It’s a pleasure for me to be here at the IEA and to join the conference to address an organization that I know has a strong and enduring belief in the power of the free market.

A freer, more unfettered market would have enormous benefit for the aviation industry and companies such as mine, and that’s the subject that I’d like to discuss with you today. But before I begin let me acknowledge the chairman, and someone in the audience who has had a role, an important role in United’s past, and that’s my colleague Mike Hulley.

Mike worked with United at our Denver hub, the source of considerable activity today at United, and now we know he’s with EDS covering transportation issues of virtually all types – Mike it’s great to see you here today and thanks very much for the introduction – special for us at United.

When I glanced at your conference schedule, it seemed fitting to me that I was going to have the occasion to speak to you between a session on corporate strategies, and the role of government in this industry. I think it’s fitting because that’s precisely the position that airline chief executive officers and chairmen often find themselves in today, awkwardly wedged between the demands of the marketplace and the restrictions of government policy.

As everyone in this room certainly knows, when it comes to aviation, these two forces are often at odds with one another; and they must be reconciled, in my view, if our industry is to fulfil its tremendous potential worldwide.

However, before the industry can realize its potential, and before our collective voices can be heard in the larger debate that you’ve engaged in the conference, we within the industry have hard work to do. We have serious decisions to make about our own businesses. Hard work to restore the credibility of those who lead the industry in the private sector. Hard work to restore our credibility with government and with other audiences such as this one.

The past decade has been an extraordinarily difficult and challenging decade for this business. We faced enormous challenges, both old and new, and it’s true that many companies have experienced huge losses. However, by getting our houses in order, we can make our voices more resonant at the bargaining table. By first looking inward, where we have work to do, we can then look forward, and make our case for change sturdier than it’s ever been before.

For some time we at United - all of the industries across the US - have been trying to determine just how to do that. At my company, we have been focused on getting our house in order, through the process of re-organization and re-structuring. And even before the past two or three years, extraordinarily difficult as they’ve been, United was faced with deep, fundamental and grave challenges.

The company needed to undergo what can best be described as a seismic shift. We had to transform United, not just to survive in this difficult industry, not simply to compete with our American network carriers and the international network carriers and the point-to-point, low-cost carriers, but to become a different type of competitor ourselves.

This is exactly what we have begun to do. United today is a dramatically different place than it was a mere year ago, and I’d like to briefly describe the steps that we’ve taken.

One: We have made significant progress in putting our financial house in order. We’re on track to reduce our annual costs by some five billion dollars. Two-and-a-half billion dollars of the five billion dollars comes from new collective bargaining agreements – six-year agreements with all of our unions, with very very resilient terms: 65% wage and benefit, 35% scope clause and productivity improvement. Even in my former business, taking five billion dollars out of your cost structuring annually is a significant event. We’ve reduced our operating run-rate by roughly one third.

Such progress has been coupled with substantial improvement in revenue performance. In the third-quarter results we recently announced, United had an operating profit of 90 million dollars, before restructuring charges – again, a number that’s impressive even to someone coming from the oil and gas industry – that’s a swing of 665 million dollars from the quarter a year ago. And in less than a year, we’ve gone from a cash burn of up to six million dollars a day to a positive cash flow of three million dollars a day. And we have consistently built our cash account through the period of the restructuring.

At the same time we have been focused on operational excellence. We’ve improved our on-time performance from eighth in the industry, to second-best in the United States. We’re re-engaging our customers through innovative marketing, and we’re drawing on our core strengths to reach the business traveler across the United States and across the world. Our employees are consistently outperforming both competitors, and United’s own previous results, on every customer-service metric across the board.

And three, and perhaps most importantly to the company, we are preserving our valuable assets in a way that opens strategic options for us as we exit Chapter 11, and will enable us to make smart, strategic choices about our future. If we had made the expedient choices that were pressed upon us six months ago, selling off key assets as some counseled, we would have far fewer choices than we do today.

There’s no doubt we at United still have a lot of hard work to do. But one thing is certain – the changes we’ve made are fundamentally transforming United Airlines. That fact, more than anything else, fills me with confidence about the future of the company. As we say inside the company, United is not looking back to our heritage – we’re flying forward.

