Good afternoon.ý Thank you for that kind introduction, Frank.

I want to start today by thanking Frank Martin and the members of the American Chamber of Commerce for giving me the opportunity to address this prestigious group.

And I'd like to acknowledge some of the special guests here today:

-ýýý James Keith, Consul General of the United States Consulate in Hong Kong;

-ýýý And Selina Chow, Chairwoman of the Hong Kong Tourism Board, which recently kicked off a truly remarkable effort to attract travelers to this great city.

Itýs always a pleasure to visit Hong Kong, but particularly on business.ý Hong Kong is a merchant city.ý It is a place hugely invested in its reputation as a center for commerce and trade ý one that it has earned.ý

Itýs a place that not only knows how to work; it wants to work and continues to work wellý

Hong Kong also knows something about challenges.ý

And we at United know a little something about challenges, tooýý.and that is what Iýd like to talk with you about today.

• First, the recent external challenges we have all had to contend with;
• Second, the challenges of staying relevant in a changing business and competitive arena;
• And, third, Iýll talk about United, and our own specific internal challenges.

In some ways, our circumstances at United are not unlike those of Hong Kong today.

If we think about the external challenges we have faced over the last several years, the world has experienced an extraordinary confluence of events.ý These include the downturn in the world economyý September 11^th and the recurrent threat of terrorism, the war in Iraqýý and, of course, SARSý

All of us ý you here in this room, companies everywhere around the world ý were impacted to a greater or lesser degree.ý We've all managed through these events to the best of our ability, but many of them clearly had a disproportionate effect on the airline industry.

The fact is, business has been tough: people have been buying less and traveling less.

Add to these unprecedented external circumstances, the fact that our respective business and competitive landscapes have changed irreversibly.

While our circumstances and yours here in Hong Kong are, in many ways, worlds apart, we both face the reality of having to not only meet these challenges, but to reassess how we remain relevant in this new environment.

Hong Kong is reassessing its role in a changed regional economy.ý

In our own world, at United, we've had to rethink our financial structure and how we approach the marketplace and our customers.ý We've had to transform our company so that we can compete and win on a changed global playing field.

And we've made substantial progress in that regard.ý We have had to do a tremendous amount of work over the last nine months to get our internal house in order.

When I arrived eleven months ago United Airlines had a serious cash problem.ý During the second half of 2002, we were burning through an average of $5.3 million a day. Not sustainable ý especially in a low-margin business such as ours.ý

United had a whole host of problems to address beyond an over-leveraged balance sheetý Productivity issues that restricted our ability to compete and made us inefficient.ý A complex governance structure...ý

But our priority issues were cash flow and costs.ý So, our first order of business was getting our costs down.ý And keeping them down.ý

We are now on track to have our costs reduced by $5 billioný annually by 2005. ý This means we also are on track to have one of the most competitive cost structures among major network carriers. To give you an idea of scale, this is almost one third of our 2002 operating expenses.ý This is a huge achievement in a short period.

In the last few months the travel environment has improved, and we have been working hard to bring back customers.

Just yesterday, we reported $35 million in earnings from operations in July.ý Our unit revenue improved 10 percent year-over-year, ahead of our U.S. peersý average for July.

And our operating cash flow for the second quarter of the year was $2 million a day.ý Thatýs a positive swing of $7.3 million a day since December of last year.

We have dramatically improved the financial stability and discipline of this company.

As important as this is, cost reduction alone does not make a competitive global business.ý It represents table stakes that allow us to stay in the game.ý We know it will take much more than that for United to reassert its relevance in a changed ý and constantly evolving ý market environment.

So, we have taken a hard look at these new market dynamics, at all of our markets, our customers and at our competitors to decide where the opportunities are.ý

We all know that there are more airlines today vying for fewer customers, who have become increasingly cost-conscious.ý Even business travelers ý our core customers ý are looking for value for money in a way they never have before.ý

We made sure that we were restructuring the airline to reflect these market realities.ý We took great care to determine what assets were of lasting value and made smart decisions to secure those assets for the long term.ý

Our greatest asset is our global route network ý the ability to serve virtually every major market around the globe either directly or through the Star Alliance, with partners such as ANA, Singapore Airlines and Lufthansa, which extends our reach. Getting our customers to 771 destinations in 133 countries with ease, efficiency and comfort.ý ýýýýTo business travelers especially, this network is essential.

We had the asset, but we did not have the full flexibility to use our route network to respond quickly and aggressively to changes in the market environment.ý Working with our unions, we now have that flexibility.

Simply put, we can now match market demand more effectively and adjust to the shifts in demand with agility.ý We can now apply our human resources far more efficiently and effectively.

So, we'veýdone all that.ý ýýýýNow what?ý ýýýHow do we become a viable enterprise that is strategically relevant in our target markets?ýý

The reality is that all of the progress that we have made at United to date has not made our airline a global market winner yet.ý It has made United market-ready and able to compete.ý

And, that is exactly what we are doing.

