CH-179008-030-1bkEDPlan For TransformationCreditors Committee MeetingJanuary 31, 2003CONFIDENTIAL
Plan For Transformation: Agenda Process To Date Overview of Strategic Challenges and Need Doug Hackerfor Transformation Customer Value Proposition Scott Praven Network Products and Cost Restructuring Greg Taylor, Scott Brandt Capital Markets Requirements and Financial Jake BraceOutlook People Strategy and Employee Value Sara FieldsProposition Strategy Summary Doug Hacker 2003 Goals and Budget Pete McDonald,Jake BraceCONFIDENTIAL1
Strategy Development Process To Date We have developed a preferred Going forward, there arestrategy in sufficient detail that meets3 streams of critical pathour financial and strategic objectivesactivities in the near-term We recognize there are other–Refine comparisons againstalternatives that need to bestrategic alternativescontrasted against ourpreferred strategy–Execute a coordinatedcommunication plan with There is an urgent need to startkey stakeholderscommunicating the plan fortransformation to key constituents–Initiate implementation(., Creditor Committee, employees,planningDIP lenders)CONFIDENTIAL2
Refine Comparisons Against Strategic Alternatives Alternative 1 – Reduce mainline We will not develop competingcosts across the board; no LCC;business planscontinue to operate under currentbusiness model We will continue to conduct/refinecritical analyses that compare and Alternative 2 – Exit unprofitablecontrast the options against oursegments, markets, hubs andpreferred strategybecome much smaller airlinefocused on “business” segments Articulate in a compelling wayand marketswhy the preferred strategy isbetter Alternative 3 – “Break up” the–Addresses strategic challenges?airline – sell off assets/pieces of–Execution risk?business to other “natural–Financial objectives?owners”CONFIDENTIAL3
Plan For Transformation: Agenda Process To Date Overview of Strategic Challenges and Need Doug Hackerfor Transformation Customer Value Proposition Scott Praven Network Products and Cost Restructuring Greg Taylor, Scott Brandt Capital Markets Requirements and Financial Jake BraceOutlook People Strategy and Employee Value Sara FieldsProposition Strategy Summary Doug Hacker 2003 Goals and Budget Pete McDonald,Jake BraceCONFIDENTIAL4
Overview Of Strategic Challenges AndNeed For Transformation Structural challenges facing the airline industry Southwest – how a successful business modelovercomes these challenges Need for transformation of United’s business modeland strategyCONFIDENTIAL5
Airline Industry Has Delivered The Worst ShareholderPerformance Of Any Industry7-year rolling normalized indexed TRS – . airline industry vs. economy*McKinsey research of 16 industries, 1008 companies400r300t Worst rfr f performance of itri 16 industries Range of typicalrr researched 200rItishareholder returnsIndustriesacross industriesrrresearchedil r,included paper,100itcommodityil,chemicals,tlsteel0-100-200196919711973197519771979198119831985198919911993199519971999*Total economy and airline nominal TRS, adjusted for inflation and indexed to starting year (1969)CONFIDENTIAL6
Structural Challenges In The Airline Industry HaveContributed To Repeated Periods Of Value DestructionLow entry and highexit barriers contributeto excess capacity andirrational pricingLabor receives aIndustry susceptibledisproportionateto periodic,share of valueunpredictable shocksLCC growth eatsPrice transparencyat mainline marketis making it harder forirrli itAirline industryshare and contributesairlines to profitablytr ldestroys valueto price pressuresegment customersPerishableUndisciplined capacitycommodityadditions contribute toproductdownward price trendsAirlines squeezed in thevalue chain betweensuppliers and distributorsCONFIDENTIAL7
Airlines Are Being “Squeezed” By Other Players InTheir Value ChainRetailReserva-Manu-GroundLessorsdistri-tionsAirlinesCaterersAirportsfacturershandlersbutionnetworksGlobal sales5774157303311025$ BillionsROIC 1992-96Percent30Airlines have failed toearn their expectedcost of capital18*161511-1410-13106Airline WACC*American Express ROE used as a proxy for retail distributionSource:Hoovers; Airline Business; Travel Weekly Survey 2000; Team analysisCONFIDENTIAL8
LCCs Attacking “Price Umbrellas” In IncumbentMarkets Are Taking Share And Lowering YieldsAnd their growth has been primarilyDriving decreased yields and revenuesLCCs have grown dramatically overat the expense of mainline carrierswhen entering new marketsthe past two decadesQuarterly Scheduled Domestic ASMsYear-over-year RPM change, June 2002Average United Yield Change with LCCBillionsMarket EntryPercent40US Airways-22%SAN-DEN35MHT-ORDLCCsContinental-11% Frontier enters in Southwest entersJune of 1996in June of 199830United-10%25Delta-10%10010020Northwest-5%8878American-18%15Southwes4%t10Fron6%tier5Am8%erican Trans0198019902000Ai23%rTranPhase 1:Phase 2:Phase 3:110%JetBlueExperi-OpportunisticEmergence of1995199719971999ment-Expansionthe CategoryationKillersCONFIDENTIAL9
Increased Price Transparency Facilitated By InternetBookings Adding To Downward Yield PressureRevenue booked via InternetPercent22 Price transparencypressures airlinesto lower fares18to win overcomparison14shoppers Market pressure tomatch competitor9prices will keepincreasing5 Businesses arealso turning to theInternet in hopesof lowering theirtravel costs19992000200120022003ESource:The Online Travel Market Place 2001-2003CONFIDENTIAL10
Despite These Structural Challenges, Airline IndustryAnd Specific Carriers Have Had Boom Years . . .Good macro-StructuraleconomicsindustrychallengesDemand spikes(., )Relativeadvantages for In “boom” years, structuralindividual carrierschallenges are outweighed by good Lagging,macroeconomics or specific relativeadvantagedadvantages for individual carriers . . .labor contracts . . . leading carriers to overspend on Favorable leasescapacity additions and promptinglabor improvements during normalnegotiating cyclesCONFIDENTIAL11
. . . Leading To Overspending On Capacity AndPrecipitating DownturnsProfit MarginPercentBeginning1st cycle2nd cycle3rd cycleof 4th cycle18Peak ordersPeak orders16Peak ordersWhile capacityPeak deliveriesadditions have14Peak ordersbecome more12rational over thelast 5 years . . .10. . . significant8excess aircraftcapacity persists6in the industry41967-1995 order andPeak deliveries2delivery patternsPeak deliveries019676971737577798183858789919395CONFIDENTIAL12
Further, Labor Contract Renegotiations Result InDisproportionate Share Of Value According To Labor,Which Becomes Unsustainable During DownturnsEBITDARW$ %United 1H 2000United 1H 2001Note: EBITDARW = EBIT + Depreciation + Amortization + Rent + Wages; business cash flow available to stakeholdersCONFIDENTIAL13
Periodic, Unpredictable Shocks Add Volatility To AnAlready-Cyclical IndustryYear-over-year change in enplanements*. launches 5strikes against Iraq (Jan 1991)0Depth of cycles-5 is increasedby various-10unpredictable-15events-20Carriers musthave the-25flexibility to-30respond tosuch shocksSep 11-35-40-1-20123456789101Months from shock*Includes enplanements for Alaska Airlines, American (including TWA), America West, ATA, Continental, Delta, Hawaii, Jet Blue, Midwest, Northwest, United, and US AirSource:MIT International Center for Air Transportation; ATA; Aviation Week Space & Technology; McKinsey analysisCONFIDENTIAL14
Today These Dynamics Have Driven The IndustryTo A Crisis, And The Future Outlook RemainsPessimisticCurrentPessimistic outlook situationStructural challenges notexpected to recede, in fact inWorseningsome cases expected to getstructuralworse (., LCC competition,challengesprice transparency)Demand/revenue environment“Perfectnot expected to improvestorm”substantially (., permanentdisinclination to fly, corporatepurchasing trends)DisproportionateWeak demand/Labor share of value mayshare of value beingrevenuediminish somewhat throughcaptured by laborenvironmentconcessionary negotiationsacross industryCONFIDENTIAL15
Overview Of Strategic Challenges And NeedFor Transformation Structural challenges in the airline industry Southwest – how a successful business modelovercomes these challenges Need for transformation of United’s business modeland strategyCONFIDENTIAL16
Southwest Is The Only Carrier With A Robust ModelThat Has Allowed It To Weather DownturnsShare of EBITDARWPercentShareholders888912119121415176Taxes8109799911111226Creditors19252423222322201817\63Labor605959595857575655541992199319941995199619971998199920002001AverageOperating11131211101416171811MarginPercentCONFIDENTIAL17
Southwest Has Emerged As The Clear WinnerIn The Industry$ MillionsMarket capitalization of major network carriers – Market capitalization of major network carriers – May 1999November 2002America West39,70811,550904Alaska2,3391,088Continental2,702Northwest4,. Airways8,. AirwaysAmerica West40United4,447United8,37477Continental10,785540244Alaska588178Frontier616 2,005Northwest998American11,88410,785270AirTran American292Frontier5571,3441,535Jetblue307AirTranDelta SouthwestOther low SouthwestOther majorsOther low Other majorscost carrierscost carriersSouthwest currently representsnearly two thirds total airlineindustry market capitalizationCONFIDENTIAL18
Alignment Across Four Key Elements Contributes ToSouthwest’s Successlr Clear andllit-i-l tcompellingBest-in-class coststr li itrcustomer valuein industryritipropositiontiSustainedrfitilitprofitabilityiili rtDisciplined growthttrti lAttractive employeef rrt i ttof network in targetl ritivalue propositionrtmarketsCONFIDENTIAL19
Overview Of Strategic Challenges And NeedFor Transformation Structural challenges in the airline industry Southwest – how a successful business modelovercomes these challenges Need for transformation of United’s business modeland strategyCONFIDENTIAL20
Alignment Across Four Key Elements Will ContributeTo United’s Successlr Clear andllit-i-l tcompellingBest-in-class coststr li itrcustomer valuein industryritipropositiontiSustainedrfitilitprofitabilityttrti lt llAttractive employeeRobust globalrrl ititvalue propositionnetworkCONFIDENTIAL21
United Faces Multiple Strategic Challenges AgainstEach Of The Critical Elements Weak Highestproposition forcostleisure/ price-lr Clear andstructuresensitivet-i-l tlliBest-in-class costscompelling(CASM) insegmentsi itrtr lin industrycustomer valueindustry Core businessritipropositionsegmentdeclining invaluetiSustainedrfitilitprofitability Employeemotivation and All networkengagementttrt llti lAttRobust globalractive employee In bankruptcyproductscould declinerrtl itinetworkvalue proposition– no credibilityand marketspost CBAwith capitalunprofitablerestructuringmarkets High LCCexposureand threatCONFIDENTIAL22
United Must Address These Critical Challengeslr Clear andllit-i-l tcompellingBest-in-class coststr li itrcustomer valuein industryritipropositiontiSustainedrfitilitprofitabilityttrti lt llAttractive employeeRobust globalrrl ititvalue propositionnetworkCONFIDENTIAL23
Plan For Transformation: Agenda Process To Date Overview of Strategic Challenges and Need Doug Hackerfor Transformation Customer Value Proposition Scott Praven Network Products and Cost Restructuring Greg Taylor, Scott Brandt Capital Markets Requirements and Financial Jake BraceOutlook People Strategy and Employee Value Sara FieldsProposition Strategy Summary Doug Hacker 2003 Goals and Budget Pete McDonald,Jake BraceCONFIDENTIAL24
Developing A Compelling Customer Proposition Target customers and understand theirunique needs Deliver relevant benefits within customersegments better than the competition Find elements within the brand andproduct portfolio that bind theofferings togetherCONFIDENTIAL25
Summary United serves a broad range of customersegments with distinct needs United’s business model was designed toprimarily serve its most valuable businesssegment (“Road Warriors”) A changing market drives multiple challenges To respond, United must react urgently tomarket challenges–Enhance and sustain focus on its corebusiness segment–Differentiate and develop new valueproposition targeted at price-sensitive/value-conscious customersCONFIDENTIAL26
Airlines Serve Six Distinct Segments – Some AreBusiness-Driven And Some Leisure-DrivenPercentage ofSegment nameindustry Business Travelers9driven34% Business Leisure -for-Fun Leisure Travelers20driven66%-driven Occasionalists27100Source:Harris Interactive Airline Segmentation study 1Q 02CONFIDENTIAL27
Segments Have Distinct CharacteristicsPragmaticReluctantJust-for-FunBusinessBusinessDIY LeisureLeisurePrice-DrivenRoad WarriorTravelerTravelerOpportunistTravelerOccasionalistBusiness heavyModeratelyModerateFrequentFrequentOccasionalpersonalbusinesshigh businessbusinesspleasurepleasurepleasuretravelertravelertravelertravelertravelertravelerFF programHuge influencer,Important,Don’t careMiles, rewards,Miles areBarely awaremostly formore for milesat allbonuses aresomewhatrecognition/than statusvery importantimportantstatusPriceLeast price-Corporate-CorporateActively shopPrice-sensitive,Very price-sensitivitysensitivedriven, fairlycrackdownfor best fares,but sometimessensitiveprice-sensitivelikely to usemore driven byefares,desire to traveldiscountwebsitesServiceExpect betterNot veryDon’t expect itServiceService isPrefer low-demandsservice due todemandingimportant, butimportant, butcost/ no-frillshigher statusgood deal ismight be cost-more criticalconstrainedSource:Harris Interactive Airline Segmentation study 1Q 02CONFIDENTIAL28
Summary United serves a broad range of customersegments with distinct needs United’s business model was designed toprimarily serve its most valuable businesssegment (“Road Warriors”) A changing market drives multiple challenges To respond, United must react urgently tomarket challenges–Enhance and sustain focus on its corebusiness segment–Differentiate and develop new valueproposition targeted at price-sensitive/value-conscious customersCONFIDENTIAL29
Road Warriors Contribute The Highest Share OfIndustry RevenuePercentPopulationRevenue482720191614141110994RoadPragmaticReluctantDIY LeisureJust-for-FunPrice-DrivenWarriorsBusinessBusinessOpportunistsLeisureOccasionalistsTravelersTravelersSource:Harris Interactive Airline Segmentation study 1Q 02CONFIDENTIAL30
Road Warriors Have District Needs That Must Be MetRelative importance of factors in selecting flight – 2002Percent332623117SchedulePriceFrequentServiceCompanyflyerqualitypolicyprogramSource: Marketrak – North America; 11+ fliersCONFIDENTIAL31
United’s Mainline Is Designed To Meet TheNeeds Of Road WarriorsPre-travelAirportOnboardPost-travel Web site Easy Check-in First class Arrivals lounges Advance seat Priority check-inseating Bonus mileageassignmentslines Economy Plus Priority lost bag Priority Priority securityseatingdeliveryreservationslines Priority meal Higher customerlines/service Loungeschoicerelations service EasyUpdate Waitlist PC power Priorityprioritizationupgrades Global services Priority reac-commodations EasyInfo Boarding passreaders Pre-boardingCONFIDENTIAL32
Competitively, United Is Perceived To Be Strong OnDimensions Critical To Road WarriorsPercent of each carrier’s flyers agreeingRecognizes frequent flyers andrewards their loyaltyBest worldwide routes/schedules737071625852371954jetBlueSouth-Amer-Conti-UnitedjetBlueSouth-Conti-Amer-UnitedwesticannentalwestnentalicanSource:Domestic Brand Monitor, 2Q2002, 6+ Fliers; jetBlue data 3Q2002CONFIDENTIAL33
Summary United serves a broad range of customersegments with distinct needs United’s business model was designed toprimarily serve its most valuable businesssegment (“Road Warriors”) A changing market drives multiple challenges To respond, United must react urgently tomarket challenges–Enhance and sustain focus on its corebusiness segment–Differentiate and develop new valueproposition targeted at price-sensitive/value-conscious customersCONFIDENTIAL34
Multiple Market Challenges To Current ModelChallenge 1:All our segments are declining invalue, and our most importantbusiness segment – RoadWarriors – is declining fasterthan othersCONFIDENTIAL35
Revenue From All Segments Is Declining,Especially For Road WarriorsIndustry Road Warriorrevenue indexUnited Average Passenger Revenue1KPremier ExecutivePremierGeneral Member617Decline from 2000 peak29%$16,000decline$14,000436$12,00021%$10,000$8,000$6,00021%$4,00019%$2,00018%$0199619971998199920002001200219952002Note:Based on tier earned via prior year flight activitySource:Mileage Plus; 1995 Cambridge Study; 1Q02 Harris Interactive Airline Segmentation SurveyCONFIDENTIAL36Net Revenue Per Member
