United are taking the appropriate actions to do so. Despite the negative effect of the fuel increase, our pretax loss of $98 million for the quarter was $7 million better than the previous year. We recorded a net loss of $53 million for the quarter, $10 million better than a year ago, resulting in a basic and diluted loss for the quarter of $0.47 per share compared to a consensus $0.89 loss. We recorded a largely non-cash, income tax benefit of $43 million in the fourth quarter based on a 44% tax rate.

As Kathy mentioned, Mileage Plus accounting had a significant non-cash impact on consolidated passenger revenue for the quarter but less so for the full year. For the full year, the Mileage Plus accounting change decreased consolidated passenger revenue by $31 million as $246 million increase in revenue related to the expiration policy was more than offset by a $277 million decrease to passenger revenue due to adopting the deferred revenue method versus the previous accounting treatment. On a year-over-year basis, the same factors increased 2007 passenger revenues by $127 million contributing less than a point to PRASM growth. Full year main line PRASM increased 7.1% while fourth quarter main line PRASM was up 13.1% from the 2006 period.

Excluding all the Mileage Plus impacts, main line PRASM was up 6.3% for the full year and 9.2% for the fourth quarter, a very strong performance that sets us apart from our peers. As John will go through shortly, the turnaround in our domestic market performance in United's consistent strength in the international markets drove our overall revenue performance. For the year, cargo and other revenue was about $1.8 billion, down from $2.1 billion in 2006 reflecting lower United Aviation Fuel Corp sales of $307 million and lower domestic mail revenue. Fourth quarter cargo and other revenue came in at the and top end of our guidance at $468 million. Fourth quarter cargo performance was strong with revenues growing by 16% as we experienced double digit yield increases in all of our geographic areas.

Turning to cost, total operating expenses for the full year increased 1.3% while fourth quarter expenses increased 11.5%. Including hedging gains, main line jet fuel price for the quarter was $2.53, up from $2.01 a year ago. You can find the details of our hedging gains in our press release. For the full year, main line CASM, excluding fuel, severance and specials, came in 3.1% higher year-over-year. In 2008, we will continue to focus on cost and later in the call I will go into further detail regarding the outlook. Main line CASM to the fourth quarter excluding the impact of fuel and special items was up 9.2% on 1% lower capacity as main line non fuel operating costs rose by 8.1%. A number of items drove the increase.

Aircraft maintenance material and outside repair costs were $306 million, 27% higher than a year ago, driven by higher air frame heavy maintenance volumes and higher engine maintenance costs. To put the increase in air frame volumes in a context, we had 28 heavy maintenance visits this quarter compared with 11 visits in the fourth quarter of 2006. Additionally, we experienced inflationary pressures from our B-2500 maintenance contracts. Purchase service expense was $366 million, up 14.7% year-over-year as we invested $20 million on information technology deployment and also made investments of about $15 million in efficiency and revenue improvement initiatives. Navigation charges were also up due to increased international flying.

The salaries and related expense line grew 5.7% year-over-year driven by accruals for profit sharing which increased by approximately $45 million year-over-year along with a $5 million in increased labor costs related to the September storms. Finally, other operating expense was $56 million higher year-over-year reflecting both tough comps from 2006 and storm-related costs. As we mentioned in our call last year, we had two insurance settlements in the fourth quarter of 2006 that lowered expenses by $23 million.

December storm-related costs increased this line by approximately $10 million and we also recorded $5 million in non-cash assets write-downs in this line. We closed the quarter with one last reminder of the challenges we face from a constrained ATC environment when you add bad weather to the equation.. We experienced winter storms in both Chicago and Denver and as a result, last month contained more severe weather days than any December on record for United and more than three times the number of severe weather days we faced in 2006. The storms in the month contributed to fourth quarter main line CASM, excluding fuel and special items, coming in 1.7 points higher than guidance. The storms lowered ASMs. higher staffing, glycol and other storm-related costs added about .7% to CASM.

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Another .6% of the CASM increase was due to increased profit sharing as stronger revenue performance and lower than expected fuel price resulted in earnings better than we anticipated. Moving to below the line, I would only remind you that our non-perating costs were lower than normal this quarter as they included the $41 million gain we recorded due to the sale of our interest in [Airink]. We generated strong cash flow for the year with operating cash flow increasing 37% to $2.1 billion and free cash flow, excluding the effect of aircraft refinancings increasing 39% to $1.7 billion. We're focused on strengthening our balance sheet and took a number of actions during the year to reduce debt and lower financing costs including refinancing and paying down our credit facility by $1 billion in February, refinancing several aircraft transactions in our Denver muni bonds at more attractive rates and paying down our credit facility by an additional $500 million in December. All told, we reduced on and off balance sheet debt by $2.3 billion in 2007 yet we ended the yeara with $3.6 billion in unrestricted cash and short-term investments.