We are doing it by making investments in our products and people in order to create an even higher-quality customer experience.ý And, by launching Unitedýs first big marketing and advertising push since 2000.ý You may have seen some of our ads ý or even a sales person or two in your offices here in Hong Kongý

In fact, for the first time in a very long while, United is getting out in front, leading the industry with bold, creative sales and marketing campaigns.ý Let me give you just a few examples.

Thanks to the unmatched strength of the Star Alliance, our ýTicket to the Worldý promotion is something only United can offer.ý Any customer who flies round trip in first or business class earns a free economy class ticket for travel anywhere on the Star Alliance network.ý So far, more than 100,000 customers have registered to participate.

And our ýFly Three, Fly Freeý campaign has inspired an amazing level of involvement ý nearly half a million customers have signed up to earn a free U.S. domestic roundtrip on United.

In the months to come, you'll continue to see us actively stimulating travel, working hard for customers' business, re-establishing our presence.

Hong Kong sits at the nexus of some of the most critical trade flows in the world, and the recent CEPA agreement will only boost that traffic.ý Aviation is a key enabler, indeed a driver, of global growth.ý The economy of the 21^st century places a premium on connectivity ý and air travel is a vital connector.ý Airlines get people and products moving across borders. The importance of that basic function cannot be overstated.

The role of air transportation is particularly important in Hong Kong as this city positions itself as a vital hub for commerce with Southern China.ý And it's important in helping Hong Kong remain a premier business center and travel destination.ý

On United's 20^th anniversary of operation in Asia, I am here to say that United intends to make its contribution to this effort.

We are more committed than ever to the region, to China, to Hong Kong.ý Asia is important to United.ý United operates more non-stop flights to Asia from the fifty United States than any other carrier in the world.ý In fact, Pacific routes account for 17% of our total global business and about 50% of our international business.

By September 1st, United will have restored all trans-Pacific flights with respect to Hong Kong.ý And with the resumption of daily Singapore service to and from this city on October 26, our Hong Kong flight schedule will be completely restored.

As I mentioned at the outset, United and Hong Kong together made news today.ý In a ceremony across the hall with Stephen Ip, Secretary for Economic Development and Labour, and Selena Chow, we announced that United is declaring October, ýVisit Hong Kong Month.ýý The goal is to drive traffic to this area through a variety of promotional activities in co-operation with the Hong Kong Tourism Board. In fact, we are finalizing a program to bring top U.S. meeting planners here to select venues and get them talking about Hong Kong to their customers and clients throughout the United States.

And we intend to continue this kind of activity.ý Every dollar spent on air travel stimulates a multiplier effect ýcircling several times around the local economy to everyoneýs benefit -- from the vendor at Hong Kong International airport to the trendy restaurant in SOHO.

United is moving forward.ý We still have much work to do, but we are now well positioned to compete. Competition is good for the airline industry, the consumer and good for Hong Kong.ý Competition is, in fact, the lifeblood of Hong Kong.

There is, however, an industry issue that impacts our ability to compete, beyond what I've already outlined.

My colleague, the retired CEO of Singapore Airlines, Cheong Choong Kong, recently addressed a gathering much like this one.ý He called his speech, ýStaying Profitable in a Lunatic Industry.ý The title alone speaks volumes about an industry that ý as a whole ý has generated a return on capital greater than the cost of capital in only three years of the past seventeen.

He was primarily speaking about the many regulatory barriers that prevent this industry from being truly globally competitive.ý Among the most important are those that prevent it from addressing its prime inefficiency: overcapacity.ý

There are more than 250 carriers that fly internationally todayý to say that this industry is fragmented is an understatement.

It has to change -- and many airlines are working with multiple governments to revisit restrictions on foreign ownership; to reassess barriers to mergers and acquisitions and to more comprehensive alliances.ý

In short, to give airlines the same tools as any "normal" industry to make its own rational business decisions ý ones that can help position us better competitively on a global basis.

As United transforms itself, we intend to play our part in the transformation of the airline industry.

• We are restructuring the elements of our own business model that need fixing.ý

• We are working with governments and the industry on regulatory changes that need to -- and will -- happen over time.

• And as we do so, we are managing through a new level of volatility with regard to external events.

These multiple challenges donýt give us license to pause operations or to opt out of competition. It just means we get to work that much harder.

At United, we are far from ýmission accomplished,ý we are ýmission ready,ý and our mission is clear. It is what I always refer to as playing three-dimensional chess:

• We are successfully managing through our reorganization process, achieving our objectives on all fronts, including financially.

• We are running an excellent airline today, building on our number-one ranking in the U.S. for on time arrivals and departures in 2002.

ýAnd we are planning well for the future. Creating an airline that can compete, be profitable and win on a global playing field.

The stronger we are, the more we can offer you as business travelers.ý The more we can contribute to Hong Kongý Chinaýý the Asia-Pacific market now and over the long term.

Your choice will be the measure of how competitive United is ý of whether we have met our challenges effectively.

Our ambitions are not modest.ý We want you to Fly United.

Thank you.

#ýý #ýý #