Revenue Decline Among Our Elite SegmentsIs Driven By Fewer Trips . . .Average trips flown per customer1KPremier Executive30PremierGeneral Member252030% decline151021% decline14% decline5Flat01996199719981999200020012002Note:Based on tier earned via prior year flight activitySource:Mileage PlusCONFIDENTIAL37Number of trips
. . . And More Recently, Lower Fares PaidAverage Fare Paid1KPremier ExecutivePremierGeneral Member900Decline from8002000 peak70012%60013%50019%40016%30020010001996199719981999200020012002Note:Based on tier earned via prior year flight activitySource:Mileage PlusCONFIDENTIAL38Average roundtrip fare paid
We Need To Understand And Mitigate “Road Warrior”Value ErosionPotential contributors toRoad Warrior value erosionWhile the structural factors arebeyond United’s control andunlikely to reverse themselves . . . Structural “disinclination to fly”(., videoconferences,…United must enhance andcompany policies)sustain its focus on this Structurally reduced yieldssegment to mitigate any share(., LCC competition, corporateloss (., improve its servicepurchasing behaviororientation) Increasing segment comfort…and United must increase itswith LCCsrelevance to other segmentsbeyond Road WarriorsCONFIDENTIAL39
Multiple Market Challenges To Current ModelChallenge 1:All our segments are declining invalue, and our most importantbusiness segment – Road Warriors –is declining faster than othersChallenge 2:United’s value proposition toprice-sensitive/value-consciouscustomers is uncompetitiveCONFIDENTIAL40
Leisure Travelers Are Extremely Focused On PriceIn Their Buying DecisionPercent of airline decision403016113PriceScheduleFrequentServiceCompanyFlyerPolicyProgramSource: Marketrak 2002 (Leisure Travelers)CONFIDENTIAL41
Customer Focus On Price Has RemainedRelatively Stable Over TimeBusiness travelersRelative importance of price in carrier selectionLeisure travelersPercent of 10-point allocation40403737252424231999200020012002Source:Marketrak 1999 - 2002CONFIDENTIAL42
United Is Perceived To Offer Poor “Value For Money”Percent of each carrier’s flyers agreeing that it delivers “good value for the money”8683302520UnitedAmericanContinentaljetBlueSouthwestSource:Domestic Brand Monitor 3Q02 National Sample of 6+ Flyers (NY sample for jetBlue)CONFIDENTIAL43
United Must Increase Its Focus On This SegmentNecessary for growth andUnited must targetNecessary forprofitabilityleisure/price sensitivesustainabilitysegments proactivelyAs the value of theRelevance to a broadbusiness segment Tailored valuerange of segments isdeclines…propositioncritical to United’sbusiness model…leisure/price sensitive Offer and be perceivedsustainabilitysegments are becomingas “good value forincreasingly criticalmoney” relative to LCCs Broad and deepcomponents of United’snetwork necessary tooverall profitability andmeet needs of businessgrowthtravelers A healthy share inleisure/price sensitivesegments necessary tomaintain acceptablenetwork economicsCONFIDENTIAL44
Multiple Market Challenges To Current ModelChallenge 1:All our segments are declining in value,and our most important businesssegment – Road Warriors – isdeclining faster than othersChallenge 2:United’s value proposition toprice-sensitive/value-consciouscustomers is uncompetitiveChallenge 3:LCC threat is real and growing;the impact is spreading to allour customer segments (includingbusiness segments)CONFIDENTIAL45
LCC Growth Has Significantly IncreasedCustomer OptionsLow-cost carriers market share of domestic O&D passengersPercentFor example…2423 10 years ago,2119nonstop service19191818between the16Washington andLos Angeles14areas was onlyprovided by10United87 Today,customers canfly nonstop onUnited, jetBlue,and Southwest1990199119921993199419951996199719981999200020011Q 02Note:Data for 2002 is from the first quarterSource:. DOT DB1A databaseCONFIDENTIAL46
At The Same Time, The Low-Fare Carriers HaveIncreased Their Range of ProductsPriority/FrequentFirstPremiumFlyerIn-flightMagazines/ClassProcessingProgramMealsEntertainmentNewspapers!!!!!!!!!!!!!!!CONFIDENTIAL47
Customers Are Very Satisfied By The BasicLCC OfferingPercent of customers agreeing with statementUA AACOSW JetBlue*Safe36%38%31%41%31%Dependable2428203830Helpful2327213830Comfortable2436191738Simple 9 8 64936Source:Domestic Brand Monitor, 2Q2002, 6+ Fliers; jetBlue data 3Q2002 (NY sample for jetBlue)CONFIDENTIAL48
Even Business Customers Are IncreasinglyFlying On LCCs“I now fly on low-fare airlines more often than I did in the past. . . .”33292811+ flyers6-10 flyers1-5 flyersSource:Flyer Attitude Tracking study (Business Travelers), November 2002CONFIDENTIAL49
United’s LCC Exposure Has Been Growing, And IsHighest Among Mainline CarriersUnited’s O&D passengers in markets with low-cost carriers’ AA58 US411990199119921993199419951996199719981999200020011Q 02Source:. DOT DB1A database; SH&ECONFIDENTIAL50
United Must Respond To The LCC ThreatMajor challenges LCCs are growing at a significantUnited must develop a crediblerate and offering an expandedalternative to the LCCs . . .range of products Customers (including business…Or risk continued pressuretravelers) are impressed by theto get “squeezed” out ofLCC offering characteristics andthe price-sensitive/value-performanceconscious segment inintensely competitive markets United’s LCC exposure is thehighest in the industryCONFIDENTIAL51
Multiple Market Challenges To Current ModelChallenge 1:All our segments are declining in value,and our most important businesssegment – Road Warriors – isdeclining faster than othersChallenge 2:United’s value proposition to price-sensitive/value-conscious customersis uncompetitiveChallenge 3:LCC threat is real and growing;the impact is spreading to all ourcustomer segments (includingbusiness segments)Challenge 4:Corporate Purchasing Agreements arehaving a major influence on businesssegment economicsCONFIDENTIAL52
Corporate Customers Are Fundamentally ChangingHow They Purchase TravelPercent Of Travel Managers Using Cost Reduction Method By Year19992002Reducing number17of trips62Corporate purchasing -VolumeRestricting meeting15becoming an importantreduc-attendance41decision makertionsReduc10ing number ofPrograms are39authorized travelersincreasinglyaggressiveEncouraging/requiring17Corporations focusednon-refundable tickets52on policy compliancePrice23Encouraging/requiringReduc-United must improve51advance purchasetionsits value proposition tocorporate purchasing17Using low-costprograms42airlines*Survey of 199 travel managersSource: “The Corporate Traveler III,” 11/25/02 Business Travel NewsCONFIDENTIAL53
Summary United serves a broad range of customersegments with distinct needs United’s business model was designed toprimarily serve its most valuable businesssegment (“Road Warriors”) A changing market drives multiple challenges To respond, United must react urgently tomarket challenges–Enhance and sustain focus on its corebusiness segment–Differentiate and develop new valueproposition targeted at price-sensitive/value-conscious customersCONFIDENTIAL54
Developing A Strategic Response To MarketChallengesStrategic response Declining value in segments,Enhance and sustain our valueespecially Road Warriorsproposition to our business segmentcustomers (including corporate Uncompetitive value propositionpurchasing)to price sensitive/leisuresegmentDevelop a value proposition that iscompetitive with LCCs to become LCC threat is real and growingattractive and maintain relevance toand influencing all segmentsthe price-sensitive segment Corporate PurchasingLeverage a branding strategy thatagreements are becoming morelinks together United’s product familyaggressiveDevelop a distinctive service orientationfocused on brand deliveryCONFIDENTIAL55
United Must Continue To Focus On Its CoreCustomers To Prevent DefectionsHow would your flying on United change if the following occurred?52%41%Core segment is30%demanding inDefinitely/their needsProbablyFly UA MoreAnd likely to defect5%if we lose focus ontheir needs-2%-2%Critical for us toDefinitelyretain focusProbablyFly UA Less-49%Add moreGuaranteeExpandGo back toEconomyof beingEconomyall StandardPlus seatsseated inPlus to allEconomyto EconomyEconomyof EconomySectionPlusBase= 189 UA loyals aware of Economy PlusSource:2001 Alliance Research phone studyCONFIDENTIAL56
United Must Continue To Leverage Its StrengthsTo Meet The Needs Of Business Segment Maintain and strengthen a broad anddeep network Maintain an attractive frequent flyer program Develop superior service Focus on the offerings that meet the needsof business travelersCONFIDENTIAL57
To Date, United Has Already Taken A Number Of StepsTo Improve Its Value Proposition To This SegmentIndustry-leading, simplified fare structure designedBusiness faresto stimulate high-end travelUnited Global ServicesWorldwide recognition program for our highest valuecustomers, designed to better meet their uniqueneeds. Benefits include priority handling/ processingand enhanced customer contact centers“Easy” ProductsSuite of technology-enabled products thatsignificantly improves the customers’ pre-flightexperience while increasing efficiencyProactiveCustomer Advocate program proactively rebooksReaccommodationcustomers on the basis of their current and futurevalue to UnitedCONFIDENTIAL58
Additionally, United Must Develop A DistinctiveOffering To Appeal To Price-Sensitive/LeisureSegmentsDistinctive targeted offering . . .. . . within United’s portfolio Positioned as distinctive, low-cost Must be understandable as partbrand (separate marketing,of United’s “product family”promotions) Should protect and leverage–Builds excitement in thisUnited’s equity (network,segmentfrequent flier program,benefits, recognition)–Manages customer expectations No change for change sake Competitive prices relative to LCC Low-frills product Service orientation designed toemulate LCCs (simplicity,consistency)CONFIDENTIAL59
Such An Offering Will Complete United’sProduct FamilySleeperInternationalSeatsFirst Class/ MainlineEconomy PlusPreferential SeatUnited LCCAssignments (or UE+)offeringExpressUndifferentiated Single Cabin(for small markets)Mileage Plus ProgramPriority Servicing for Frequent FlyersCommon to AllAirport ProcessesCONFIDENTIAL60
To Knit This Family Of Products, United MustDevelop A Strong Umbrella Brand And EnsureStrong Brand Deliveryri ffriPremium offeringUnited needs to develop a strong brandrf ifor businessand sub-brands that are exciting andtsegmentsrelevant to a broad range of customersegmentsHowever, United faces several brandchallengesfrfiOfferings-frillNo-frills trilon otherSing Disadvantaged starting point onleffriofferingirlirllairlinesumbrebrand perception (“boring”, “large/llafr llfor smalltrrthroughbrandbureaucratic”, “past its prime”)rtmarketsllialliances Potential for natural tensionbetween creating sub-brands andcausing customer confusionSuperior brand delivery through front- ffri frLCC offering forline employees will be key to successri-iti/price-sensitive/lir tleisure segmentsCONFIDENTIAL61
United Must Focus Its Service OrientationOn Brand DeliveryThe service needs of United’s customer segments varyBusiness customer needsLeisure customer needsRecognitionValue for moneyandimproved processesUnited’s service orientation must focus on brand delivery andmeeting the needs of distinct segmentsCONFIDENTIAL62
Key Messages United must react now to continued market pressures United must maintain its relevance to a broad range ofsegments – critical for sustained profitability and growth United must enhance and sustain focus on its core businesssegment (broad and deep network, frequent flyer program,premium products) United must proactively target and increase our attractivenessto price-sensitive/leisure segments through a tailored offeringthat is fully competitive with LCCs To link this family of products together, United mustdevelop a vibrant brand strategy and and focus on superiorbrand deliveryCONFIDENTIAL63
Plan For Transformation: Agenda Process To Date Overview of Strategic Challenges and Need Doug Hackerfor Transformation Customer Value Proposition Scott Praven Network Products and Cost Restructuring Greg Taylor, Scott Brandt Capital Markets Requirements and Financial Jake BraceOutlook People Strategy and Employee Value Sara FieldsProposition Strategy Summary Doug Hacker 2003 Goals and Budget Pete McDonald,Jake BraceCONFIDENTIAL64
Today’s Discussion Need for a portfolio of network products Case for a network business (“network tutorial”) –it still works Network product challenges–Alliances–Express–Mainline–LCC Restructuring program to address networkproduct challenges–Business Transformation Cost Improvements–SAM restructuring–1110 actions–CBA modifications Resulting outcome of restructuring program–Competitive offerings–Flexibility–Growth opportunitiesCONFIDENTIAL65
Distinct Customer Segments Drive Need for TailoredValue Propositions and Product Offerings . . .Percentage of industrySegment Business Travelers9driven34% Business Leisure -for-Fun Leisure Travelers2066%-driven Occasionalists27100Source:Harris Interactive Airline Segmentation study 1Q 02CONFIDENTIAL66
. . . However, Market Economics And Needs AreDriven By More Than Just Customer NeedsDemandSizeCritMix of business marketCustomer mixleisure/price-sensitivecharacteristics thattravelersinfluence the choiceof economicalnetwork productLCC and OA presence andCompetitivesharesintensitySignificance of city, feedNetworktraffic contributionstrengthCONFIDENTIAL67
Market Characteristics Drive The Choice OfThe Most Economical Network ProductPrimarydriversMarket characteristicsEconomicalTypicalNetworkCompetitiveLogical productnetworksizestrengthintensityCustomer mixExampleofferingsproductMedium,HighLow-no LCC orMix of businessORD-LAXMulti-cabin,Mainlinelargeminimal shareand leisurepremium(domestic andtravelers (moreserviceinternational)high-yield mix)Medium,HighHigh-current orLeisure/price-ORD-MCOLow-frillsUnited LCC*largeprobable LCCsensitiveproductmarketdominated (morelow-yield mix)SmallHighMixedAll travelersSFO-EUGSingle cabinExpressAllLowMixedBusiness andPIT-PHX,Varies (multi-Alliance/leisure travelersJFK-FRAcabin, low -code sharefrills)*Mainline and United LCC offerings may be mixed in select markets to maximize profitsCONFIDENTIAL68
United’s Strategic Network Product Portfolio Typically large “business” marketsit iliUnited Mainline Points of network strength (hub) Multi-cabin, including premium service Competitive mainline cost structurelli/it rAlliance/Uniterrd Expresst tStrong network rcode shareirl Single brand Markets where United has Typically small marketsinsufficient network strength Feeds traffic to/from hubsor restricted access Single cabin(regulatory) Competitive regional carriercostsit United LCC Leisure/price-sensitive segmentsor LCC competition Points of network strength (hub) No-frills offering Competitive LCC cost structureCONFIDENTIAL69
Today’s Discussion Need for a portfolio of network products Case for a network business (“network tutorial”) –it still works Network product challenges–Alliances–Express–Mainline–LCC Restructuring program to address networkproduct challenges–Business Transformation Cost Improvements–SAM restructuring–1110 actions–CBA modifications Resulting outcome of restructuring program–Competitive offerings–Flexibility–Growth opportunitiesCONFIDENTIAL70
Why Does A Network Business Matter? Large, well-situated hubs provide superiorconnection service and traffic advantages Broad and deep network builds Unitedbrand value Increased connectivity provides market shareadvantage in markets where United providesmost capacity Efficiency of hub-and-spoke system allowshigher frequency of service between citiesCONFIDENTIAL71
United Has Breadth And Depth Through ItsHub-And-Spoke NetworkDaily service for United/United Express riSan Francisco flit 237 flightsiChicago titi 56 destinations flit 561 flights titi 132 destinationsitrWashingtonDenver flit 245 flights flit 365 flights titi l 72 destinations titiLos Angeles 97 destinations flit 260 flights titi 54 destinationsCONFIDENTIAL72