The company expects to reduce net financing costs by approximately $120 million on an annual steady state basis through the transactions it implemented in 2007. In the fourth quarter, traditionally our weakest from a cash flow perspective, we generated $132 million in operating cash flow but had negative free cash flow of $98 million due to the rapid rise in fuel price and a year-over-year increase of $120 million in CapEx to $230 million. We also paid down nearly $700 million in on and off balance sheet debt in the quarter, including the $500 million reduction of our credit facility I mentioned a moment ago. We ended the year with total debt of $11.5 billion and net debt of just under $8 billion. Now, I'll turn it over to John to discuss our revenue performance.

John Tague - UAL Corporation - CFO Revenue Officer Thanks, Jake. United's full year and fourth quarter passenger revenue performance was among the best in the industry, no matter how you cut the numbers. For the full year, main line PRASM was up 7.1% and for the fourth quarter main line PRASM increased 13.1% year-over-year. Total revenues in the fourth quarter were up 9.7% while passenger revenues were up 11.6%. We aggressively managed to this outcome. Taking decisive action in the face of unprecedented fuel costs.

We used all of the tools available to drive improved revenue performance throughout the year, leading the industry in reducing capacity domestically, while seizing the opportunity to expand internationally. With new service to Hong Kong and Frankfurt out of Los Angeles; and Rome, Rio de Janeiro and Beijing from Washington, DC.. We leveraged the constructive tension we created between supply and demand to extract even more value through aggressive inventory management practices and disciplined pricing behavior.

As we close the book on the year, I am pleased to report that our revenue performance is strong across the board. With every region having improved significantly. In the first quarter, our domestic results were disappointing. Coming off of that performance, we took definitive action to realign our capacity with current market demand, setting the stage for a substantial turnaround in our domestic performance. United's main line domestic results through the remainder of the year leave no doubt that our approach to capacity planning and revenue execution is working.

International markets continued their impressive performance in the fourth quarter. A trend we saw consistently throughout the year. The Atlantic region was a standout performer in both the full year and the fourth quarter, with some of the highest unit revenue growth in the industry, despite significant capacity growth. For the full year Atlantic PRASM was up 13.8% on a 6.8% increase in capacity. For the quarter, Atlantic PRASM was up 18.3% on a 7.1% increase in capacity. Specific PRASM for the fourth quarter of 2007 was up 12.7 on a 4.8% growth in capacity. Our capacity in Latin America declined modestly by 1.4% in the quarter, that helped PRASM improve by 14.1% versus the prior year. Overall international PRASM was up 11.6% in 2007 and 14.9% in the fourth quarter.

Full year domestic main line PRASM increased 4.5% from 2006 and the fourth quarter domestic main line PRASM increased 12.3% year-over-year, on a 5% reduction in capacity. Looking at our regional performance full year PRASM increased 2% year-over-year on capacity growth of 3.6% and a 4.9% increase in stage length. Fourth quarter regional affiliate PRASM increased by 9% over the prior year on basically flat capacity and a 10.6% increase in yields. Our willingness to be conservative with capacity

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© 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. FINAL TRANSCRIPT Jan. 22. 2008 / 11:00AM, UAUA - Q4 2007 UAL Corporation Earnings Conference Call deployment gives us a strong platform to launch and sustain fair actions that are necessary to offset rising fuel costs. We have not hesitated to use that platform as evidenced most recently by the introduction of the domestic fuel surcharge effort and our continued efforts to increase it even further. Capacity discipline breeds commercial discipline. Establishing this foundation makes compensatory pricing possible and enables more value to be driven through aggressive revenue management practices.

In our pursuit of industry-leading revenue performance, United is challenging legacy practices and improving on execution by developing new tools and technology solutions, overhauling our performance management strategies, refining our segmentation tactics while strengthening and redesigning our organizational model. In today's world success requires new approaches and superior execution market-by- market, day-by-day. This work clearly shows in our results and importantly, we know there is more opportunity, and we have established an ambitious agenda to realize it. United is taking the actions necessary and needed to mitigate the negative effects of the business cycle.