And yet, United can fly - quite literally - only as far as the laws permit. The same is true for airlines in Europe and around the world. We operate in this industry in an environment where the invisible hand of the market is constrained by the visible hand of regulation. In which outmoded policies impede the market forces of competition, consolidation and innovation. This, along with the changing dynamics of our industry, creates significant hurdles for international network carriers.

Let me begin with the regulatory climate. In fact, it makes little sense to start anywhere else, because regulations are the first and the most fundamental fact of everything that we do.

We know that de-regulation has occurred on both sides of the Atlantic – we also know that it’s more in name than in deed. Many of the old restrictions are still firmly in place, though the world they were designed for is fast changing.

It leaves this industry as a hybrid industry - one that is neither fully regulated, nor fully de-regulated. Government decisions play a primary role in our most basic financial and operational decisions. As we all know, governments not markets determine who can fly where, and who can own what. As a result, our ability to compete globally has been seriously impaired.

I consider it an irony. Aviation is a key enabler of globalization. A key driver of growth in the international marketplace. But at a time when market forces are leading most industries - from energy to telecommunications - toward consolidation, toward the creation of truly global companies, aviation will be one of the last sectors to globalize.

Even as our planes carry people and product around the world, there are no truly global carriers. Instead, we find ourselves fragmented within the US, across Europe and around the world.

Today there are 280 international carriers. Thirty-nine of those offer scheduled service between the United States and Europe – thirty-nine. Of those thirty-nine carriers twenty-five are European, six are American and eight are neither – carriers such as Air Tahiti and Air India.

We have too many airlines providing too much service to and from places that do not necessarily warrant it.

That presents us all in this industry with an unfortunate choice – we fly half-empty airplanes from point A to point B, or we offer fares well below the cost of providing service in the first place. No matter where we fly - across the Atlantic, across borders or within our own countries - over-capacity in this industry is a fact of life.

In this environment, new competitors have emerged, some applying different business models. I’m referring primarily to low-cost carriers, which as we all know have proliferated during the past decade and are going to continue to do so.

Low-cost carriers are part of an evolving aviation marketplace, one in which network carriers face new kinds of competition, but remain as important and viable as ever.

In this environment, network carriers such as United need to think of their product offerings as a portfolio. We hope that you will have noticed that we have launched none other than Ted, in Denver: United’s answer to low-cost competition in the Denver hub, a leisure-market-designated low-cost carrier for United. We’ll fly out of the Denver hub to leisure destinations such as Las Vegas, Reno, Phoenix, Orlando, Fort Lauderdale, with a fleet of A320s. Fare simplification, fleet simplification, direct competition with Frontier, and at the same time providing United with the opportunity to experience the thrill of new product creation and innovation. And we’re excited about adding Ted to the United portfolio.

Our hub-and-spoke system continues to provide service that customers want and low-cost carriers such as Ted cannot offer. It means that a passenger in a town of 100,000 people can step onto a regional jet near their home, fly to a nearby hub and make their way to Narita.

It also means that a passenger from Tokyo can get to that small town just as easily. Low-cost carriers have been upfront about their lack of interest in serving these customers. In fact, if they started to do so they wouldn’t be low-cost carriers any longer, they would be network carriers.

But the sustainability of our networks is increasingly dependent on something that we’ve been pursuing for many years, and that is constructive, accretive-to-shareholder consolidation. Although cost cutting has helped the industry’s short-term outlook, a higher level of consolidation will make long-term forecasting much brighter.

To date, alliances have been a proxy for consolidation, and they have been a boon to our customers. United’s membership of the Star Alliance has provided our passengers with better fares, seamless connections and enormous global reach. It’s also been critical to United’s success as a company. International flying has provided most of our growth over the past sixteen years.

We remain strongly committed to our Atlantic Plus partnership with Lufthansa and our alliances with the UK’s finest carrier, British Midlands.

We’re excited about our recent code-sharing deal with Air China and US Airways’ forthcoming entrance into the Star Alliance. The Air China code-sharing deal with United is especially exciting; it’s going to offer Air China customers access to fourteen cities across the United States; United-ticketed customers, passengers, access to five cities across China.

But as I said, alliances are only a substitute for genuine consolidation. While they offer the enormous benefit of bigger and more seamless networks, they also entail transaction cost, uncertainties for investment decisions, and they hit regulatory limits and constraints.