Hub-And-Spoke Network Is Important To OverallCarrier Economics5-spoke hub:6-spoke hub:15 unique markets served; each21 unique markets served; eachroute carrying 50 local and 40route carrying 50 local and 50connecting passengersconnecting passengersAA90100FBFBPaxPax9090100100PaxPaxPaxPaxAdd 1 spokeHH90100100PaxPaxPax90100CECPaxPaxRoutes+20%DDMarkets served +40%Passenger enplanements +33%CONFIDENTIAL73
Even Low-Cost Carriers Are Increasingly BenefitingFrom Connecting Passenger TrafficPercentage of connecting passengers – FY 2001Low-costcarriersSouthwest’s connecting71traffic increased from 13%67to 27% between6363621993 and 20015958523837302713B6WNTZF9ASFLCOHPAAUSUADLNWCONFIDENTIAL74
A Schedule Advantage In A Market Results InDisproportionately Higher Revenue Share ForThe Number One CarrierRevenueshareCapacity Share (QSI)CONFIDENTIAL75
Number Two Carrier In A City Will Generate RevenueShare Roughly Equal To Its Capacity ShareRevenueshareCapacity Share (QSI)CONFIDENTIAL76
Third and Subsequent Carriers Receive Less ThanTheir Fair Share Of RevenueRevenue shareCapacity Share (QSI)CONFIDENTIAL77
High Market Share In A City Drives ProfitabilityHighRevenueShareLowLowHighCapacity Share (QSI)CONFIDENTIAL78
United Leads All Carriers In Terms Of TopMarket PenetrationRevenue inPercentMSA populationNo. 1 marketsof top 25AirlineNo. 1 marketsMillions$ :Based on year-end 3Q 01 DB1A revenue in top 25 domestic city marketsCONFIDENTIAL79
A Strong Route Structure Continues To Be AnImportant Choice Driver For Frequent FlyersRelative importance of factors in selecting flight – 2002Percent332623117SchedulePriceFrequentServiceCompanyflyerqualitypolicyprogramSource:Marketrak – North America 11+ fliersCONFIDENTIAL80
A Strong Network Results In SustainableRevenue Premiums Market share premium fromincreased city presence Connecting traffic advantageStrong network Compelling frequentValuetraveler programproposition Corporate volumeRevenueagreement leverage Higher yield forpremiumcomparable schedule Better mix ofpassengers than LCCsCONFIDENTIAL81
Network Carriers Still Command A Unit RevenuePremium Over LCCsUnit revenue advantage – network carriers vs. LCCsPercent313028272626262422141319929394959697989920000102ESource:Goldman Sachs; DOTCONFIDENTIAL82
In Summary, The Hub-And-Spoke Network ModelIs Still A Superior Operating Model For The AirlineIndustry Large, well-situated hubs provide superiorconnection service and traffic advantagesThe benefits of Broad and deep network builds Unitedthe networkbrand value(hub-and-spoke)model are “alive Increased connectivity provides market shareand well”advantage in markets where United providesmost capacityUnited mustmaintain its Efficiency of hub-and-spoke system allowsstrong networkhigher frequency of service between citiesto benefit fromthese effects Carriers with strong hub network benefit fromrevenue premiums and increased market shareCONFIDENTIAL83
Today’s Discussion Need for a portfolio of network products Case for a network business (“network tutorial”) –it still works Network product challenges–Alliances–Express–Mainline–LCC Restructuring program to address networkproduct challenges–Business Transformation Cost Improvements–SAM restructuring–1110 actions–CBA modifications Resulting outcome of restructuring program–Competitive offerings–Flexibility–Growth opportunitiesCONFIDENTIAL84
To Maximize Value Of The United NetworkEach Network Product Must Be Fully CompetitiveitUnited Critical that each networkiliMainlineproduct be fully competitive Synergistic relationshipbetween network productsdrives total profitability However, less competitivecomponents are vulnerable tolli/Alliance/itUnitedStrong networattack by niche competitorskcoderExpressSingle brand And, if the componentsrshareweaken, network valuewill weaken Today, each United networkproduct faces challenges Current path (“status quo”)itUnitedwill lead to continued valueLCCdestructionCONFIDENTIAL85
ILLUSTRATIVEProfitability Of Individual NetworkComponents Is Critical For Stability – ExcessiveMarket Cross-Subsidization Is UnsustainableTraffic flow: BWI-ORD (-25% local margin, +14% beyond margin)Current situationOverall passengers: 126 – 55% local, 45% beyondTop beyond destinations: SEA, LAX, PDX, SAN, SJC, MSP, SFO, DFW, MCI Cross-subsidization existsacross markets in a networkYVRbusinessGEGSEA Less profitable localPDXMSPsegments are maintained toATWBOIMSNGRRcontribute passengers to restCIDSBNOMAof networkSLCDENINDMCIBWICOS HoweveSMFr, if local profitabilitySTLSJCSGFdeclines sufficiently in theseLASsegments (., driven by LCCOKCcompetition), it becomes aLAXPHXSANDFWcandidate for exitIAH Disciplined capital investmentMSYSATlogic, applied over time, willlead to exiting of lessprofitable local segments . . . . . . leading to a shrinkingIn a network business, shrinking by exiting unprofitable local segments can have devastatingairlineeffects; an optimal and sustainable network business should strive for local market profitabilitywhile maintaining the connectivity benefitsCONFIDENTIAL86
United Currently Faces Significant ChallengesIn Each Potential Network ProductNetworkproductCompetitive deficienciesImplicationsAlliance/ Domestic and international restrictions Network voidsCode Share Limited revenue-sharing/blocked space Lost revenue opportunities Cargo restrictionsExpress Limited RJ fleet size Mismatched capacity with No jet aircraft >50 seatsdemand High cost Inferior product offering in many Route limitationsmarkets Lost market opportunitiesMainline High cost – unprofitable in most markets “Squeeze” markets Product offering not appropriate to Exit unprofitable marketscustomer demands in all markets Replace with Express/Code Share Unsustainable fare structureUnited LCC Not currently available Market cross-subsidization Do not serve markets Use Express/Code Share insteadCONFIDENTIAL87
United’s Restructuring Must Improve TheCompetitiveness And Performance Of EachNetwork ProductAlliances/Gain labor contract flexibility to facilitate participation in theCodesharegrowth of alliances, revenue sharing partnerships, and othercommercial arrangementsUnited ExpressGain labor contract relief to expand the RJ fleet and renegotiatecontracts to ensure competitive costsMainlineLower total costs to be competitive with lowest costmainline carrierUnited LCCLower total costs to be competitive with best-in-classLCC competitorCONFIDENTIAL88
ALLIANCES/CODESHARECHALLENGESCONFIDENTIAL89
Competitive Response Has Eroded United’sSubstantial Lead In Alliance/Codeshare AgreementsDeparturesDaily departures & destinations served through AlliancesDestinationsJanuary 1999January 200310,36710,6908,0607,782 United’s advantageis eroding2,9992,964Launched6/00 While the UScodeshare dealwill improve UA’sLaunchedposition . . .2/99721667 . . . potential522492CO/DL/NWcodesharing321322would counteractadvantages00Note:Star Alliance members include Air Canada, Air New Zealand, ANA, BMI, Austrian Airlines, SAS, Lufthansa,Mexicana, Singapore Airlines, Tyrolean Airlines, Lauda, Thai Airlines, and VarigCONFIDENTIAL90
Ability To Respond Effectively To Continued MarketChanges Is Key To Future CompetitivenessMarket trendsLimiting factors to United response Domestic alliances like United/US Labor contracts (scope clauses)Airways and Continental/Delta/limit ability to pursue code shareNorthwest are changing domesticrelationshipscompetitive environment Joint ventures are restricted by Revenue sharing/joint ventures arelabor issuesstrengthening alliance ties andincreasing their value Cargo alliances/joint ventures Full value potential of cargorepresent a potential untappedoperations restrained by limits onopportunity for the industryjoint ventures and outsourcingCreating flexibility through changes in labor contractsis important to United’s future profitabilityCONFIDENTIAL91
Challenges Facing United Cargo Highlight NeedFor Flexibility Yields continue to declineAir cargo carriers Integrators gaining share in mail and heavy freightthreatened by Customers demanding service improvements, integratedchanging conditionssolutions and broader product offering Freight forwarders own customer relationships Uncompetitive cost positionUnited Cargo not Narrow product offering and below best-in-classfavorably positionedservice reliability Significant investment required in back office processesand systems Limited access to capital given UAL bankruptcy filing Unable to leverage existing assets (., Asian routeauthorities, excess facility capacity, United Airlines brand)United Cargo must Compete with more sophisticated competitors on both costoverhaul businessand service standardsmodel to secure a Respond to changing customer needssustainable Break out of the negative spiral afflicting the industrycompetitive positionCONFIDENTIAL92
UNITED EXPRESSCHALLENGESCONFIDENTIAL93
United’s Current RJ Fleet Is Small Relative ToOverall Fleet, And Lags Competitors . . .Percent ofAirlineRJs in operationmainline fleet299Delta54Continental18850America West3323United12823US Airways7022AMR1692016Alaska16Northwest53121,015Industry30Source:SSB Fleet Handbook – April, 2002; UAX Master Fleet PlanCONFIDENTIAL94
United Runs The Risk Of Falling Further Behind AsCompetitors Aggressively Adopt 70-seat RJs . . .On handOn orderNumber of 70-seat aircraft58United cannot utilize70-Seat RJs basedon current scope30clauses25220DeltaAlaskaAmericanAmerica WestUnitedNote:In addition US Airways recently negotiated scope for 80 70-seat aircraftCONFIDENTIAL95
. . . That Fulfill An Important, Unmet Need InPassenger Demand And RangePassengers per departure – domestic UA mainlinePercent of flightsRange – 50-seat vs. 70-seat RJ50-seatrange 1,00019% onauticalf flights departwmilesith average loadsappropriate for 70-seat aircraft1313121099DEN866543270-seatRegional Jet<505060708090100110120130140150>150range 1,500nautical milesSource:PRS TME Nov 02; includes extra sectionsCONFIDENTIAL96
Additionally, United Express Carriers Are OperatingAbove Current Market CostsRegional jet fee per departure – UAX actual bid for 500-mile stage lengthDollarsDifference =3,5713,132 UAX carriers28%2,960charge a premium2,732to market rates2,565 Competitiveservice to Expressmarkets is ensuredby achieving costscomparable tocompetitorUAX 1UAX 2UAX 3Bid 1Bid 2Note:UAX carriers – ACA, Skywest, and Air WisconsinCONFIDENTIAL97
United’s Express Network Product Profitability WillBe Significantly Enhanced By Optimizing Fleet SizeAnd Mix, And Cost Labor contract scope relief needed to allowExpress RJ fleet expansion to optimize network Labor contract scope relief needed to ensure theintroduction of more RJs where economical UAX agreements renegotiation needed to bringdeparture fees in line with market ratesCONFIDENTIAL98
MAINLINE CHALLENGESCONFIDENTIAL99
United’s Mainline Has Achieved And Sustained ARevenue Premium Relative To The CompetitionUnitedStage length-adjusted unit revenueOA CompositeAdjusted RASMCents 12¢10¢8¢6¢4¢2¢0¢19801982198419861988199019921994199619982000Brand, schedule, frequent flyer program and product havegenerated tangible benefits for UnitedNote:OA includes majors with Southwest – Frontier and jetBlue are not includedCONFIDENTIAL100
However, United’s Mainline Costs Currently ExceedIts Revenues In Most Markets2002 actual RASM and CASM vs. stage length –all marketsCents50403020CASM10RASM005001,0001,5002,0002,5003,000Stage lengthCONFIDENTIAL101
United Faces A Significant Cost DisadvantageRelative To The CompetitionStage length adjusted unit cost – 1H ’sunit costsare 17%higher thanthe “best-in-class”mainlinecompetitorUAAACONWOAUSDL**ASHPF9B6WNcurrent* *UA mainline with actual stage length of 1,200 miles in 2002; adjusted for noncore subsidiaries, fuel hedging, special charges,Economy Plus seating and excludes aircraft financing effects**Cost at equivalent stage length; also adjusted for fuel hedging, special charges, and excludes aircraft financing effectsCONFIDENTIAL102
And Even With Expected Unit Revenue Growth,Contractual Path Costs Would Still ExceedRevenues In 20052005 RASM and Contractual Path CASM by stage lengthCents50Even with40increasingunit revenues,cost reduction30must be aCASMstrategic20imperative forthe United10RASMmainline005001,0001,5002,0002,5003,000Stage lengthCONFIDENTIAL103
Some Markets Have Significantly Lower Yields ThanOthers, And Face A More Significant Cost Challenge2002 Actual Yield vs. Stage LengthYield cents60504030Business markets(average yields: ¢)2010Price-sensitive/leisure markets (average yields: ¢)005001,0001,5002,0002,5003,0003,500Stage LengthCONFIDENTIAL104
In Summary, United Must Significantly Reduce ItsMainline Costs United has earned a revenue premium relativeto other carriers Costs today make most of United’s marketsunprofitable Even with expected unit revenue growth,contractual path costs would exceed revenuesin 2005 To be successful in medium-to-large marketswith a good mix of passengers, United mustachieve mainline costs that are competitivewith other carriers To be successful in other low-yield/price-sensitivemarkets, United will need to achieve additionalcost reductionsCONFIDENTIAL105
UNITED LCC CHALLENGESCONFIDENTIAL106
To Succeed In Lower Yielding Markets, United NeedsAn Offering Competitive With Best In Class LCCs United is uncompetitive in a number oflow yield markets Even with yield growth and mainlinecost reductions, United will continue toDevelop and launchbe uncompetitive in these marketsa fully competitivelow cost offering To compete in such markets Unitedneeds to develop a low cost offering andachieve a cost structure competitivewith LCCsCONFIDENTIAL107
There Is A Spectrum Of LCC Business Models FromWhich To ChooseShare ofLCC revenueKey model characteristics50% High asset utilization (aircraft, facilities, labor) Single fleet type – one class, high density Has evolved to “nearly” national footprint with multipleconnection nodes Simple product offering Value proposition for leisure and business segments Lowest overall unit cost5% Lowest labor cost Simple product offering Single fleet type, new aircraft Value proposition to attract “mixed” customer base Primarily NY-FL and transcon service45% Single hub-and-spoke network Single fleet type (except AirTran) Moderately low unit costs Used aircraft, older fleets – transitioning to new Focus on routes under major’s price umbrella Target leisure and cost-conscious business travelersCONFIDENTIAL108
LCC Models Have Evolved Over TimeExperimentationOpportunistic expansionSophisticationUsed low-price, efficientTransitioned to new LCCs launch withaircraftaircraft, increased fleetnew aircraft fleetssize(., jetBlue)Served local nicheBroader network service Increasingly servingmarketsintroducedtrans-con markets andexpanding to internationalleisure markets (.,Cancun)Offered point-to-pointExpanded network to Hub-and-spoke LCCs growservice to smaller airportsunderserved and over-priced marketsTargeted leisure segmentContinued to target Product offeringsleisure segmentincreasingly appeal tobusiness segmentCONFIDENTIAL109
Historically, All Major Carriers’ LCC Attempts HaveFailed Due To Lack Of Competitive Cost StructureCarrier-within-carrierLaunch & eventualLCC attemptsoutcomeKey reason cited for failure Launched in 1993“. . . the all-important low costs have Ceased operationsbeen elusive so far.”—Airlinein 1995 after losingBusiness (1/95)$120 million“. . . Shuttle by United was struggling Launched in 1994with high costs even before the Ceased operationsSeptember 11in 2001attacks.”—Washington Times(11/02) Launched in 1996“. . . it has not been as low-cost as Planned exit andhoped…its costs were allowed toreplacement bycreep up.”—Leo Mullin, CEOsubsidiary announcedin 2002 Launched in 1998“. . . it had high costs… while most Ceased operationsof it’s passengers were low-farein 2001paying, leisure flyers.”—SamButtrick (UBS Warburg)CONFIDENTIAL110
However, LCC Offerings Are Regaining PopularityWith Majors Who Are Striving To Achieve Separation Launched Zip this year as“Zip will allow us to participate insubsidiary to compete againstthe fastest growing and mostWestJetdynamic segment of the airline Costs are 30% below mainline andindustry today”—Robert Milton,Tango (low-cost division product)CEO Launched germanwings, a partially-“germanwings will not beowned subsidiary as an LCC inhampered (by mainline concerns,October, 2002as Lufthansa Airbus and Express Wholly and partly ownedwere) . . . and will therefore be ablesubsidiaries and other airlines willto enter the fray against the toughoperate thinner routeslow-cost competition.”—FlugRevue (10/02) New subsidiary low-cost offering“It’s going to be an organizationwill launch in 2003 servingthat will be an entity to itself . . .primarily leisure marketsindependent strategies and its own In 2004, Delta plans to evaluateidentity and culture”—Leo Mullin,adding the LCC product to its hubs,CEOincluding AtlantaCONFIDENTIAL111