Moving to our revenue outlook. We continue to expect strong unit revenue improvements in the first quarter. Today, we are adjusting our capacity a little bit further as we firm up our schedules and Jake will provide you with more detail on this later in the call. With domestic capacity well matched to demand and our continuing focus on executional excellence, we have good reason to feel good about our domestic performance and we are well positioned to generate competitive revenue results in 2008. I would like to add that in setting our original capacity plan for 2008 we took into consideration the likelihood of a softening economy. We are certainly watchful of developments since then but remain encouraged by our revenue outlook. Should further adjustments be required, you know that we will act responsibly and decisively and now I will turn it over to you, Pete,.

Pete McDonald - UAL Corporation - COO Thanks, John. From an operational perspective, 2007 was a challenging year with bad weather compounding issues from the constrained ATC environment, impacting the industry's ability to meet customers' expectations. Throughout the year we focused on improving our operational reliability in this environment and we made significant progress towards this goal. By using standard work practices, we are improving our operating efficiency and our Department of Transportation rankings. For the 12 months ended November, 2007, the latest results available, we ranked third among the six network carriers in on-time arrival 14, moving up from the fifth position last year. We improved from fourth place to third place in mishandled baggage. We also had the fewest involuntary denied boardings of any network carrier based on the last available results from September, 2007, and we had the fewest number of chronically delayed flights, metrics we know are important to our customers.

I would like to thank my fellow employees who did great work, putting our customers first in an environment extremely challenged by weather and ATC issues. Our employees in the field will share in the results of their work and will soon be paid $110 million in profit sharing, having already earned some $40 million throughout the year from success-sharing payments, our incentive plan tied to meeting. reliability, customer satisfaction, and financial goals. Including the $20 million distribution our employee stockholders will receive tomorrow, our employees will receive $170 million in cash payment related to our 2007 performance. We are building on our work, executing against plans in place to further improve reliability for our customers. This year, we will be increasing ground time and adding three spare aircraft, increasing our ability to both recover from irregular operations and reduce cancellations due to mechanical issues. I will hand the call back to Jake who will take-- talk more about our guidance for 2008.

Jake Brace - UAL Corporation - CFO Thanks, Pete. Speaking of guidance for the first quarter and the full year of 2008, last quarter we guided 2008 main line domestic capacity down 3 to 4% for the year. We are now pulling down main line and consolidated capacity by another half a point. The result is a decrease in mainline domestic capacity of between 3.5 and 4.5%. I would remind you this reduction is on top of a decrease of 3.3% in mainline domestic capacity in 2007. For the full year, we expect year-over-year mainline capacity to range between a decline of .5% and an increase of .5%. In the first quarter of 2008, we expect both mainline and consolidated capacity

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Year-over-year CASM increases are largely driven by higher maintenance expenses, both due to higher engine and air frame volumes as well as increased components and materials costs. In addition, purchase service expense will also be up due to increase investment in IT systems. Our plan for the year and our guidance reflects a $200 million non-fuel cost reduction program, this helping offset inflationary cost pressures. We're also targeting a reduction of about $40 million from reducing consolidated fuel consumption. You can find our fuel and hedge position guidance in our earnings release. With that, Latasha, let's open the call for questions.

QUESTIONS AND ANSWERS Operator Thank you. First we will take questions from the analyst community. Then, we will take questions from the media. (OPERATOR INSTRUCTIONS) Please hold for a moment while we compile a list. And your first question comes from the line of Mike [Lindenberg] with Merrill Lynch. Please proceed.

Mike Lindenberg - Merrill Lynch - Analyst Yeah, good morning, all. I guess two questions. The recent change in the pilot retirement age from 60 to 65. What sort of impact -- I realize it's early and may be you haven't crunched the numbers but maybe you can just give us a feel for how that plays out on financials, both the P&L and cash flow.

Jake Brace - UAL Corporation - CFO Sure, Mike. It's Jake here. Because we don't have the (inaudible--poor sound) plans, don't see a really big benefit from that. We do get about a $15 million benefit in 2008 due to post retirement medical expenses going down and that's both -- not really a cash piece but it is a book benefit.

Mike Lindenberg - Merrill Lynch - Analyst Okay. And then impact on maybe with more senior pilots at a higher wage rate?

