The theme for this conference:

Aviation’s New Flight Plan: Innovation, Adaptation and Consolidation, speak directly to the challenge facing our industry. It comes at a critical time for our industry and the U.S. Chamber of Commerce is certainly well suited to address this subject.

Five years ago, when I joined United, the case for change was clear -- the U.S. airline industry was in financial crisis; many carriers, including United, could not access the credit and capital markets and eventually sought bankruptcy protection. 

More than 20 U.S. airlines filed for chapter 11 protection between 2001 and 2006, including four of the six largest network carriers. 

Those that restructured in and out of Chapter 11 reduced their costs and improved their balance sheets.

These restructurings had an impact on all constituents -- vendors, aircraft financiers, employees and customers – and certainly investors.

That said, they did not change historic dysfunction; and will not be sufficient, with oil at $100+ a barrel, to maintain the industry's short-lived period of profitability.

The case for change in this industry is more compelling today than it was five years ago. 

The only way to enable success in any business, that I am aware of, is to confront challenges and to seize opportunities.  

In that regard, my remarks this morning will focus on our company and the industry factors that influence us.  I am not being prescriptive for others who may see things differently -- this is our view of competing successfully.

Today, we have a straightforward financial ambition -- to earn a level of profitability in line with general U.S. industry;  essentially the minimum standard for a public company in a free market; we believe anything less is unacceptable.

This may seem an unremarkable goal. Yet, in this industry, earning returns which are “average” of general industry - is both ambitious and remarkable.

Five years ago our ambition was also straightforward: to fundamentally restructure United -- to regain our ability to compete; ultimately to be a sustainable enterprise that can successfully balance the needs of all constituents -- our employees, our customers and the communities we serve, as well as our investors.

At that time the U.S. industry was in very dire straits.

·         In 2002 United’s operating loss was $2.8 billion, out of a combined industry loss of $9.5 billion

·         And we were burning through some $5 million in cash, per day

The end result was a $23 billion restructuring of our company:

·         $7 billion in annual cost reduction

·         debt reduced by some $13 billion with

·         a further reduction of $2.6 billion over the last two years

We reduced our mainline fleet by more than 100 aircraft, eliminating older inefficient planes and thereby reducing cost.

Yet today, by making smart choices about our network and better use of our assets, we serve more destinations than we did 5 years ago.

Our revenues have increased by 27 percent, or $4.3 billion dollars.

·         Last year we generated $1 billion in operating earnings and;

·         $2.1 billion in operating cash flow

·         That breaks out to almost $6 million a day

·         An $11 million a day swing from five years ago

We drove improvements -- managing our business to meet different and changing market requirements; providing our customers with innovative and differentiated products and services they value and they are willing to pay for.

·         We launched ps for premium customers flying coast to coast

·         We put extra leg room in Economy plus – counterintuitive at a   time when others were adding seats

·         We created Ted to better compete with LCCs in leisure markets

·         We eliminated food service in domestic coach and launched “Buy on board,” turning a $100 million cost that few customers valued into a profit center

·         And, we were first to move domestic capacity to international routes

Despite our mainline fuel expense increasing by some $3 billion -- we achieved our first ambition to successfully restructure the company -- and last summer we took stock of our progress and that of the industry overall, as we contemplated the next five years. 

We assessed the scorecard for United and the U.S. airline industry -- last year generating about a 3 to 4% pre-tax margin, clearly below what is needed to achieve minimum acceptable returns of the “average” of general industry -- and nowhere near what would be expected at what appears to be the top of the current cycle for this industry.

The airline network carriers continue to face serious challenges:

·         Real air fares have been declining for the past 20 years and nominal fares have declined since 2000.

·         LCCs have grown from 21% of the market to 32% of the market today; and with coverage in approximately 80% of the US market; they are an integral part of the competitive landscape.

And, outside the US, leading foreign carriers continue to strengthen their position when compared to their U.S. counterparts.

The world’s two largest airlines based on revenue have been created by the merger of Air France with KLM and the merger of Lufthansa with Swiss Air.

·         Leading foreign carriers have a higher percentage than U.S. carriers of capacity deployed outside of their country of origin -- and sixteen foreign flag carriers have begun service to the US since 1999.

·         Foreign carriers have made significant investments in their fleets and have moved even further ahead of the US in terms of the quality of their products and services; leading recent innovation, both in equipment and customer enhancements.

·         There are no US carriers ranked in the top 10 for next-generation aircraft on order.

·         Emirates is at the top of the list with more than $30 billion in orders – including 58 A380’s.  

These carriers are adapting as the regulatory environment continues to evolve – moving toward an open market for global air travel; with the European and now the Australian Open Skies agreements, the most recent examples of globalization.

Airlines play a vital role in the world becoming flatter. 