Truly Separate Operation Is Necessary For TheSuccess Of A Major Carrier’s LCC“Must Haves” for LCC successWhy “separation” is important to achieveLower costs Enables more durable CBA for LCC operationCompetitive labor costs Facilitates single fleet deploymentCost benefits of simplificationUnique brand, marketing and promotion Reduces customer confusionTargeted at leisure/price-sensitive segment Increases customer excitement Manages customer expectations Facilitates tailored product offeringsDistinct employee culture and focus Increases management commitment –Entrepreneurial environmentIncreases “skin in the game”Maximum accountability Reduces distractions Allows for unique employee value propositionand separate profit sharingPotential for independent access to Creates separate legal entitycapital markets Increases credibility with capital marketsand competitors Enables funding of investment andgrowth independent of mainlineCONFIDENTIAL112
United LCC Concept Definition Low-cost, high-value airline targeting price-conscious business andiiVisionleisure travelers Alternative product offering to traditional mainline carriers, competingdirectly against low-cost carriers (Southwest, ATA, jetBlue, etc.) Operating in “commodity” markets where passenger mix/low-costrt/rtMarkets/routescarriers lead to below average yields Platform for entering low-yield markets not currently served by Mainline Critical components of customer value proposition will be low fares,rt ftr/Product features/reliability, consistent quality, and good customer serviceribranding Distinct sub-brand, livery, and culture Simplified “low-frills” product offering (., limited beverage service,exclusively e-ticket) Code share agreement will facilitate interline connectivity with UA Mileage Plus participation Separate operating entity, with distinct management team andrGovernancecoordinated interactions (., subsidiary) Profit-sharing opportunities Pricing, scheduling & marketing will be performed by mainline(similar to UAX agreements)CONFIDENTIAL113
United LCC Markets Will Be Selected On The BasisOf Lower Yields, LCC Presence, And TypicalPassenger Profile2002 Actual YieldYield Cents60504030Likely Mainline markets2010Likely LCC markets005001,0001,5002,0002,5003,0003,500Stage LengthCONFIDENTIAL114
There Are A Number Of Potentially AttractiveMarkets For United’s LCCANCSEAPDXMSPMHTDTWBDLORDCLEPVDCMHDENINDRNOMCISMFBWISTLOAKIADSFOLASABQPHXLAXSANMSYMCOSATTPAPBIRSWFLLMIASJUCONFIDENTIAL115
United LCC Operating Statistics – PreliminaryDomestic SystemUnited LCC – (June ’03)Steady StateComparisonFleet size428134~30% of domestic baseCities served8137~45% of existing citiesDaily ASMs~ 250,000~ 85,000~35% of domestic ASMsAverage stage ~ 1,140~ 900~240 miles hour per dayUtilizationincreaseHours per dayCONFIDENTIAL116
Today’s Discussion Need for a portfolio of network products Case for a network business (“network tutorial”) –it still works Network product challenges–Alliances–Express–Mainline–LCC Restructuring program to address networkproduct challenges–Business Transformation Cost Improvements–SAM restructuring–1110 actions–CBA modifications Resulting outcome of restructuring program–Competitive offerings–Flexibility–Growth opportunitiesCONFIDENTIAL117
Restructuring Program Must Address NetworkProduct ChallengesAlliances/ Gain flexibility to expand United’sCodeshareportfolio of alliances andPartner contractcodesharesnegotiations andCBA modificationsUnited Express Gain flexibility to optimize UnitedExpress network and reduce coststo be competitiveMainline Reduce costs to be fully competitiveProduction costwith best-in-class competitorsimperativeUnited LCC Launch LCC offering with fullycompetitive costsCONFIDENTIAL118
United Has Launched A Comprehensive RestructuringProgram Designed To Accomplish These ObjectivesStrategic objectives Competitive, durable mainline cost structure Competitive, durable LCC brand cost structure Flexible, profitable United Express network product Robust portfolio of alliances/codesharesBusinessSAM§1110CBALCC start-uptransformationrestructuringmodifications “$ billion” Significant Returned Scope clause Createprogramreduction-in-aircraftand work rulesubsidiaryforceflexibilityairline UAX contract Aircraft leaserenegotiations Wage andrenegotiations Productivity Develop LCCbenefitimprovementslabor terms Ongoingreductionsand conditionsperformance Wage and fringeimprovementreductions Launchplans (best-and grow Furloughspracticeoperationsprogram)CONFIDENTIAL119
Restructuring Program Must Address NetworkProduct ChallengesAlliances/ Gain flexibility to expand United’sCodeshareportfolio of alliances andcodesharest ttPartner contracttiti negotiations and ifitiCBA modificationsUnited Express Gain flexibility to optimize UnitedExpress network and reduce coststo be competitiveMainline Reduce costs to be fully competitivewith best-in-class competitorsProduction costimperativeUnited LCC Launch LCC offering with fullycompetitive costsCONFIDENTIAL120
United Must Obtain Scope Relief To Grow ARobust Portfolio Of Alliances And CodesharesUnited must fully participate in theCurrent key scopeCBA modificationsgrowth of the airline industry throughhurdles Gain scope flexibilitycodeshares and alliances Contractually limitedto allow UA to fullyability to expandparticipate incodesharescodeshare anddomestically (.,alliance growthNumber of daily destinationsbelow 1% of total Gain scope flexibilitythrough alliancesblock hours)UA/Starto enable potentialOther Limited ability tocargo joint venturealliance/codedevelop deeperJanshares7213321,053network partnerships99(., joint ventures,profit sharing)Jan2,0026671,33503CONFIDENTIAL121
United Express Contract Renegotiations And ScopeFlexibility Will Provide Significant BenefitsUnited must renegotiate its UAX contractsUnited must get relief from current scope hurdlesto current market rates No operation of jet aircraft over 50 seatsRegional jet fee per departure – UAX actual under current contractscompetitive bid for 500-mile stage length Capped at 65 incremental (without mainlineDollarsgrowth)3,5713,132 Mainline fleet and block hour minimums for RJ-28%utilization2,9602,7322,565UAX 1UAX 2UAX 3Bid 1Bid 2BCBA modificationsankruptcy enabled opportunity Eliminate m Renegotiating contracts will save Uainline fleet and block hournited $170milliominimumsn Eliminate RJ fleet size restrictions Eliminate RJ size restrictions (70-seat) Eliminate geographic restrictionsNote:UAX carriers – ACA, Skywest, and Air WisconsinCONFIDENTIAL122
Restructuring Program Must Address NetworkProduct ChallengesAlliances/ Gain flexibility to expand United’sCodeshareportfolio of alliances andcodesharesPartner contractnegotiations andCBA modificationsUnited Express Gain flexibility to optimize UnitedExpress network and reduce coststo be competitiveMainline Reduce costs to be fully competitiveProduction costwith best-in-class competitorsimperativeUnited LCC Launch LCC offering with fullycompetitive costsCONFIDENTIAL123
PRELIMINARYTo Develop Mainline Cost Target, CASM MustBe Adjusted To Be Comparable With CompetitorsNon-Labor1H 2002 forUnited industryAdjust forMainline CASMnon-coreEconomycomparableaircraft(1H 2002 – DOTsubsidiaryPlus seatmainlinefinancingForm 41)activity (UAFC)densityCASM (2002)effects**Exclusion of imputed interest on aircraft operating
United Needs To Achieve Fully CompetitiveCosts For The MainlineLabor costsStage length-adjusted unit cost – 1H 02Non-labor costsCentsTarget CASMfor UA –AACONWUS –DL**HPF9B6WNcurrent*post*UA mainline with actual stage length of 1,200 miles in 2002; adjusted for noncore subsidiaries, fuel hedging, special charges,Economy Plus seating and excludes aircraft financing effects**Cost at equivalent stage length; also adjusted for fuel hedging, special charges, and excludes aircraft financing effectsCONFIDENTIAL125
PRELIMINARYRestructuring Program Must Deliver A Cost-Competitive Mainline By 2005LaborNonlaborCASM – stage-length adjustedCentsUnited Mainline Status quo will lead tomust close a 25%higher mainline costs(¢) CASM gap the industry (duematch contractual path ) However, is mainline carriersto aggressively Best-in-class competitorin 2005 is assumed tohave the same nominalAdjustedUnitedBusinessSAM§1110CBARestruc-Best-in-mainlineMainlinetrans-restruc-benefitssavingsturedclassCASM as 2002CASM2005formationturingMainlinenetwork(1H 2002)(withoutprogrambenefits2005carrierchanges)benefits(2002 and2005)CASMs at equivalent stage length; also adjusted for fuel hedging, special charges, aircraft financing effects andEconomy Plus seating densityCONFIDENTIAL126
United’s Business Transformation Program IsOn Track To Deliver Target Savings2005 expectedexpense impactDescription$ Millions United is on track Major cost reduction programs, .,tCostto capture $390–MaintenancetiReductionmillion in overall–Fuel purchasing/ consumptioniSavingscost reduction–Purchasing effectiveness680savings Company-wide productivity program, .,–Change in aircraft cleaning procedures Business–Change in food service levelsTransformation–Market spend effectivenessOffice (BTO) andprogrammanagement Revenue programs, .,rIIncreasedstructure in place–US Airways codeshare(290)ril tvariable costs–Increased RJ usage Talented leaders tdue to–Lufthansa codeshare expansionare drivingtrtistrategic individualrrevenueprogramsienhancingrjtprojectsTotal390CONFIDENTIAL127
United Will Continue To Identify And CaptureAdditional Savings In Phase 2 Of The BusinessTransformation Programit i ttiUnited is targeting illi i itil$400 million in additionalt ti ibest practice savingsPhase I cost savings ll f itUnited must continueacross all areas of itsare not suti, ..,fficient toto improve its costoperations, .,achieve overalit til beststructure to remain Airport operationspractices in alitlcompetitive as other Maintenanceititifunctionscarriers cut costs Distributionlit Flight ops- i On-board servicest Others Phase 1 and Phase i f 2 savings of $790illi i million in 2005 or. ¢ CASMCONFIDENTIAL128
SAM Restructuring: United Has Taken AComprehensive Approach To StreamliningManagementPerformance/skill-based Redeployment Review changesOrganizationalComprehensive against incumbentTalent pooldesignreview Coordinatedselection process Clean sheet Performance tool CentrallyReduction in forceredesign ofused to makemanagedorganization toretention“skills Transition assistancesupport forecastdecisionsinventory” Exit by January 30business–Evaluatesdatabase Ongoing exercise–Departmentemployeesby HReliminationbased on skills, Organization–Functionalqualifications,gap/surplusconsolidationand experienceanalysis–Incorporates2001/2002performanceevaluation dataCONFIDENTIAL129
PRELIMINARYUnited’s Salary And ManagementRestructuring Program Will Contribute$350 Million In 2005 Cost SavingsCost savingsProgram initiativesImpac$ Millionst United’scurrent SAMSAM furloughs 1,000 positions80restructuringthrough reduction-in-yieldsforce by March 2003substantialbenefitsSalary reductions 7% average reduction170 $350 millionin salaryin 2005 costsavingsBenefits savings 33% reduction in100translatebenefits expenseinto ¢driven by new benefitin CASMplan350impactCONFIDENTIAL130
§1110 Restructuring Actions Will DeliverAdditional CASM ReductionsCASMimpact2005 costsavings United’s §1110 process$ Millions§1110 impactis ongoing withuncertain outcomes225Operating cost reductions United’s §1110 processis expected to generate225Interest expense benefitsover $500 million inOther (., aircraft eliminated from fleet) 50gross annual savings Of this, approximately500Gross §1110 savings$225 million is operatingcost reductions,reducing CASM by ¢CONFIDENTIAL131
CBA Cost Reductions: Guiding Principles Focus first on reducing inefficiencies(., elimination of unproductive time)To be achieved using Establish industry-leading productivitya durable mix of wage,levels in critical functions (achieve cost-benefit, work rule, andcompetitiveness, or outsource noncorescope changesfunctions)Question: Does this Provide competitive compensation andapproach result inequitable benefits across all employeesbest-in-class CASMlevels? Ensure that contractual changes result indurability and enable strategic flexibilityCONFIDENTIAL132
NOT EXHAUSTIVEKey CBA Modifications That Focus OnReducing Inefficiencies Eliminate vacation overlapALPA Eliminate under 8 hr augmentation Create international relief pilot position Eliminate requirement for downtown hotels Rationalize number of training events to correspond to current needs Permit 1 day international layoversAFA Combine domestic and international reserve pools Eliminate vacation overlap Eliminate requirement for downtown hotels Company to control distribution of open flying Retain part-time positions while eliminating full-time positionsI IAM 141 Phased outsourcing of less complex reservations Eliminate outsourcing restrictions Modify furlough protection Eliminate pay for unrequired licensestl itI Total impactIAM 141M Increase the lead mechanic ratio illi*$370 million* Outsource less complex component maintenance Solve competitive disadvantage in cabin service Eliminate receipt and dispatch requirement Permit maintenance base rationalization*Average annual number, 2003-2009 of CBA savings for this categoryCONFIDENTIAL133
NOT EXHAUSTIVEKey CBA Modifications Elements ThatTarget Industry-Leading Productivity Minimum guarantee 60 hoursALPA Institute preferential bidding 92-hour monthly maximum Reduce minimum monthly reserve days off to 12 and make 4 moveable Reduce lineholder minimum days off to 10 per month Eliminate duty rigs Eliminate lineholder reassignment restrictionsAFA Institute preferential bidding Increase monthly maximum line averages by 5 hours Establish 4 moveable reserve days off per month Increase maximum scheduled reserve hours by five hours per month Eliminate duty rigs Permit greater use of part-time ramp employeesI IAM 141 Cost-competitive cargo warehousingtl itTotal impact illi*$240 million* Right-size heavy maintenanceI IAM 141M Eliminate furlough protectionlrl All groups*Average annual number, 2003-2009 of total CBA savings for this categoryCONFIDENTIAL134
Key CBA Modifications That TargetCompetitive BenefitsExample of current United1H2002 benefits cost*benefitsKey required elementsStage length adjusted 11% B-plan for pilots Common defined pensionbenefit Defined benefit multiplier is Common 401(k) matchnot consistent No Non-contributory medical 20% all Medical plans not Common national across groupsplan for all itF9Total impact illi**$430 million** *Benefits cost excluding payroll taxes and personnel expense**Average annual number, 2003-2009 of total CBA savings for this categoryCONFIDENTIAL135
Key CBA Modifications That Target CompetitiveWage LevelsWagesALPA 29% initial cut with % increases starting 2004 Eliminate premium pay categories (., international,night pay)WagesAFA 9% initial cut with % increases starting 2004 Eliminate/reduce pay overrides and international pay rate Eliminate lump-sum paymentsWagesI IAM 141 13% initial cut with % increases starting 2004 Ramp pay scale to 10 yearsWagesI IAM 141M 13% initial cut % increases starting 2004 Eliminate pay for unrequired licensestl itTotal impact,$1,230 Eliminate contractual pay rate increasesil*lilrl million*All groups Establish profit/gain-sharing plan*Average annual number, 2003-2009 of total CBA savings for this categoryCONFIDENTIAL136
PRELIMINARYTotal CBA Restructuring Impact*2003-09 average annual expense reductions from contractual path$ MillionsTotalCommentsWages1,230 Achieve competitive wagelevelsBenefits430 Common benefits planacross all groupsReduced610 Target industry leadinginefficiencies &productivity improvementsimproved Increased flexibility toproductivityrespond to changingmarket conditionsTotal2,270***Labor savings are net of increase in purchased services due to outsourcing**Does not include $350 million SAM savings; reflects valuation assumptions from week of 1/20/03Source: WHQCJCONFIDENTIAL137