Jake Brace - UAL Corporation - CFO Yeah, there's some of that and it's offset by training benefits and not having to train people up through the seats as well. Our view is it's pretty modest for us. We don't get a huge benefit from not having retirement expenses, obviously. And you do have higher people on average, higher seniority people on average but it's pretty much a push for 2008 other than the $15 million I mentioned.

Mike Lindenberg - Merrill Lynch - Analyst And just my second question, it's to Glenn and maybe John, just sort of the initial thoughts on Lufthansa taking a stake in Jet Blue as one of your close partners and then sort of a part two of the question, Lufthansa has indicated down the road there

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Glenn Tilton - UAL Corporation - Chairman, President and CEO Well, Michael, if I could take the question from a back end. We have been pretty positive on the call in our meetings to all of you. That is an area of interest for both United, that being the east coast, United -- due to our networks in combination with one other. The transaction itself obviously better directed to (inaudible--poor sound) but I think (inaudible) whether or not ultimately it's strategic for Star I think remains to be seen and a lot of other things have to play out before we can come to that judgement.

Mike Lindenberg - Merrill Lynch - Analyst Okay. Very good. Thank you.

Operator Your next question comes from the line of Frank [Boroch] with Bear Stearns. Please proceed.

Frank Boroch - Bear Stearns - Analyst Hi, John, may be you could remind us in the first quarter of '07 of the mileage impact on revenue, I think was almost $100 million. As we look forward, should we be thinking of something similar. It should be a little bit less than that on a year-over-year basis, right?

John Tague - UAL Corporation - CFO Revenue Officer Actually in total. The Mileage Plus adjustments depressed our revenue performance in the first quarter and we're scurrying to find what the number was.

Katherine Michaels - UAL Corporation Frank, this is Katherine. In the table in our press release. The new table that I referenced and it it depressed our revenue -- off of the top of my head, I think by $100 million and the big number was coming off of the-- just the impact of the deferred revenue accounting treatment relative to the incremental cost method. And you may recall that in the first quarter of 2007 we still had one month where the method was new to us and so we did take sort of a larger charge than we would think we would take on a normal ongoing basis. The one thing that I would caution you to is assuming consumer behavior year to year is the same in an upward yield environment. We will always have an increase year-over-year in terms of the negative effect. Just as a result of the way we account for it, always looking to add the liability at what's reflecting kind of the current fair environment.

Frank Boroch - Bear Stearns - Analyst Great and maybe one for Jake. Could you give us an update on the initiatives to set up the internal P&L for the Mileage Plus and any progress on MRO discussions.

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Jake Brace - UAL Corporation - CFO Let me start with the MRO. We, as we mentioned, have multiple proposals in hand and we're continuing to work through those proposals with our advisers. One of the proposals came in and was not in the form contemplated, but was still a very interesting proposal and so it's taking us a little bit longer to get through the analysis of that because again, it was not-- it was not consistent with what we were originally seeking, but it was a creative proposal and we thought it warranted the time to spend on it to really understand it better and we're going through that. So, we're a little bit behind the time table I talked to you about on the last call, but we're still making progress on the MRO transaction.

John Tague - UAL Corporation - CFO Revenue Officer As it a relates to the frequent flyer program, we are -- we've made good progress on that. We are in the position where we said we would be where we are going to be able to have that business, have it's own P&L beginning earlier. Beginning January 1.

We haven't closed the books on it yet for the month of January, but we're in a position where when we close the quarter, we are going to have a P&L for that business. We are evaluating what that-- what we should do with that P&L and what we should do with that business. You've heard my bias on that before, and so we're just progressing down that path on the same time table we told you last quarter.

Frank Boroch - Bear Stearns - Analyst Great, thank you.

Operator Your next question comes from the line of William Green with Morgan Stanley. Please proceed.

William Green - Morgan Stanley - Analyst Yeah, hi, I'm just wondering if you can let us know with regard to M&A, do you have any provisions in the labor deals that would give them sort of a veto or do they need to be discussed with them and do you need to get permission with them or are you pretty much open to negotiate how you see fit.

Glenn Tilton - UAL Corporation - Chairman, President and CEO Let me speak again and I'll let Jake speak to the front end of the question. Remind all of you that we have two labor directors. So, in the course of the discussions that you might appropriately imagine, Bill, that we have with our board, it includes, of course, those two labor directors. That is a transparent discussion. I think to follow on as to how we communicate the current circumstances, the company has to discuss, we also briefed other representatives from our other unions that are not represented on the board. And, with that I will turn over to Jake with respect to the contractual issues because you know we are more than, of course, one union.

