APC225

EMPLOYEE BULLETIN: UNITED ANNOUNCES CHANGES
IN 2011 CAPACITY PLAN

In our February traffic release issued after the close of the stock market today, we announced that we are reducing capacity this year in response to the recent increase in fuel prices.

Effective with our May schedule, we plan to reduce consolidated capacity by 1 percent from our prior plan. Effective with our September schedule, we plan to reduce consolidated capacity by 4 percent from our prior plan.

In the fourth quarter specifically, we expect consolidated domestic capacity to decrease 5 percent versus the same period last year. However, we plan to increase more profitable international flying, and our consolidated international capacity in the fourth quarter is expected to be up by 2 percent, compared with the same period last year.

As a result of the capacity changes, for the full year 2011, we will reduce our domestic capacity by 1.5 to 2.5 percent compared with 2010, while increasing 2011 international capacity by 2.5 to 3.5 percent compared with last year. So for the full year 2011, our consolidated capacity will be about flat with what it was for 2010, rather than growing the 1 to 2 percent that we planned for the year.

The capacity reductions will come from reducing flight frequencies, indefinitely postponing the start of certain markets and exiting less profitable routes, primarily in our domestic schedule. The modest increase in international capacity allocates our aircraft on more profitable routes.

We will announce details of specific schedule changes as they are finalized and entered into seasonal schedules.

In addition, we are analyzing exiting certain less fuel-efficient aircraft from our fleet and will be taking other cost-saving measures.

“High and rising fuel prices hurt our business and our financial results,” said Jeff. “Although we’ve raised our fares recently, we aren’t fully recovering our increased costs, and higher fares reduce demand. As a result, we need to reduce our capacity and allocate our aircraft carefully to markets where we can make money.”

To deal with higher fuel prices, we have initiated several fare increases and fuel surcharges. In addition, we continue to have an active fuel hedging program. For the first quarter of 2011, 63 percent of our expected fuel consumption is hedged, and for the full year, we have hedged 40 percent of our expected consolidated fuel consumption. Finally, we are running our operation efficiently to reduce fuel consumption.

“We will continue to work together to run our operations as efficiently as possible in the face of these high fuel prices. I appreciate the work that my co-workers are doing to keep the new United focused on fuel efficiency,” Jeff said.

Capacity Reduction Q&A

2010 was a successful year for both United and Continental. Why are we reducing capacity now?

In a rising fuel-price environment, more flights become unprofitable and unsustainable.

Even before the recent rise in the price of oil, we spent more money on fuel than on our people worldwide, our aircraft worldwide, or our facilities worldwide – $9.6 billion in 2010, up 33 percent from 2009. Every $1 increase in the price of a barrel of oil costs us $100 million annually. With higher fuel prices in 2011, we now expect to spend nearly $13 billion on fuel this year.

For us to remain competitive and make money, we have to manage our capacity responsibly and fly the right routes with the right frequency to permit us to remain profitable.

Other airlines are announcing reductions that only cut previously announced 2011 capacity increases. Are we cutting more capacity than they are?

We are cutting the right amount of capacity for us to better match our capacity to demand and the reduced profitability of our routes.

Aren’t there other ways that we can deal with higher fuel costs, such as raising fares, adding fuel surcharges, additional fuel hedging or reducing non-operating expenses?

We have taken actions in all of these areas since the price of fuel began increasing in 2010. We intensified those efforts in the fourth quarter and continued to do so in 2011. Managing capacity will give us the ability to be more effective at pricing our product more appropriately for this fuel environment.

It is important for us to note that, although we’ve had some success raising fares, we can’t expect to fully offset the effects of higher fuel prices this way. Each fare increase reduces the affordability of air travel, so fewer people travel, which means we have a smaller market to sell into, and, therefore, we need fewer flights.

Are we going to pursue other cost-saving measures?

To try to remain profitable as we deal with extraordinary increases in fuel prices, we will need to reduce costs as we reduce capacity. We will work together across the company to increase efficiency and work to accelerate realization of cost synergies from our merger.

Will we involuntarily furlough frontline people as part of this capacity cut?

Not at this time. However, we can’t continue to cut capacity without also reducing the size of the workforce. As always, we will attempt to mitigate any future employee impacts with voluntary programs such as leaves, early outs, job-share and early retirement programs.

Will there be any involuntary reductions in management headcount as a result of this capacity cut?

We expect that that there will be few, if any, management reductions, because we anticipate vacancies will occur as some management co-workers decide not to relocate to Chicago or Houston. Additionally, we expect to mitigate any management impacts with voluntary programs such as leaves, early outs and early retirement programs.

Doesn’t it make sense to reduce more regional flying?

About half of our domestic capacity reduction will come from regional flying, much of it through a reduction in daily frequencies or day-of-week flying and, in some cases, exiting routes. As the world’s leading airline, we want to continue service to the communities in our network, which also enables us to feed customers into our hub locations for access to our destinations around the world.

What routes will be impacted?

We will share this information as we make the schedule changes.

How will I know how my hub or fleet is going to be affected?

As we finalize schedule changes, we will share the information with co-workers, customers, community and government leaders and others. We realize that any changes can affect the lives of our co-workers, and we will share the information as soon as possible.