PRELIMINARYRestructuring Program Will Yield A Near-Best-In-Class CASM By 2005LaborStage length-adjusted CASM; §1110CBARestruc-Best-in-quotrans-restruc-benefitssavingsturedclassMainlineformationturingMainlinenetwork(2005)projects2005carrier(2005)Note:Mainline CASM in 2005 includes all markets; excludes noncore subsidiary activity (. UAFC) and aircraft financing effectsCONFIDENTIAL138
PRELIMINARYUnited’s Cost Restructuring Program WillResult In Some Markets That Are StillUnprofitable2005 RASM and CASMCents3530RASM for unprofitable markets25After restructuring,approximately 30%20CASM curve for status-quo Mainlineof markets are still15unprofitable105CASM curve for restructured Mainline005001,0001,5002,0002,5003,000Stage lengthMilesCONFIDENTIAL139
Restructuring Program Must Address NetworkProduct ChallengesAlliances/ Gain flexibility to expand United’sCodeshareportfolio of alliances andPartner contractcodesharesnegotiations andCBA modificationUnited Express Gain flexibility to optimize UnitedExpress network to reduce costs tocompetitive levelsMainline Reduce costs to be fully competitivewith best-in-class competitorsProduction costimperativeUnited LCC Launch LCC offering with fullycompetitive costsCONFIDENTIAL140
Creating A United LCC Start-Up: Guiding PrinciplesPrinciplesResulting actionsCredible with Target CASM levels competitivecapital marketswith Southwestand competitors Create separate operating entitywith competitive LCC costsUnited LCC mustOperation and Craft competitive wages and benefitsbe built from theCASM on parfor employeesground-up as awith best LCCs Generate single fleet efficienciescompetitive new Leverage increased asset utilizationentrant to the LCCand LCC operating characteristicsmarket Realign product levels to be LCC-competitive Execute with operational excellenceLeverage UA Design for seamless connectivityproductacross all United network productsnetworkCONFIDENTIAL141
However, The United LCC Will Have Some DistinctFeatures As A Part Of United’s Network PortfolioitUnited Target competitiveiliMainlineCASM levels Markets of deployment willlikely have stage lengthhigher than Southwest, butlower than mainline Unitedlli/Alliance/tr tritStrong networkUnited Serving as an extensioncodeil rSingle brandLCCrof United’s network resultssharein CASM premium ( fees at primaryairports, etc.) . . . . . . however, connectionitwith United network andUnitedrbrand will also commandExpressa RASM premiumCONFIDENTIAL142
PRELIMINARYCASM Target Development For United’s LCCStart-UpLaborNon-laborIril tr-rlt riIncompressible network-related CASM premiumsCASM rilit t li f Facility rents and landing feesCents rll tiiti Full CRS participation rrt itrtil ii Prorated international -in-classBest-in-classNominal costAdjustment toUnited LCCUnited LCCLCC competitor –LCC at Unitedgrowth to 2005United LCCincompressibleCASM targetSouthwestmainline stagestage lengthnetwork-(2005)(DOT Form 41lengthrelated costs2002 1H)(2002 1H)CONFIDENTIAL143
United LCC Must Have Labor Terms And ConditionsThat Are Competitive With Low-Cost Carriers Wage premium to lowest cost LCCcompetitorsWages Profit sharing plan lUAL launches tt-LCC start-up Best benefits practices in marketplace ffand offersfit–401(k) plan with match (only)Benefitsltemployment–Paid time off competitive with other LCCttcontracts–Medical, dental and other insurance costtiticompetitivecompetitive with LCCit with LCCs Work rules comparable with other LCCs lWork rulesCONFIDENTIAL144
PRELIMINARYAdditionally, United LCC Will LeverageOperational Efficiencies Inherent To TheLCC Operating ModelOperational standardsMeasureIncreased asset Increased departuresutilization Increased hours flown/day Higher seat densityLCC cost reductions Reduced meal cost Reduced crew travel costsIncreased labor Flight crew works more productive hoursproductivity Increased utilization of ground employees Cross-utilization of ground employees Reduced pilot training due to singlefleet typeCONFIDENTIAL145
PRELIMINARYNetwork, Operational And Labor ElementsWill Allow United LCC To Achieve ’s LCC a competitiveCASM by building best-in-class labor and non-labor cost structuresfrom the ground -laborUnited LCClabor CASMcompetitiveCASM Targetachievedcosts(2005)through newachievedlabor contractsthroughoperationalefficienciesCONFIDENTIAL146
Today’s Discussion Need for a portfolio of network products Case for a network business (“network tutorial”) –it still works Network product challenges–Alliances–Express–Mainline–LCC Restructuring program to address networkproduct challenges–Business Transformation Cost Improvements–SAM restructuring–1110 actions–CBA modifications Resulting outcome of restructuring program–Competitive offerings–Flexibility–Growth opportunitiesCONFIDENTIAL147
Resulting Restructuring OutcomeFully CompetitiveSuite of ProfitableNetwork ProductsSuccessfulRestructuringProgramFlexibility toRespond toGrowth PlatformDifferent MarketConditionsCONFIDENTIAL148
With Restructured Costs, Revenues Will ExceedCosts Across Mainline Markets By 2005RASMCASM2005 Projected RASM and CASM vs. stage length – mainlineCents5040302010005001,0001,5002,0002,5003,000Stage LengthCONFIDENTIAL149
In United’s LCC Markets, Revenues Will AlsoExceed Restructured CostsRASMCASM2005 Projected RASM and CASM vs. stage length – United LCCCents50403020RASM best-fit curve10CASM best-fit curve005001,0001,5002,0002,500Stage lengthCONFIDENTIAL150
Restructuring Program Results In A Fully CompetitiveProduct Portfolio That Strengthens An Already StrongUnited NetworkCompetitive mainline costitUnitedstructure operating iniliMainlinehigh-yield, businessdominated marketslli/itAlliance/tr trUnitedStrong network rrcode shareil rExpressSingle brandFlexibility toCompetitive Expressparticipate in andoffering that cangrow alliances/grow at better thancodeshareaverage ratesagreementsti United LCCCompetitive low-cost offeringthat operates profitably inlow-yield marketsCONFIDENTIAL151
Multiple Network Products Provide Flexibility ToRespond To Uncertain Market ConditionsPotential industry scenarioLower network carrier mainlineNetworkExplosive LCC growth; PAX unwillingness tocosts lead to stalled LCC growth andProductpay for premium productresurgence in mainline demandMainlineSHRINKGROW Routes exited/reassigned Scheduled aircraft deliveries taken by mainline Further cost reductions necessary Some reassigned routes may return tomainlineExpressGROWGROW Increased role of 70 seat RJs More city pairs become supportable Increased replacement of mainlineLCCGROWGROW AND FLATTEN More markets low yielding Increase in profitability due to system-wide Low-end traffic further stimulation“rising tide” and value of connecting trafficAlliances/otherGROWGROWCode Share Increased role of low cost, niche providers Increased benefits of OA codes on UA flights Potential addition of other LCC affiliatesCONFIDENTIAL152
Multiple Network Products Well Positioned ToCapture Growth OpportunitiesCapture “network” benefits ofitUnitedcompetitive and growing feediliMainlineproducts (., LCC, Express)lli/itAlliance/Unitedt Growth Loop code shareExpressIncreased accessAbility to expandto domestic andthe size of theinternationalExpress networkcodesharing(competitive costs,itUnitedopportunitiesscope relief)LCCthrough scopereliefAbility to enternew marketsCONFIDENTIAL153
Plan For Transformation: Agenda Process To Date Overview of Strategic Challenges and Need Doug Hackerfor Transformation Customer Value Proposition Scott Praven Network Products and Cost Restructuring Greg Taylor, Scott Brandt Capital Markets Requirements and Financial Jake BraceOutlook People Strategy and Employee Value Sara FieldsProposition Strategy Summary Doug Hacker 2003 Goals and Budget Pete McDonald,Jake BraceCONFIDENTIAL154
Capital market challenges and financialrequirements for United’s planFinancial plan and outlookCONFIDENTIAL155
Capital Market Challenges and FinancialRequirements for United’s Plan Airline industry has destroyed shareholder value over thepast several years More recently, creditor losses have mounted leading torestricted access to debt markets With the exception of Southwest, no carrier has earned itscost of capital over an entire industry cycle To attract capital and obtain exit financing, United mustset and achieve financial targets that will meet investorrequirementsCONFIDENTIAL156
. Airline Industry Has Failed to Earn Its Cost OfCapital Over The Long Run . . .Median ROIC* 1985-2001PercentAverageWACC** 1010= %99888887777ROIC “gap”Average5ROIC =%321858687888990919293949596979899002001*Median of US Airline Industry ROIC; ROIC including capitalized operating leases**Estimated average WACC from Stern Stewart research (9/2000)Source:McKinsey analysisCONFIDENTIAL157
. . . Leading To Sector UnderperformanceRelative To The MarketTotal shareholder return – 1982-2001Return Index, 100 = January 19822,5002,000S&P 5001,500S&P1,000Airlines50001/1/821/1/851/1/881/1/911/1/941/1/971/1/00CONFIDENTIAL158
Capital Market Challenges and FinancialRequirements for United’s Plan Airline industry has destroyed shareholder value over thepast several years More recently, creditor losses have mounted leading torestricted access to debt markets With the exception of Southwest, no carrier has earned itscost of capital over an entire industry cycle To attract capital and obtain exit financing, United mustset and achieve financial targets that will meet investorrequirementsCONFIDENTIAL159
Increasingly, Even Airline Creditors Are ComingUnder Pressure And Enduring LossesDebt ratings across theindustry have worsenedDebt issuanceis downCurrent “incumbent” debttrading at discountsEvidence ofAnd, mostcreditorcarriers havepressuresincreasinglyCollateral values arerestricteddecliningaccess to debtmarketsBankruptcies and creditorlossesCONFIDENTIAL160
Capital Market Challenges and FinancialRequirements for United’s Plan Airline industry has destroyed shareholder value over thepast several years More recently, creditor losses have mounted leading torestricted access to debt markets With the exception of Southwest, no carrier has earned itscost of capital over an entire industry cycle To attract capital and obtain exit financing, United mustset and achieve financial targets that will meet investorrequirementsCONFIDENTIAL161
Only Southwest Has Created Significant ShareholderValue Over TimeTotal Return to Shareholders index=100, CAGR in %% CAGR Almost all major300airlines havedestroyed250shareholder value200 Only Southwesthas created150significantMajorsshare holder100(UA, AA, DL, % CO, NW, US, HP)CAGR500Sep-94Sep-96Sep-98Sep-00Sep-02CONFIDENTIAL162
Southwest’s Best-In-Class Costs Lead To OperatingMargins That Are Well Above Network CarriersDomestic division operating marginPercent25 Southwest has the lowestSouthwestcost structure in the industry,15driven by low labor costs andoperating efficiencies5 Only Southwesthas been able to maintainprofitability through good-5times and badNetwork Its operating margin acrossCarriers*-15the last business cycle hasaveraged 13%, well aboveindustry profit levels-251980198419881992199620002002*America West, American, Continental, Northwest, United, US Airways Source:DOT Form 41 via BACK Aviation SolutionsCONFIDENTIAL163
Southwest’s Return on Capital Has Been MuchHigher Than The Industry Cost Of CapitalROICPercent13131313tt12SouthwestI*ROIC*.%10101010These financial9results driveItrIndustrySouthwest’s**WACC**%shareholderresults,attractinglong-termequity investors1992199319941995199619971998199920002001 *Southwest ROIC, including capitalized operating leases**Estimated average WACC for airline industry since 1985, including capitalized operating leasesCONFIDENTIAL164
Southwest’s Credit Rating Has Remained StableThroughout The CycleSouthwest vs. network carriers – credit ratingsASouthwestBBB+BBB- SouthwestBBAmericancredit ratingsContinentalhave remainedB+stable,B-keeping theirborrowingDUnitedcosts low and19921993199419951996199719981999200020012002stableLeverage ratio FinancingDebt / (Debt+Equity)needs are less100%dependent onUniteddebt – a moreContinental80%conservativebalance sheet60%than the restof the industry40%American20%Southwest0%19921993199419961996199719981999200020012002CONFIDENTIAL165
In Summary, Southwest’s Financial Metrics SetThe Capital Markets Standard For The Rest OfThe Airline SectorSuperior returnsStrong and stable credit ratings(ROIC>WACC)Southwest: %Southwest: A/A-Southwest enjoysRest ofRest of Belowaccess to all areasIndustry: %Industry: investment gradeof the capital marketsRest of the industryhas to rely on “tailored”financing instruments“Best-in-class” cost positionCritical to set targetsthat are comparable toSouthwest CASM: Lowest in Southwest in terms of industryvalue creation abilityRest of industry: Network carriers 60-90% higher; other LCCs 10-30% higherCONFIDENTIAL166
Capital Market Challenges and FinancialRequirements for United’s Plan Airline industry has destroyed shareholder value over thepast several years More recently, creditor losses have mounted leading torestricted access to debt markets With the exception of Southwest, no carrier has earned itscost of capital over an entire industry cycle To attract capital and obtain exit financing, United mustset and achieve financial targets that will meet investorrequirementsCONFIDENTIAL167
United Must Set And Achieve Robust FinancialTargets To Attract Capital InvestorsCreate shareholder valueMaintain creditworthiness ROIC > WACC “Cusp of Investment Grade”debt rating (BBB- /BB+)Target financials ROIC Credit Rating CASMAchieve “best-in-class” costs Competitive mainline CASMwith best-in-class mainlinecarriers Competitive LCC CASM withbest-in-class LCCsCONFIDENTIAL168
United’s Financial Targets: Steady StateCreate shareholder valueMaintain creditworthiness ROIC > WACC “Cusp of Investment Grade”debt rating (BBB- /BB+)Target financials ROIC > % BBB-/BB+ rating Competitive mainlineCASM Competitive LCC CASMAchieve “best-in-class” costs Competitive mainline CASMwith best-in-class mainlinecarriers Competitive LCC CASM withbest-in-class LCCsCONFIDENTIAL169
Capital market challenges and financialrequirements for United’s planFinancial plan and outlookCONFIDENTIAL170
United’s Strategy Is Designed To Drive StrongFinancial Performance And Enable United ToAchieve Its TargetsUnited’s strategy . . .. . . designed to drive durablefinancial resultsCompetitiveitUnitedcostsiliMainline ROIC > WACC (over thebusiness cycle) Creditworthiness (cuspof investment grade)ltrrl ti/itAllStrong networkiance/Unitedrril r Single brandcode shareExpress Cost competitiveness (best-GrowthCompetitivein-class mainline, LCC costs)opportunitiescosts andgrowthflexibilityitUnitedLCCCompetitivecostsCONFIDENTIAL171
Strategic Plan Financial Outlook We have developed a 6-year financial outlook for ourstrategic plan It is important to recognize that this is based onassumptions about critical variables that are highlyuncertain at this time– CBA outcome on labor costs– 1110 outcome on fleet costs– Exit Plan capital structure At this stage, we have made simplifying assumptionsfor modeling purposes in some areas (., LCC costs,capital structure) We will continue to refine our assumptions and the planCONFIDENTIAL172
High-level Capital Structure Assumptions And BalanceSheet Outlook Capital structure assumptions are very preliminary, pendingresolution of 1110 process and eventual plan of reorganization–1110 mark-to-market savings assumed for on and off-balancesheet debt–On balance sheet secured debt assumed to be “haircut” by 25%–Unsecured debt and preferred assumed converted to equity–Municipal debt assumed to be “haircut” by 25% (pending legalreview) "Fresh start" and other reorganization impacts based on illustrativeenterprise valuation of 5 times 2004 EBITDAR No assumptions have been made regarding the size/nature ofclaims or eventual distributions under the plan of reorganizationCONFIDENTIAL173
Strategic Plan Financial HighlightsEven under conservative revenue andeconomic recovery assumptions . . . We return to profitability by 2004 Mainline and LCC product lines showacceptable levels of profitability (minimizesResults in a crediblecross-subsidization in network)business plan forthe capital markets We achieve our financial targets as acompany– Average ROIC > WACC– Creditworthiness– Cost competitivenessCONFIDENTIAL174
Financial Outlook Elements2003-2008 financials Fleet Plan Product Line P&Ls Capacity Plan(Mainline, LCC) Revenue Assumptions Company P&L Expense Assumptions ROIC, creditworthinesscalculations and comparison Profit-sharing Assumptionsagainst targetsCONFIDENTIAL175