Jake Brace - UAL Corporation - CFO So the contractual issues, the short answer is there's not a veto right to -- regarding entering into a transaction. Having said that, we have to abide by the provisions in all of those contracts that have things like successorship clauses and the like in there and what you can do and how you have to operate a merged company. But there's nothing that we see that would amount to a contractual veto. We do, as Glenn said, talk to our unions and make sure that they know what is going on so that none of this

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William Green - Morgan Stanley - Analyst Okay. Then if I could switch to a capacity question. Is there a reason why you're not cutting the regional capacity more. You've cut the main line quite significantly. I would just think in this fuel environment that perhaps regional would be less compelling, but may be I've got that wrong.

John Tague - UAL Corporation - CFO Revenue Officer John here. If you look at what we've done to reduce capacity over the last several years, the regional has been a very good tool for us to maintain the depth and breadth and quality of our schedules by reducing gauge domestically. So I think while we're not going to grow that system substantially in the future, it's been very, very effective to us by reducing capacity and maintaining schedule integrity.

William Green - Morgan Stanley - Analyst All right. Thanks for your help.

Operator Your next question comes from the line of Ray Neidl with Clayton Securities. Please proceed.

Ray Neidi - Clayton Securities - Analyst Good morning, everyone. I don't want to put words into your mouth, but I want to make sure I have it clear what you were saying about demand. It looks like you're saying that demand, both domestically and on all your international roots looks pretty strong going through the first quarter which is going to enable you to get some yield momentum there, is that pretty much what you think?

John Tague - UAL Corporation - CFO Revenue Officer Ray, John. Yeah, we like what we see in the first quarter and we expect continued strong year-over-year performance in terms of unit revenues and I think it would be accurate to see that flowing mostly from yield improvements.

Ray Neidi - Clayton Securities - Analyst Okay. Great. And my second question is regarding the frequent flyer programs. You've changed the terms as other airlines are changing, they're tightening up the programs. What do you foresee for the future of frequent flyer programs. Not only in the in terms of maybe in assets spinoff but if you kept them within the parent company what is that going to do for the airlines going forward. Are we going to see a lot of changes going forward there?

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John Tague - UAL Corporation - CFO Revenue Officer John here, I'll start. We see significant opportunities to improve these businesses. We don't think they're fully mature. So we're looking at growth opportunities. We're seeing good performance in the credit card but we know we can do more and we think that the reflection of the financial statements is a good catalyst for us to continue to provide more and more discipline around the economics of these programs as we're much more accurately reflecting the true cost of doing business. So, I think regardless of where we come out in the discussion that Jake had earlier, we can improve the performance of these programs financially and we're very focused on doing it.

Ray Neidi - Clayton Securities - Analyst Great. Thank you.

Glenn Tilton - UAL Corporation - Chairman, President and CEO I think, Ray, one thing that I would add to that, if you think of the sequencing of the decision it really behooves us and our shareholders to focus on improving the performance of Mileage Plus before we present it to market in the event that we were to take that decision. Because we would like to be able to transparently represent to the market it's true value as we perhaps take the last step.

Ray Neidi - Clayton Securities - Analyst Great. Are we'll be able to see those results broken up, when did you say, Jake, in the next quarter or so?

Jake Brace - UAL Corporation - CFO I said we would have them next quarter. We have not decided whether we're going to disclose those or not. But, I said I was biased to, but we haven't made that decision yet.

Ray Neidi - Clayton Securities - Analyst Thank you.

Operator Your next question comes from the line of Daniel McKenzie. Please proceed.

Daniel McKenzie - unidentified - Analyst Hi, good morning. Thanks. Just a couple quick questions here. I'm wondering if you could provide some color on where the incremental domestic capacity is coming out as we look ahead to 2008?

Jake Brace - UAL Corporation - CFO I would say that it's pretty smooth across the system. Generally with more coming out of O'Hare than the system average and less coming out of San Francisco than the system average.

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Daniel McKenzie - unidentified - Analyst Got it, and does that mean that United won't be required to rely on pilots to fly overtime with these incremental capacity reductions?

Pete McDonald - UAL Corporation - COO Well, I would say -- this is Pete McDonald -- in response to that we obviously had a change as we talked about earlier with the retirement -- mandatory retirement age on December 13th, which gives us the ability to hold onto some pilots so that we don't have to rely on overtime and our plans do not include relying on overtime as we go forward.