For example, even though regulators on both sides of the Atlantic have blessed United’s alliance with BMI as pro-competitive, we cannot code-share on flights between Heathrow and the US, because another group of regulators has been unable to reach an agreement to fully open the US-UK market.

Mergers, however, do happen in this business, and the Air France-KLM deal reflects the industry-wide interest in consolidation, and in finding innovative new methods for forging such agreements. However, in the current regulatory climate, most mergers have been painful, and they’ve been chaotic. Many have been reached under duress, with one of the parties teetering on the brink of collapse. Other deals, however sound, however carefully-crafted, never clear the eventual regulatory threshold or hurdle.

Why do most airline mergers fail to get off the ground? Because governments still treat aviation as a local business, not a global one. Companies are eager to compete internationally, to accept the risks and the responsibilities of the free market, we’re eager – but we’re tethered, and we’re earthbound.

And that’s why our industry must forge a new partnership with government, one that acknowledges goals shared by both parties, and allows market forces to be an equally important variable in that equation.

You know, pausing for a second and considering my career in the oil and gas industry - and having just gone through the transaction that put Texaco together with Chevron, as a competitive response to BP/Amoco and Arco, as a competitive response to Exxon and Mobil, followed by a competitive response by Conoco and Philips - you can imagine the contrast that I experienced, having gone through those mergers of genuine note, in a hugely strategic industry, to come to this industry, and find this impediment.

The negotiations between the US and the EU should help us move toward that partnership. A new agreement on the North Atlantic has the potential to change the way we’re regulated in several key respects.

It would:

Remove the restrictions on nationality that have kept cross-border mergers from happening in Europe – the Air France-KLM agreement certainly contemplates these changes occurring;

Provide an opportunity for both the United States and the EU to eliminate outdated restrictions on foreign ownership, providing the industry with access to global capital;

Allow more strategic investment among carriers (this would create geographical risk-sharing, so that a severe down-turn in one region might be offset by growth and sustainability-stability in another);

Increase opportunities for the exchange of expertise and technology, benefit customers by allowing price, service and efficiency improvement beyond that which allowances currently permit; and

Serve as a catalyst for de-regulation elsewhere in the world.

The US-EU negotiators can make progress on all these fronts - if they’re committed to do so. I’m confident that negotiators can reach an agreement, and I believe it’s possible to do so on a reasonable timetable.

If they succeed, forty percent of the world’s total air traffic will be open to truly open skies. And that clearly would have wide-ranging effects for carriers and passengers everywhere.

However, as I said before, we cannot talk seriously about these strategies if our companies and our industry remain insulated from market forces. No matter how hard one airline works, no matter how we restructure our organizations to meet the competitive demands of the 21^st century, the future of air transport ultimately depends on breaking down the regulatory barriers that have held us all back in this industry for so very long.

If market forces could act in our industry as they do elsewhere, as I described in the oil and gas industry, many of the issues we now face could resolve themselves. We could become more sustainable, we would be more efficient, and we’d be more solvent. We would be able to survive on our own without government support. And we’d be more ready to meet the demands of whatever challenges may come next.

But let me conclude where I began, by saying that before market forces can take control in this industry, this industry has hard work to do itself. As I said, to establish the credibility of voice that we within the industry need to have to earn the right to have our opinions known, to stand before you as I am today, and to be a part of the re-shaping process, we have to get this industry’s house in order, and stop whinging about it. Our credibility relies on it.

Paving the way for change, for open-skies, for an agreement between the US and the EU, relies on those of us in the industry.

Ms. Palacio has summed it up succinctly. She wrote recently in the Financial Times, and I quote, “This opportunity that we have today must not be missed”.

I think this is a watershed moment for the industry, after a few of the roughest years in aviation’s hundred-year history, we have today a historic chance to fundamentally improve the way we do business.

No one knows exactly what the future holds for this industry, but we do know this: we must all take part in shaping it. As always, it’s going to require tremendous dedication from all of us in the industry and around the industry. I’m confident that together, with the challenges of the recent past behind us, and the learnings of the recent past before us, we can create a future that’s every bit as strong as our past.

Mike, thanks very much for the time and the podium, I appreciate it.

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