6-Year Fleet Plan Reallocates Fleet Among United’sNetwork Product Offerings2003 Network Fleet2008 Network FleetUnited MainlineUnited LCCNarrowbodyNarrowbodyUnited134Express RJs199241United MainlineNarrowbody408275118United MainlineUnited119WidebodyExpress RJsUnited MainlineWidebody Primary focus: reallocation of fleet among United’s networkproduct offerings (Mainline, LCC, Express) United LCC grows to 134 narrowbody aircraft by 2008 United’s overall narrowbody fleet size is reduced by 33 over theperiod (replaced by RJs)CONFIDENTIAL176
Network Capacity Is Assumed To GrowConservatively2003 Network Capacity2008 Network Capacity149 billion ASMs160 billion ASMsUnited ExpressUnited LCC1029United Express16115United Mainline139United Mainline United LCC ramps to 20% of system ASMs by 2008 (ramp-instarts January 2004) ASM growth modeled is conservative (potential for additionalgrowth depending on market conditions and competitivenessof products)CONFIDENTIAL177
600230020002799149911991889158912891Revenue Assumptions Reflect A MoreConservative OutlookRevised financials reflectSystem Passenger Revenue significantly more$Billions ATSB, DIPconservative short-termlenders and Wall$25revenue outlook andStreet were6/24long-term recoveryskeptical ofForecast$20business planassumptions10/22submitted to theForecast % core passenger$15ATSBCurrentRASM growthActualForecast Revenue plan$10 Strategic revenuefeedback:initiatives ( RASM–Overly$5CAGR %codeshare and A+)optimisticramp into coreview on$0 passenger revenuesrevenuegrowthin out years ascompetitors match–Under-estimation ofRevenues were modeledLCC impactby product line to reflectdemand and networkcharacteristics (mainline,LCC, Express)CONFIDENTIAL178
Expense Assumptions Reflect Impact Of OngoingCost And Productivity Programs Fuel price forecast based on January WEFA forecasts Term sheet wage rate growth (% annual increase beginningin 2004) Non-labor, non-fuel price growth at January WEFA inflationforecast Business transformation cost savings assumed to ramp-in andachieve full run-rate by 2005 (Phase 1 projects, company-wideproductivity actions, and additional best-practice programs) Labor savings reflect–Mainline CBA modification-based cost reductions–Incremental United LCC labor contributions–SAM restructuring, salary and benefits reductions–Profit sharing offset assumedCONFIDENTIAL179
Business Plan Financial Results: United MainlineTotal revenues – excluding UAFC$ United Mainline200320042005200620072008returns to profitabilityin 2004 and isPassengerprofitable thereafterRASM CAGR*–Movement ofPercentlower-yieldmarkets to UnitedLCC producesPretax earnings – excluding UAFCfavorable margin$ Profit sharing payouts of $ annually in2005 and thereafter200320042005200620072008Pretax margin-12611131313Percent*Mainline includes net UAX contributionCONFIDENTIAL180
Business Plan Financial Results: United LCCTotal revenues – excludes UAFC$ - United LCC achievesprofitability in its initial200320042005200620072008year of operationPassengerbased on initialRASM CAGRmarkets –Fully ramped-inoperations by 2007–Margins are in thePretax earnings – excludes UAFCrange of Southwest$ Profit sharing payout in $40 million in 2005 - 200320042005200620072008Pretax margin–1713141315PercentCONFIDENTIAL181
Business Plan Financial Results: UAL CorporationTotal revenues – excludes UAFC$ returns toprofitability in 2004and is profitablePretax earnings - excludes UAFCthereafter$ margin-12712131314PercentCONFIDENTIAL182
How Well Does The Plan Meet United’sFinancial Targets?Create shareholder valueMaintain creditworthiness “Cusp of Investment Grade” ROIC > WACCdebt rating (BBB- /BB+)Target financials ROIC > % BBB-/BB+ rating Competitive mainlineCASM Competitive LCCCASMAchieve “best-in-class” costs Competitive mainline CASMwith best-in-class mainlinecarriers Competitive LCC CASM withbest-in-class LCCsCONFIDENTIAL183
Long-Term Financial Imperative:Shareholder Value GenerationReturn on invested capitalPercentAverage ROIC 2005-08 = 10% estimatedWACC = 9% United ROIC exceeds WACC over the 2005-08 period Further analysis required to refine estimate of United’s futureWACC upon exit and thereafterCONFIDENTIAL184
Long-Term Financial Imperative:CreditworthinessFunds flow to total debt ratio (FFTD) is a key determinant of credit ratings for airlines35%30%Target25%FFTD Range22% to 25%20%15%10%5%0%2002200320042005200620072008Debt to totalcapitalization*1019871645854Percent*(Debt + PV of Operating Leases – Unrestricted Cash + Pension Liability + Benefit Liability) / (Debt + PV of Operating Leases – Unrestricted CashPension Liability + Benefit Liability + Equity + Deferred Gains)CONFIDENTIAL185Funds Flow to Total Debt
United Achieves Cost Competitiveness Across itsLabor costsProduct LinesNon-labor costsUnited Mainline achieves best-in-class network carrier costsUnited LCC achieves competitive LCC costsCASM – 1H – 2005 atNetworkUA LCCUA –AACONWUS –DL**UA – post*UA LCCrelated CASMCASM -current*poststage lengthpremium2005 *UA mainline with actual stage length of 1,200 miles in 2002; adjusted for noncore subsidiaries, fuel hedging, special charges, Economy Plus seating and excludesaircraft financing effects**Cost at equivalent stage length; also adjusted for fuel hedging, special charges, and excludes aircraft financing effectsCONFIDENTIAL186
Strategic Plan Financial SummaryEven under conservative revenue andeconomic recovery assumptions . . . We return to profitability by 2004 Mainline and LCC product lines showResults in a credibleacceptable levels of profitability (minimizesbusiness plan forcross-subsidization in network)the capital markets We achieve our financial targets as acompany– Average ROIC > WACC– Creditworthiness– Cost competitivenessCONFIDENTIAL187
Plan For Transformation: Agenda Process To Date Overview of Strategic Challenges and Need Doug Hackerfor Transformation Customer Value Proposition Scott Praven Network Products and Cost Restructuring Greg Taylor, Scott Brandt Capital Markets Requirements and Financial Jake BraceOutlook People Strategy and Employee Value Sara FieldsProposition Strategy Summary Doug Hacker 2003 Goals and Budget Pete McDonald,Jake BraceCONFIDENTIAL188
Summary Effective people strategy and strong leadership are fundamental to thesuccess of our transformation plan–Successful business outcomes requires alignment between all keyconstituencies–Our customers and capital markets demand better alignment–Transformation strategy has created additional challenges–People strategy is critical to ensure desired business outcomes–Leadership has the responsibility to lead execution of the people strategy,and set the direction for an attractive Employee Value Proposition Our employee engagement work provides the fact-base for developing thepeople strategy–Engagement is strongly correlated with business outcomes–Survey findings define the current state/gaps–Focus groups identify causal relationships and suggest corrective actions Our people strategy recommendations demand improvements in 2 areas, andinforms the development of our Employee Value Proposition–Required improvements in leader behaviors–Necessary changes for a performance orientation–Critical elements of our Employee Value PropositionCONFIDENTIAL189
United Needs Alignment Between All KeyConstituencies To Deliver The Business Results“When service companies put employees andcustomers first, they achieve great success”Employees“UA is a greatplace to work”Customers“UA is my carrier ofchoice”Leadership“Our employeesCapital Marketsare our greatest“UA is a companyasset”worth investing in”Unions“UA creates mutuallybeneficial relationshipswith our members”CONFIDENTIAL190
Our Customers and Capital Markets Have ClearlySignaled The Need For Better AlignmentCapital marketsCustomersAirline delivers “good value for money”Percent %%value (CAGR)*ROIC** HighestLowest2520UAAACOF6WNDebt ratingDA/A-“Business plan does not position UA to meet“It is just more difficult to be loyal (to UA). Thethe challenges of the current industryagent at SFO must have learned customerenvironment”service from the IRS”ATSBMedford-based 1K*CAGR1994-2002**ROIC 1992-2001Source:Domestic Brand Monitor 3Q 02 National Sample of 6+ Flyers (NY sample for jetBlue)CONFIDENTIAL191
Our Customers and Capital Markets Demand ATransformation Strategy Which Creates AdditionalChallenges for Alignment Market conditions dictate new strategic imperativesriLeadership New customer value proposition–Family of products Customers are–Brand strategy that leverages and links product familyuncertain about our–Distinctive service orientationability to New cost imperatives–Successfully–Individually competitive network componentsnavigate–Market competitive costsbusiness–Industry leading productivitychallenges–Strategic flexibility to optimize network–Deliver anattractive Business challenges drive contract restructuringcustomer valueiUnions–Labor requirements/approach are significantly different from thepropositionpast–Difficult balance between meeting market-based requirements Capital markets areand protecting advantageous contract termsuncertain about our–Negotiations under time pressureability to generateappropriate return Changes across all elements of the Employee Value Propositionon invested capitallEmployees–Compensation and benefits lowered from industry leading tocompetitive–Productivity requirements simultaneously drive more work–Service orientation demands excellence in service delivery–Performance culture introduces accountability for our behaviorsCONFIDENTIAL192
To Create Alignment, Each Key Constituency HasTo Honor Their Responsibilities Clearly articulate the vision for the businessriLeadershipand cultureCustomers Develop a robust business strategy and Recognizecompelling customer value propositionsuperior value Develop an attractive employee valuedeliveryproposition that creates alignment between Reward theemployees and companycompany withloyalty Understand the market conditions that drivesiUnions Drive companythe business strategyprofitability and Confirm that the business strategy createsgrowthmutual benefits for the company and theirmembership through constructive,fact-based dialogueCapital Markets Align with the company to motivate Believe anemployees and increase engagementappropriate returnon investment can Understand own roles and responsibilities be realizedlEmployees Practice the behaviors that are required by the Provide UA withbusiness strategy and customerrequired capitalvalue proposition Deliver distinctive customer experienceCONFIDENTIAL193
Our People Strategy Is Critical to Create AlignmentBetween The Key ConstituenciesOur people strategy describes how we will lead ouremployees and engage them To meet the demands of our customers andcapital markets To deliver superior performanceCONFIDENTIAL194
Our Transformation Plan Will Fail Without AnEffective People StrategyLack of an effective People Strategy leads to a “bad cycle”Business strategy defines newNew imperatives createimperativesfurther challenges to Complex customer propositionemployee engagement Restructured contractsLess engagedEmployee morale andemployees do notOutcome of theengagementdeliver customer“bad cycle” isdecreasedsatisfaction onliquidationproductivityCompany faced withCompany’s challengesdramatic business challengeare increasedCONFIDENTIAL195
A Carefully Aligned People Strategy IsFundamental To Successful TransformationOutcome of the “good cycle” is emergenceBusiness strategy defines newNew imperatives createimperativesfurther challenges to Complex customer propositionemployee engagement Restructured contractsPeople strategy carefullyaligns with businessEmployee moraleOutcome of the “goodstrategy to createand engagementcycle” is emergenceemployee engagementdecreasedCompany faced withdramatic business challengeCompany emergessuccessfullyCONFIDENTIAL196
Leadership Has The Primary Responsibility OfCreating The Employee Value Proposition Created by the leadership Composed of core values that are non-negotiable–Respectful and constructive engagement–Honesty without equivocation–Interactions based in fact rather than leverageCompany Models what it means to be a part of the United family –cultureindividually and collectivelyCustomerdemands andcapital market Uphold core valuesrequirements “Do good work” – engage others positivelyshape the Reward/Recognize work contributionsEmployee ValueBehavior and Consequence Use appropriate disciplinary measures toPropositioneliminate negative behavior Provide challenging/energizing workenvironment Match interests and skills with jobEnvironment and Give authority and responsibility to makeDevelopmentdecisions Recognize and advance high performers Provide market competitive packages Ensure internal and external equity Create incentives based on companyCompensation and Benefitssuccess and individual/groupperformanceCONFIDENTIAL197
Summary Effective people strategy and strong leadership are fundamental to thesuccess of our transformation plan–Successful business outcomes requires alignment between all keyconstituencies–Our customers and capital markets demand better alignment–Transformation strategy has created additional challenges–People strategy is critical to ensure desired business outcomes–Leadership has the responsibility to lead execution of the people strategy,and set the direction for an attractive Employee Value Proposition Our employee engagement work provides the fact-base for developing thepeople strategy–Engagement is strongly correlated with business outcomes–Survey findings define the current state/gaps–Focus groups identify causal relationships and suggest corrective actions Our people strategy recommendations demand improvements in 2 areas, andinforms the development of our Employee Value Proposition–Required improvements in leader behaviors–Necessary changes for a performance orientation–Critical elements of our Employee Value PropositionCONFIDENTIAL198
Our Employee Engagement Work Provides TheFact-base For Developing The People Strategy Employee engagement is a measure of actionablelevers that drive involvement in one’s work andone’s company Gallup research of million employees at500 companies indicates that engagedemployees exhibitEmployee engagement–Increased motivationultimately drives–Increased commitment to company successimproved performance,–Increased willingness to exert discretionaryand competitivework effortadvantage The business impact of improved engagementincludes–Improved operational performance–Higher customer satisfaction–Increased safety awareness–Lower employee turnoverCONFIDENTIAL199
Internal Research Confirms A Strong CorrelationBetween Employee Engagement And CustomerSatisfaction . . .Index of customer :UA Employee Engagement Survey; UA Marketing DivisionCONFIDENTIAL200
. . . And A Similar Correlation Between EngagementAnd Operational PerformanceOn-time :UA Employee Engagement Survey; UA Operations Planning and AnalysisCONFIDENTIAL201
Therefore We Used The Engagement Model ToDevelop Our People StrategyFocus on. . . creates engaged. . . and delivers desired7 key drivers . . .employees . . .business outcomeConfidence in SeniorLeadershipUnderstandingCustomer Company Direction,satisfactionand employee roleLocal SupervisorEffectivenessEngagedOperationalCompetitiveRecognitionEmployeesperformanceadvantageTools and InformationTo Do Your JobJob Skills andOpportunities Safetyto GrowTeamworkCONFIDENTIAL202
Our Engagement Survey Defines The CurrentState/Gaps For Each Key Driver . . .2002 resultsPercent favorableDrBenchmark range*iverEmployee satisfactionConfidence in senior leadership23Understand own role58and company direction45Local supervisor effectiveness32RecognitionTools, information50to do the job43Job skills, growth opportunities65Teamwork*Benchmark ratings range from 60-80 based on historical findings from Mayflower GroupSource:UA Employee Engagement SurveyCONFIDENTIAL203
. . . And The Disconnect Between Front-lineEmployees, Management, And Leadership2002 resultsRankingsPercent favorableFront-line employeesManagement*Leadership**Confidence in senior183841leadershipUnderstand own role,536781company directionLocal supervisor386379effectivenessRecogn24ition5074Tools, information475868to do the jobJob skills, growth414874opportunities58Teamwork8091 *Salaried, Management (non-supervisor), Supervisor OM**Director/GM VP and aboveSource:UA Employee Engagement SurveyCONFIDENTIAL204