Daniel McKenzie - unidentified - Analyst Great, thanks a a lot, appreciate it.

Operator Your next question comes from the line of Robert Barry with Goldman Sachs. Please proceed.

Chris unidentified - Goldman Sachs - Analyst Hi, everyone, this is actually Chris filling in for Rob. Just a couple of quick questions. First with respect to your regional revenue disclosures, can you provide any more color as to what would be a normalized regional disclosure in the Atlantic or the Pacific if we were to back out some of the mileage plan related items?

John Tague - UAL Corporation - CFO Revenue Officer We don't have that -- we haven't prepared that disclosure, but I can give you the key to doing it, which is we spread the mileage revenue in proportion to passenger revenue. It's all proportional.

Chris unidentified - Goldman Sachs - Analyst Fair enough. When you look across your hubs, any particular standouts. When we look at Denver, Chicago, Dulles, in terms of demand -- n terms of, I should say performance in the fourth quarter, what are you seeing across your hubs?

John Tague - UAL Corporation - CFO Revenue Officer We're seeing good distribution and performance trends which I think is simply indicative of a good capacity planning. Overall, we don't really see any outliers good or bad in the current domestic trends.

Chris unidentified - Goldman Sachs - Analyst Okay and then just a quick one on fuel, you guided to about 250, $260 for the quarter, and then you came in at about $253. What was -- how did you get that good guy.

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Jake Brace - UAL Corporation - CFO There were two things -- this is Jake -- there were two thing that drove that. One is with the spike in fuel prices near the end of the year, that put our hedges that applied to 2008 further in the money than we thought they would and we do a market-to-market at the end of the quarter. So that drove a piece of that and the other is we had higher than expected -- we share in the trading profits of Morgan Stanley, who is our fuel supplier and we got a bigger than expected share of those trading profits again because of the volatility and high prices and the fuel.

Chris unidentified - Goldman Sachs - Analyst Okay, great, thank you.

Glenn Tilton - UAL Corporation - Chairman, President and CEO Thank you.

Operator Your next question comes from the line of Jamie Baker with J.P. Morgan. Please proceed.

James Baker - JP Morgan - Analyst Hey, good morning, everybody. Glenn, I may have have inadvertently irritated one of my managements last week, by asking a bit too bluntly whether they expected to generate a return for steak holders this year so I'm going to try to ask the same question but a little more delicately. Steak holders obviously entrust you with capital, they expect to generate a return on that capital, but I'm curious how United does intend to generate a return. What you actually quantify as acceptable in terms of short-term and long-term returns and how you measure your progress towards hitting those internal return targets?

Jake Brace - UAL Corporation - CFO Jamie, this is Jake.

James Baker - JP Morgan - Analyst Hi, Jake.

Jake Brace - UAL Corporation - CFO We clearly are focused on generating shareholder returns. Something that is pretty alien to this industry and we've obviously been somewhat controversial in some of the things that we've approached to do it. We have not publicly disclosed target, ROIC. Obviously we're looking at our internal projects and we have an internal hurdle rate that exceeds what, I think you would say is a good ROIC. So we put all of our project decisions through a-- an economic analysis and financial analysis that I think would support the creation of shareholder returns and then we're very focused on all of the other levers we can pull in order to generate shareholder returns.

So, that's why we're-- that's why we did this special dividend distribution we are going to do tomorrow. That's why we're moving down the path on MRO and frequent flyer program and that's why we're so vocal about consolidation and have been for a

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James Baker - JP Morgan - Analyst I appreciate that. My editor's probably won't probably allow me to use the term alien to the industry though I happen to agree with you. Secondly, I understand how the minimum block hour guarantee works within the pilot contract, but are there any other similar provisions within other groups, contracts that would affect your ability to downsize further?

Jake Brace - UAL Corporation - CFO We have -- trying to think -- we have some no furlow -- some dates that if you were hired before a certain date you can't be furlowed. Those I don't think are realistically binding where we are today so I think the short answer is-- there are some technical things out there but the short answer is I think we have the flexibility that we need. The other thing you'll find in our pilot contract we have as a constraint, which is actually not a binding constraint, is that we have to-- we can't operate any more regional jet block hours than we have main line block hours, but that's not a binding constraint as I said.