At United we support Open Skies; we want to compete and believe the market should be allowed to work.  Open Skies brings increased competition and opportunity for those who are ready to compete.

These are the realities of the market place - it is with that understanding that we created our five-year plan to be the global airline of choice for premium customers, employees and investors. 

Strengthening our airline by running it as a business starts with our customers. 

We benchmark our international competitors to determine what our customers should expect from us for both product and service. 

We recognize our customers, like our investors, have increasing choices, and we want them to choose United.

We begin with getting the basics right; comparing performance to the best airlines and looking for best practice beyond our industry.  These include;

Disney and Ritz Carlton, to improve customer service;

Toyota for benchmarking continuous improvement that drives efficiency and promotes safety through standard work -- as well as innovative solutions such as NASCAR pit crew training for our ramp teams --

which benefit the performance of our operations and directly correlate to customer satisfaction.

We have set the standard for product improvement among our U.S. competitors with our lie flat seats in International First & Business Class.  Our new premium lobby at O’Hare offers our best customers a new level of service and convenience.

We are creating new revenue streams by unbundling products and services; merchandising those our customers value and will pay for.  Giving customers the option to pay for products they value, such as Economy Plus, will generate some $220 million of incremental revenue -- while our best customers sit in Economy Plus for no extra charge, a recognition of their loyalty. 

We are changing expectations by charging for additional services our customers use.  For example, only 1 out of 4 customers checks a second bag, and we think it appropriate that customers who make that choice -- and not the other 75 percent -- pay for those bags.

When we made that announcement in February, it generated much consternation and more media interest than $105 oil.  Three other carriers have since announced that they, too, will be charging for a second bag. 

Adding to this portfolio of options and services, continuing to innovate and adapt to market realities, we believe we can create a $1 billion revenue opportunity for United over the next five years. 

We continue to demonstrate capacity and pricing discipline by ensuring we put our assets to work where they make sense; high-growth areas such as China, where we are the leading U.S. carrier. 

Divesting assets that do not earn an acceptable return is just as important as investing only where we can earn sufficient profit. United will not be taking delivery of new aircraft until we need them and we are confident they will fly profitably.

Our objective is to have a clear line of sight to the performance of each business unit.

This improves business decisions and eliminates cross subsidies that mask inefficiencies, and enables us to create value from ancillary businesses. 

We are consistent in our goals for United – and in our belief that U.S. network carriers would benefit from consolidation.  This is particularly true today in an environment where oil prices are rising and foreign carriers are merging.

There is sound industrial logic behind consolidating a fragmented industry; allowing carriers to build comprehensive, national networks, enabling them to compete globally and perform better through all phases of the business cycle – enabling U.S. carriers to compete more effectively against international carriers who are more profitable and better capitalized.

The negative outcomes commonly associated with mergers -- such as reduced flights, customer service cuts and job losses – are industry realities today and are, in fact, exacerbated by a fragmented market dealing with the unprecedented price of oil. These challenges can be overcome in the long-term by creating a sustainable domestic industry.

Consolidation will create stronger global networks to connect US businesses to the world; access that makes US commerce more competitive.

As to smaller markets in the US, there is no evidence they will be harmed. In fact, we depend on them, and they depend on us.

One of the best ways to ensure service to our smaller communities is to maintain the long-term health of the network carriers that serve them.

The Chief Economist for the Air Transport Association of America, John Heimlich recently testified that U.S. airlines are expected to spend an additional $14 billion on fuel in 2008, shattering the record set last year.

In 2007 United paid on average $72 per barrel of oil – with prices around $100 per barrel, we face a cost increase of more than $2.0 billion. To put that in context, it is more than twice the operating earnings we generated last year, in what may prove to be the peak of the most recent cycle.

As one economist recently stated “the airlines are boom and bust…the problem is the booms are small and the busts are big.”

That comment may beg the question those of you attending this conference will endeavor to answer:

“What will it take to get this industry out of its cycle of serial bankruptcies?”

If you acknowledge the current state of the industry as it is, and yet accept our view that the industry should achieve general industry returns, then one gets a sense for just how much needs to change.

There is no “one thing” -- not an asset spinoff or consolidation that will work alone.

With the pressure of higher oil prices, we need to accelerate the pace of change.

A recent analyst report from Merrill Lynch said quite pointedly: “Frankly, we do not believe that the U.S. airline industry can withstand $100+ a barrel oil prices without major structural change and as long as the industry remains highly fragmented, sustainable profitability will remain an elusive goal.”

To succeed in the global marketplace will take a new mindset… the old paradigms no longer apply.  The world is changing and industry and regulatory frameworks must continue to adapt and change with it.

There is no hiding from the competition that comes with a globalizing economy.   Either we are in a position to compete and win – or there has to be a better idea – and, frankly, I don’t know what that might be.