Employee Focus Group Data Identifies TheCauses Of Low Employee EngagementRoot causes*Required action Frequent changes in strategic direction suggest Provide clear directionLack of Confidencethat leaders do not have a long term plan orof the company’s vision,in SeniorvisionstrategyLeadership Inconsistent/conflicting messages from leaders Ensure alignment of allLack ofis indicative of lack of alignmentcompetingUnderstandingCompany Direction,constituencies Inconsistent/conflicting messages fromand employee rolecompany leaders vs. union leaders Maintain a stable courseLow LocalSupervisor Little personal interaction between company CommunicateEffectivenessleaders and front-line leads to perception thateffectively with allleaders are invisible and unresponsiveemployeesLack of Meaningful Existing communication channels are ineffective Model the values/Recognitionin getting messages to the front-linebehaviors that weexpect employees toLack of Tools andInformation To DoupholdYour JobLimitedOpportunities ForNew JobSkills/GrowthTeamwork*Focus group discussion findingsCONFIDENTIAL205
Employee Focus Group Data Identifies TheCauses Of Low Employee Engagement (Continued)Root causes*Required action Supervisors often lack technical skills Enable supervisors to bea coach/mentor Supervisors’ workload/responsibilities consumed byLack of Confidence inprocess issues related to operations and grievanceSenior Leadership–Clarify role,responsibilities Leaves little, if any, time forLack of Understanding–Providing solutions to day-to-day challenges–Give authority toCompany Direction,make front-line–Fair, accurate, detailed feedback in real timeand employee roledecisions Management creates obstacles to getting the job done–Provide access to–Raise bureaucracy vs. adapt to need/ opportunityLow Local Supervisormanagement toolsEffectiveness–Do not seek employee input for work processand trainingredesign Supervisors rarely have the time to get to know their Create a performanceLack of MeaningfulRecognitionemployees and provide timely, fair, and accurateorientationfeedback–Define expectationsLack of Tools and Good individual/team performance is rarely–Create meaningfulInformation To Doacknowledged. However, poor performance is actedrewards andYour Jobupon immediatelyrecognition (.,Limited Opportunities Existing formal recognition programs are oftenperformance bonus)For New Jobinconsistent, insincere, and are perceived as–Reinforce withSkills/Growth“entitlement”consequencemanagementTeamwork*Focus group discussion findingsCONFIDENTIAL206
Employee Focus Group Data Identifies The CausesOf Low Employee Engagement (Continued)Root causes*Required action Initial training matches job requirements, but Ensure adequate tools/further training to enhance skills is not availableresources to perform the jobLack of Confidence in Career advancement is unattractive across theSenior Leadership Provide additionalboardopportunities/responsibilities–Little incentive for union employees to learnLack of Understandingto high performersCompany Direction,new skills or advance into managementand employee role Acknowledge short termpositionsinvestment limitations and–Limited advancement opportunities forLow Local Supervisormake long-term commitmentmanagement employeesEffectivenessto learning Focus on controlling costs has resulted inshrinking resources to serve customersLack of MeaningfulRecognition Employees lack knowledge/training to accessrelevant informationLack of Tools andInformation To DoYour JobLimited OpportunitiesFor New JobSkills/GrowthTeamwork*Focus group discussion findingsCONFIDENTIAL207
Therefore, We Must Execute Corrective Actions ToAddress The Current GapsExamples of corrective actions Launch aggressive communication campaignConfidence in–Articulate strategic direction that meets demands of customers, capital marketsSenior Leadership–Build confidence in business plan Demonstrate how employees work directly impacts business outcome Model behaviors that embody core values–RespectUnderstanding–HonestyCompany Direction–Fact-based interactions and employee role Engage employees in redesign of own work processes Enable/empower supervisors, line managers to be fine coaches and mentors–Easy access to training and toolsLocal SupervisorEngaged–Support infrastructure to guide trainingEffectivenessEmployees Set meaningful performance targets, bonuses, and consequencesRecognition Ensure availability of tools and resources to complete job Give authority to make decision in own work function/areaTools and Develop other intrinsic rewards–Certification of employees who complete trainingInformation To Do–Personal recognition for a job well doneYour JobJob Skills andOpportunities to Create challenging/energizing rolesGrow Give high performers greater opportunities/additional responsibilities Encourage external competition through internal collaborationTeamworkCONFIDENTIAL208
Summary Effective people strategy and strong leadership are fundamental to thesuccess of our transformation plan–Successful business outcomes requires alignment between all keyconstituencies–Our customers and capital markets demand better alignment–Transformation strategy has created additional challenges–People strategy is critical to ensure desired business outcomes–Leadership has the responsibility to lead execution of the people strategy,and set the direction for an attractive Employee Value Proposition Our employee engagement work provides the fact-base for developing thepeople strategy–Engagement is strongly correlated with business outcomes–Survey findings define the current state/gaps–Focus groups identify causal relationships and suggest corrective actions Our people strategy recommendations demand improvements in 2 areas, andinforms the development of our Employee Value Proposition–Required improvements in leader behaviors–Necessary changes for a performance orientation–Critical elements of our Employee Value PropositionCONFIDENTIAL209
Our People Strategy Is Closely Linked To TheBusiness Strategy and Driven By The Demands OfCustomers and Capital MarketsThe goal of our transformation plan isThe People strategy demands improvementsto create value for all key constituentsin 2 areas to ensure value creationEmployeesLeader behaviorValuePeopleValueLeadershipCustomerscreationstrategycreationPerformanceorientationUnionsCapital marketsCONFIDENTIAL210
Our People Strategy Demands ImprovementsIn Two AreasAreaKey driverActions Provide clear and compelling direction of the company’sConfidence in Seniorvision, strategy LeaderLeadership Ensure alignment of all competing constituencies againstbehaviorsmarket imperatives Maintain a stable courseUnderstanding Communicate effectively with all employeesCompany Direction, Model the values/behaviors that we expect employeesand employee roleto upholdLocal SupervisorEffectiveness Clarify all dimensions of the performance expectations Performance–Define rolesorientation–Clarify responsibilitiesRecognition–Give authority–Create accountability Ensure that front-line employees are fully enabled todeliver against the performance expectationsTools and Information–Provide coaching, trainingTo Do Your Job–Provide resources, tools, information Reinforce performance expectations with measurementJob Skills andand recognitionOpportunities –Create rewardsto Grow–Enforce consequence management–Eliminate negativityTeamworkCONFIDENTIAL211
Changes In Leader BehaviorVision Convey the desired future state of the company andestablishes the fundamental business propositionVision Provide the basic rationale for the different kinds ofCulturebehavior and performance that will be required Build the platform on which the culture is basedBehavior andLeadershipConsequence Define the specific elements of the culture and thevalues that drive those choices Establish how people are expected to behave andWork environment,work with one anotherdevelopment Communicate what the culture means inunderstandable and actionable terms Model the appropriate behaviors and holdthemselves and all employees accountable for ownCompensation, benefitsbehaviorsCONFIDENTIAL212
Immediate Actions To Improve EngagementThrough Leader BehaviorEngagement driverProposed actionsLeadership teamConfidence in Create the vision for the future and roadmap to get theresenior Educate employees on the business challenges facing the companyleadership Share the business plan widely to engage employees in the visionand strategyUnderstand–Build confidence in the business plan through “open” employeecompanymeetingsdirection–Market the plan to employees through posters and bulletins–Reinforce messages through weekly system wide voice messages Frequent, consistent and comprehensive updates on our progress “Open days” to discuss employees’ pressing concerns Employee suggestion program to foster engagement in thetransformationLine managers, supervisors Continue and elaborate on leader communications Conduct group meetings to motivate employees and addressquestions/concernsCONFIDENTIAL213
Performance Orientation The culture establishes the frame of howpeople are expected to behave To achieve these expectations,performance must be managedCulture–Desired behavior must be recognized,reinforced and rewarded–Unacceptable behavior must be correctedBehavior andor potentially lead to terminationConsequence–Performance management demands thatthere are consequences to the behavioralWorkchoices made by employeesenvironment, The creation of a performance culture isdevelopmentonly possible when it’s been demonstrated–By actual actions taken throughout thecompany at all levels – that unacceptableCompensation, benefitsperformance will not be tolerated anddoing good work will be recognizedCONFIDENTIAL214
Performance Orientation (Continued)Authority Engage employees in redesign of own work processes Give authority to make decision in own work function/area Enable/empower supervisors, line managers to be fineCulturecoaches and mentors–Easy access to training and tools–Support infrastructure to guide trainingBehavior andResponsibilityConsequence Set meaningful performance targets, bonuses, andconsequences Ensure availability of tools and resources to complete jobWorkenvironment,Accountabilitydevelopment Give high performers greater opportunities/additionalresponsibilities Develop other intrinsic rewardsCompensation, benefits–Certification of employees who complete training–Personal recognition for a job well doneCONFIDENTIAL215
Immediate Actions To Improve EngagementThrough Performance OrientationEngagement driverProposed actionsLine managers, supervisorsUnderstand Educate supervisors on the business plan and their responsibilitiesown role–Define role and expectations–Explain how their work specifically impacts business outcomes Support supervisors and managers to execute effectivelyLocal–Provide access to knowledge, resources and toolssupervisor–Train managers to coach and mentor employees in best practiceseffectiveness Simplify and clarify front-line decision authority Provide metrics that enable performance tracking against businessplan targets–Behavioral metrics that track coaching success–Operating metrics that track performance vs. cost and productivity Emphasize accountability and track against measures aggressivelyCONFIDENTIAL216
Immediate Actions To Improve EngagementThrough Performance Orientation (Continued)Engagement driverProposed actionsRewardsRecognition Create group performance bonus incentives for all employees Provide intrinsic recognition (., certificates for training completion,celebrate milestones, personal acknowledgement for job well done)Tools and informationTools andinformation to Ensure employees have access to learning toolsdo your job–Provide learning through online and traditional methods–Support training with expert guidance from supervisors trained tocoach and teach Ensure that employees are involved–Explain productivity targets and the impact on success–Engage employees in redesign of their own work processes–Capture internal best practices and share learnings acrossfunctions–Provide feedback and coaching on performanceCONFIDENTIAL217
Immediate Actions To Improve EngagementThrough Performance Orientation (Continued)Engagement driverProposed actionsGrowthOpportunities Provide developmental opportunities for high performersto grow Create challenging roles Provide opportunities to learn and apply new skills/best practicesTeamworkTeamwork Focus on external competitive targets Encourage internal collaboration through team-based incentivesCONFIDENTIAL218
Thus, The People Strategy Ultimately Informs TheDevelopment Of Our Employee Value PropositionExternal imperativesInternal drivers Leadership–Create and communicates the vision–Model behaviorsWe must create an attractive–Hold themselves accountableproposition for capital marketsCompanyand customersCulture CultureThis proposition should drive–Demands specific behaviorsour culture and behaviors–Defines roles and responsibilitiesBehavior and–Drives rewards and consequenceConsequenceCustomer demands and Successful executionmarket conditions drive–Improves work environmentour business strategyEnvironment and–Creates growth opportunitiesDevelopment–Enables investmentsThis, in turn, shapesthe foundation of ouremployee value Market conditionsCompensation andproposition–Dictate competitive baseBenefitscompensation–Set competitive benefit levelsCONFIDENTIAL219
In Conclusion Customers and capital markets are demandingour transformation Successful execution of our People strategy will enablesuccessful execution of our plan for transformation Delivery of the employee value proposition requires anintegrated set of actions across the seven drivers ofemployee engagement Providing the right leadership and creating a performanceorientation are our top two priorities Our next step is to expand our base of leadership byengaging key constituents and gaining their commitmentCONFIDENTIAL220
Plan For Transformation: Agenda Process To Date Overview of Strategic Challenges and Need Doug Hackerfor Transformation Customer Value Proposition Scott Praven Network Products and Cost Restructuring Greg Taylor, Scott Brandt Capital Markets Requirements and Financial Jake BraceOutlook People Strategy and Employee Value Sara FieldsProposition Strategy Summary Doug Hacker 2003 Goals and Budget Pete McDonald,Jake BraceCONFIDENTIAL221
United Faces Multiple Strategic Challenges AgainstEach Of The Critical Elements Weak Highestproposition forcostleisure/ price-lr Clear andstructuresensitivet-i-l tlliBest-in-class costscompelling(CASM) insegmentsi itrtr lin industrycustomer valueindustry Core businessritipropositionsegmentdeclining invaluetiSustainedrfitilitprofitability Employeemotivation and All networkengagementttrt llti lAttRobust globalractive employeeproducts In bankruptcyrrcould declinetl itinetworkvalue propositionand markets– nopost CBAunprofitablecredibilityrestructuring High LCCwith capitalexposuremarketsand threatCONFIDENTIAL222
United’s Transformation Plan Addresses OurStrategic Challenges Create a family of Execute restructuringproducts, includingprogramLCC, to offer a–Business transformationcompetitivelr Clear and–CBAt-i-lproposition to price-lliBest-in-classcompelling–1110tr i itsensitive segmentstr lcosts in industrycustomer value–SAMr Enhance and sustainitipropositionfocus on coretiSustainedbusiness segmentrfitilitprofitability Ensure leadershipalignment on StrengthenttrtiAttractivetransformation plan Crediblet llRobust global“hub-and-l lemployee value Create aplan tortnetworkspoke”ritipepropositionrformance cultureattractmodelwith rewards,capital Returnincentives forinvestorsportfolio ofperformancenetworkproducts toprofitabilityCONFIDENTIAL223
Our Plan Will Require Transformational Change Each individual element of the strategic plan representsmajor change for United and involves risk In our case, these actions must be carried outsimultaneously and rapidly BUT, ANYTHING LESS WOULD BE EVEN RISKIERCONFIDENTIAL224
Plan For Transformation: Agenda Process To Date Overview of Strategic Challenges and Need Doug Hackerfor Transformation Customer Value Proposition Scott Praven Network Products and Cost Restructuring Greg Taylor, Scott Brandt Capital Markets Requirements and Financial Jake BraceOutlook People Strategy and Employee Value Sara FieldsProposition Strategy Summary Doug Hacker 2003 Goals and Budget Pete McDonald,Jake BraceCONFIDENTIAL225