James Baker - JP Morgan - Analyst Okay. Just wanted to make sure. Thank you very much.

Glenn Tilton - UAL Corporation - Chairman, President and CEO Jamie, I would like to add one thing to what Jake said in the manner in which we're running the business and the conversation we're having with the board. When we put together the five-year plan that you're all familiar with and we've been discussing already on the call, we went out in time and we established the objectives, the goals for the company, to generate a satisfactory rate of return in this business that is commensurate with returns for general industry which, as everybody on the call knows, this industry has not been able to do. And then we asked ourself, the management team, what would we have to do and what would we believe possible, to put ourselves in a position to be able to generate comparable rates and returns and then we worked back from that goal. So in some sense that may provide you with context for some of the decisions we make between now and the end of the five year period that frames our plan.

James Baker - JP Morgan - Analyst I appreciate that. You mentioned going out in time five years, I think the challenge comes in convincing stake holders that time isn't running out. I don't happen to believe it is but if you look at -- or talk to your investors, many seem to be concerned that the clock is ticking not so much for United necessarily, but simply for the industry here. ,

Glenn Tilton - UAL Corporation - Chairman, President and CEO I think that's a good point. It actually is the conclusion that one would reach and I think that then plays well into the consolidation discussion.

James Baker - JP Morgan - Analyst Agreed. Hopefully this is the year.

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Jake Brace - UAL Corporation - CFO Thanks, Jamie.

Operator Your next question comes from the line of Bob [McDudo] with Avondale.

Jake Brace - UAL Corporation - CFO Hey, Bob. We know who you are.

Bob McDudo - Avibdake - Analyst Good, thanks. You talked a little bit on the domestic capacity thing about where it's come out and whatever. How much of that 5 or 6% or whatever is the change of gauge impact as opposed to actually pulling down departures. Any sense on that?

Jake Brace - UAL Corporation - CFO One sec here. The year-over-year A & M change that's reflected in the guidance is a point lower than the change in departures. Nominal change year-over-year in gauge. I think most of that work was really done in '03 to '06 time frame, Bob.

Bob McDudo - Avibdake - Analyst Okay. And you did say that in terms of regionally, that O'Hare was taking a bigger cut than some of the others?

Jake Brace - UAL Corporation - CFO That's correct.

Bob McDudo - Avibdake - Analyst One other thing. On the $2.74 fuel price assumption that you've been given. We've obviously had the price of a barrel of oil going up and down by what, $12 or $13 in the last couple of weeks. Where was that number struck from or what is the assumption-- the oil assumption behind that, or how do you go about getting those numbers?

Jake Brace - UAL Corporation - CFO We did that on the 17th.

Bob McDudo - Avibdake - Analyst So we look at what it looked like on the 17th, or something?

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Jake Brace - UAL Corporation - CFO Exactly. Look at the forward curve on the 17th and then make whatever appropriate adjustments from there. It has been quite volatile --

Bob McDudo - Avibdake - Analyst Obviously you could say it's 99. You could say it's 87 and in the last week or two that's reasonable.

Jake Brace - UAL Corporation - CFO It's been moving around and that's a fair question. We called that number on the 17th and obviously, market's moved a lot since then.

Bob McDudo - Avibdake - Analyst Okay. Thanks.

Jake Brace - UAL Corporation - CFO Okay.

Operator That, ladies and gentlemen. This concludes the analyst and investors portion of your call today. Before we take questions from the media, I would now like to turn the call over to Mr. Tilton for closing comments.

Glenn Tilton - UAL Corporation - Chairman, President and CEO Thanks everybody on the call for your questions and for the discussion. In closing, as I mentioned to our employees in my recorded message this morning, we're doing the work that we said we would as we exit our restructuring. We're executing our plan to strengthen our core airline, create value for customers, shareholders and employees as we have discussed. 2007 has been a year of real progress for United. Our customers saw the launch of a new international product. The company's most significant product upgrade in ten years. A benefit from the many other products and service investments underway at the company.

As Jake mentioned, we also paid down debt, something that benefits all stakeholders. Increased operating profit by some $.5 billion. Provided cash distribution to shareholders and will paying out , as Pete mentioned, $170 million of cash payments related to our 2007 performance. So in closing, the work that we have done enables us to look to the future with. confidence, to compete, to seize opportunities as they're presented to us, to make the right choices at the right time for our customers, our shareholders and our employees. And with that, operator, we are now ready to take questions from the media.

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