2003 Goals BackgroundThe 2003 core objectives are similar to the past 2 years Safety is now a separate category, rather than acomponent of the People goalsGoals Safety Financial Reliability Customer Satisfaction PeopleCONFIDENTIAL226
2003 Operating EnvironmentThe significant environmental and transformationalchanges under way at United will impact performanceon most objectives Restrictive DIP loan covenants are driving additionalcost reductions beyond those initially contemplated–While the reductions were designed to minimizereliability and customer impact, given the depthof reductions, some impact is inevitable The dramatic changes may also impactemployee attitudesCONFIDENTIAL227
2003 Safety Goal Target has been established to maintain 2002 performance Maintaining current results will be a significant challenge–All current safety and operational training continues–Ratio of supervisors to employees has been reduced–Various productivity and transformational changes,particularly in Airport Operations and Maintenance,will result in new and less familiar work activities formany employeesProposed safety goal – Lost Time
2003 Safety Goal – Lost Time Injuries (LTI)Rate per 100 2003TargetCONFIDENTIAL229
2003 Financial GoalsTwo financial goals Short term: Meeting all DIP loan covenants Long term: Transform United’s profitabilityShort-term goal Maintaining DIP loan is critical for survival Required improving profitabilityLong-term goal Focuses on viability and competitiveness Early implementation is essential to reach short-termprofitability improvement goalCONFIDENTIAL230
2003 Financial Goals – Short TermThere are a variety of DIP loan covenants EBITDAR* Cash balance CapEx Reporting requirements The most critical and comprehensive covenant EBITDAR covenant requires monthly compliance beginningwith February results December 2003 EBITDAR covenant is $575 millionFuture circumstances (., Iraq war, significant revenuedeterioration) may require renegotiation with DIP loan lenders Changes in covenants would lead to a revision of theEBITDAR goal*EBITDAR: Earnings Before Interest, Taxes, Depreciation, Amortization, and A/C Rent (a commonly used cash-flow measure)CONFIDENTIAL231
2003 Financial Goals - Long Term Business transformation profitability improvements–Lead company to long-term competitive coststructure maximizing profitability–Include three parallel efforts Collective Bargaining Agreement cost savings §1110 (Aircraft) cost savings Non-labor profit improvement (over 30specific projects) Combined value in 2003 is planned at $3,218 million Measurement will be a combination of actualprofitability improvement and accomplishment ofspecific project milestonesCONFIDENTIAL232
2003 Reliability Goal Anticipate 2003 to be the second-best operating year in United’s history,although target has been reduced four (4) points below 2002 actual The reliability environment in 2003 is expected to be a positive factor–Industry departure activity expected to decline % in 2003–United capacity and departures down % and %, respectively–Scheduled ground times and aircraft utilization held at 2002 levels However, there are potential offsets to these reliability positives–Reduced staffing levels – Airport Operations and Maintenance Divisionproductivity up 19% and 17%, respectively. Overall system productivityto grow 6% in 2003 before CBA initiatives, the highest level recorded inthe past ten years–New and less familiar work activities for many employees givenproductivity needs will initially have a negative impact on reliability–New security procedures including 100% bag match and lobby screeningProposed reliability goal – departure on-time :00ActualTarget200270%58%200366%CONFIDENTIAL233
2003 Reliability Goal – Departure On-time : 2003TargetCONFIDENTIAL234
2003 Customer Satisfaction Goal Anticipate 2003 to be the second-best operating year in United’s history,although target has been reduced points below 2002 actual The expected decline is driven by several factors–Closure of reservations offices and relaxed call standards–Lower on-time performance–Reduced overnight cleaning criteria and reduced aircraft turn staffingwill challenge aircraft appearance ratings–Meal service reductions–Reduced flight attendant staffing–Reduction in B747 flying expected to reduce seat comfortratings internationally–Lower quality of onboard feature films–Perceived longer lobby line waits given new security proceduresProposed customer satisfaction goal –intent to
2003 Customer Satisfaction Goal –Definite Intent To 2003TargetCONFIDENTIAL236
2003 People Goal Employee engagement is essential to effectively executeour Business Strategy Engagement will be measured using an employee survey Challenges to maintaining results–Lack of financial support for recognition, employeedevelopment, and training–Environment of downsizing, outsourcing, and furloughsProposed goal – employee engagementActualTarget200244%200344%CONFIDENTIAL237
2003 People Goal – Employee EngagementSurvey approach The survey will consist of some historical questions,as well as questions to address current topics Content includes questions measuring the 7 drivers ofEmployee Engagement Pulse surveys administered during second and thirdquarters to a representative sample of employees Census survey administered fourth quarter to allemployees to allow for division-specific resultsTarget Due to the challenges faced and the businesstransformation required by United in 2003, the targetfor this year will be to maintain the level of engagementachieved in 2002CONFIDENTIAL238
2003 Goals Summary 2002 2002 2003TargetActualTargetCorporate Safety GoalLost Time Injury - Rate Per 100 Financial GoalsMeet Monthly EBITDAR Tests ($ million)$575*Business Transformation ($ million)$3,218Corporate Reliability GoalDepartures On-Time :0058%70%66%Customer SatisfactionDefinite Intent To %%%PeopleEmployee Engagement 44% 44%*December 2003 test; tests are made each month February 2003 through May 2004CONFIDENTIAL239
2003 Financial Plan Review financial objectives 2003 Operating Plan elements–2003 Revenue/Capacity Plan–2003 Expense Plan 2003 Capital Plan elements Plan performance compared to objectivesCONFIDENTIAL240
Objectives Meet DIP covenants–Cumulative monthly EBITDAR target–Quarterly capital spending target–Minimum cash balance A solid first step toward the transformation ofUnited’s cost structureCONFIDENTIAL241
2003 Financial Plan Review financial objectives 2003 Operating Plan elements–2003 Revenue/Capacity Plan–2003 Expense Plan 2003 Capital Plan elements Plan performance compared to objectivesCONFIDENTIAL242
The Plan Reflects A Comprehensive Approach ToTransforming United’s Cost Structure . . . Business transformation initiatives §1110 savings Collective Bargaining Agreement (CBA) savings Management and salaried initiatives Tactical cost reductionsCONFIDENTIAL243
. . . And Meets Our Financial Objectives Financial DIP covenants met–Maintain $134 million EBITDAR headroom–Quarterly capital spending within covenant–Minimum cash balance of $444 million First steps of transformation to a competitivecost structure under way–% year-over-year adjusted CASMimprovement–$ billion year-over-year improvement inoperating earnings Excludes the impact of an Iraq War scenarioCONFIDENTIAL244
Operating Earnings Review$ Millions(915)(2,705)97(365)2261,0471,815(431)(140)2002(459)(571)200320022002 andFringeCBABusinessSectionCapacityOther2003operating2003inflationsavingstrans-1110decreaseoperatingearningscontractualformationeffectsearningswageinitiativesincreasesCONFIDENTIAL245
2003 overview$ Millions Plan B(W) than 20022003 Plan DollarsPercentRevenue*13,5451791Expenses*14,4601,61010Operating earnings*(915)1,78966*Excludes UAFCCONFIDENTIAL246
2003 Passenger Revenue Plan Development Core revenue plan based on a % year-over-yearincrease in passenger unit revenue–In-line with historical trends and capital marketconsensus–DIP lenders concurred Total unit revenue increase, including businesstransformation initiatives, is %–Comparable to forecasts by Wall Street analystsCONFIDENTIAL247
2003 Passenger Revenue2003 Plan B/(W) Than 2002 RASM($ Millions)Plan Dollars Percent B/(W)Core passenger revenue$11,514$ (358)()% %Bankruptcy effect$ (197)$ (197)() pts () ptsDec ’02 forecast difference(56)(56)() pts () pts UAX RJ Deployment247 247 pts pts US Airways Codeshare298 298 pts pts Atlantic Plus30 30 pts pts Other Initiatives258 258 pts ptsBusiness transformation 834 834 pts ptsInitiatives included in core(152)(152)() pts() ptsTotal passenger revenue$11,942$ 70 % %CONFIDENTIAL248
Forecast AssumptionsYear-over-year changeIndustry revenue growth(1)%United core revenue efficiency ptsEconomic Real % Nominal % Corporate %Capacity United(6)% Industry (excluding UA)(1)%CONFIDENTIAL249
2003 Passenger Revenue PlanB/(W) than %()%()%()%()%Unit revenue Core()%()% % % % With initiatives*()% % % % %*Includes Bankruptcy PenaltyCONFIDENTIAL250
Cargo And Other Revenue$ Million Cargo revenue increased due to the resumption of mail over 16ounces after a post-9/11 ban Incidental revenue increased by $54 million primarily due to higherULS sale of miles Plan B(W) than 20022003 PlanDollarsPercentCargo revenue734619Contract services285(5) (2)Incidental5845410Total*1,6031107*Excludes UAFCCONFIDENTIAL251
2003 Operating Expenses$ Million Plan B/(W) than 20022003 PlanDollarsPercentSalaried and related5,6581,45521Fuel1,984(62)(3)Purchased services1,540(96)(7)Food and beverage3965512Landing fees and facilities1,01861Aircraft ownership1,09828821Commissions387297Maintenance materials686(66)(11)Other1,693––Total operating expense*14,4601,61010*Excludes UAFCCONFIDENTIAL252
Salaried And Related Expense$ Million459571141431(1,795)7,11320032002(407)5,658(284)2002 salary2002 and 2003FringeCBACapacityDivision and2003 salaryand relatedcontractualInflationSavingsBusinessand relatedincreasesTransformationInitiativesCONFIDENTIAL253
Manpower, Salary And Fringe Plan B/(W) than 20022003 PlanNumberPercentPMEs67,95210,78014Productivity (ASMs/PME)2,0511619Salary per PME57,4295,7329 2003 2003 2002Fringe %%%%%%Taxes and %%%%%%4CONFIDENTIAL254
PME Reduction78,732(4,525)(2,278)(2,194)67,952(1,783)2002VolumeDivisionalBusinessCBA2003PMEsRelatedInitiativesTransformationPMEsReductionsInitiativesCONFIDENTIAL255
Fuel Expense$ Million14(137)1,984232(47)1,9232002RateHedgeCapacityEfficiency /2003FuelPurchasingFuelExpenseEffectivenessExpenseCONFIDENTIAL256
Purchased Services$ Million1,5405511,445392002Capacity / BusinessOutsourcing2003PurchasedOtherTransformationPurchasedServicesEnablingServicesExpenseCONFIDENTIAL257
Aircraft Ownership$ Million $27 million year-over-year increase in aircraft ownership costprimarily due to Airbus sale-leaseback transaction $356 million reduction in aircraft financing and ownership costdue to the 1110 processCONFIDENTIAL258
Other Expenses $53 million decrease in personnel-related expense–The crew hotel cost savings initiative andcapacity reduction $27 million–Capacity reduction drove $18 million lowerflight crew per diem $39 million increase in United Services’ cost ofnon-UA sales due to lower margin contract sales $26 million decrease in traffic-related expensesprimarily due to % lower RPMsCONFIDENTIAL259
Financial Reporting During Reorganization The AICPA Statement of Position 90-7 providessuggested guidelines for financial reporting during aChapter 11 proceeding Included in the non-operating section are Reorganizationcosts, which potentially include the following–DIP loan-related fees–Interest income on non-dispersed cash due tobankruptcy protection–Professional fees related to bankruptcy–Severance for furloughs announced after thebankruptcy filing–Gain/loss on disposal of assets or extinguishmentof debt Upon emergence from bankruptcy, Fresh Startaccounting dictates that most assets and debt are to berevalued at Fair Market ValueCONFIDENTIAL260
2003 Non-Operating Expense$ MillionPlan B/(W) than 20022003 PlanDollarsPercentReorganization costs*153(144)n/m DIP interest46(45)n/m Debentures–64100 Other interest4517614Total interest expense4979516Interest income(12)(47)(79)Interest capitalized–(25)(100)Other, net2826Total non-operating665(116)(21)expense*Excludes gain/loss on sale of assetsCONFIDENTIAL261
2003 Net Earnings$ MillionPlan B/(W) than 20022003 PlanDollarsPercentRevenue*13,5451791Expenses*14,4601,61010Operating earnings*(915)1,78966Non-operating expense665(116)(21)Pretax earnings(1,573)1,66451Provision for taxes–––Net earnings(1,573)1,66451*Excludes UAFCCONFIDENTIAL262
2003 Financial Plan Review financial objectives 2003 Operating Plan elements–2003 Revenue/Capacity Plan–2003 Expense Plan 2003 Capital Plan elements Plan performance compared to objectivesCONFIDENTIAL263
Overview Of Total Capital Spending$ BillionAircraftNon-aircraft$$$$$ 9/11 Capital Plan$$$$$
2002 Monthly Capital Spending vs. Plan$ Million504540Plan ($400)3530252015Actual spending ($246)1050JanFebMarAprMayJunJulAugSepOctNovDecCONFIDENTIAL265Monthly
$425 Million Is The 2003 Capital Plan Target Maintains basic operational capability Complies with DIP covenants Allows for some infrastructure maintenance Funds business transformation initiativesCONFIDENTIAL266
Major Components of Recommended 2003Non-Aircraft Capital Plan$ Million Business transformation initiatives103 Spare parts and engines93 Other projects*229 Total 2003 capital plan425*Includes $66 million carry-over projectsCONFIDENTIAL267
Business Transformation Initiatives$ Million UAX facility expansion (DEN)25 US Airways codeshare facilities modifications23 UAX facility expansion (ORD)18 Reservations productivity projects8 Atlantic Plus7 EasyCheck-In7 OPETE7 Maintenance business transformation initiatives4 Other4 Total business transformation initiatives103CONFIDENTIAL268
Non-Aircraft Capital Spending$ Million 2001 2002 2003ActualActualProposedBusiness transformation initiatives––103Spare parts and engines18810193Other Information systems1232253 Maintenance and security261031 Aircraft products901315 Airport/facilities903219 Aircraft direct support451214 Ground equipment12817 All others853230 1110-related contingency–25– Other contingency––25Total659246425CONFIDENTIAL269
2003 Financial Plan Review financial objectives 2003 Operating Plan elements–2003 Revenue/Capacity Plan–2003 Expense Plan 2003 Capital Plan elements Plan performance compared to objectivesCONFIDENTIAL270
Cumulative EBITDAR$ Million1,0008002003 Plan6004002000(200)(400)EBITDAR covenant(600)(800)(1,000)JanFebMarAprMayJunJulAugSepOctNovDecCONFIDENTIAL271
EBITDAR Headroom Covenant Compliance$ Million5002003 Plan400300200100$134 millionDIP Business PlanMinimumHeadroom0JanFebMarAprMayJunJulAugSepOctNovDecCONFIDENTIAL272
2003 Capital Plan vs. DIP Covenants(50% of unused funds can be carried over)($ Millions)160120804001Q032Q033Q034Q031Q042Q04C01193000ontingencyQu7710991989594arterly PlanC110110116142100100ovenant Targets110127116145107103Covenant Target w/CarryoverCONFIDENTIAL273
2003 Unit Cost2003 Plan B/(W)2003 Planthan 2002 actual CentsPercentCost/ for 2002 fuel expense)Cost/(includes fully ramped-in §1110,CBA, and business transformationinitiatives, normalized for 2002fuel expense)*Excludes UAFCCONFIDENTIAL274
Unit Cost – 2003 With Ramped In Cost SavingsCentsSteady-state level of savings()()adjustments and () §1110,BenefitsBenefitsBusiness2003 fullyA/C rentadjustedCBA,of §1110of CBAtrans-rampedEconomLyabor2005 unitunit costand BTIformationPlusand othercost goalsavingsinitiativesdensityinflationadjustmentCONFIDENTIAL275
Unit Cost – 2003 With Ramped In Cost SavingsCentsSteady-state level of savings()Competitiveadjustments and ()()()() §1110,BenefitsBenefitsBusiness2003 fullyA/C rentEconomyLabor2005 unitadjustedCBA,of §1110of CBAtrans-rampedPlusand othercost goalunit costand BTIformationdensityinflationsavingsinitiativesadjustmentCONFIDENTIAL276
Conclusion Financial DIP covenants met–Maintain $134 million in EBITDAR headroom–Quarterly capital spending within covenant–Minimum cash balance of $444 million First steps of transformation to a competitivecost structure under way–% year-over-year adjusted CASMimprovement–$ billion year-over-year improvement inoperating earningsCONFIDENTIAL277
