Taking UAL to Lower Atmosphere

We are significantly reducing our estimates on UAL Corporation (UAUA - Analyst Report, United or UAL) to a per share loss of $8.05 from a loss of $1.50 for 2009 and to a loss of $1.50 from earnings of $1.75 for 2010.

We have lowered our revenue estimates following UAL’s recent investor update on June 17, in which UAL estimated that second quarter mainline revenue passenger miles are expected to fall 11.7-12.7% and mainline unit revenue should drop 20.1-21.1%, while mainline unit operating costs excluding certain items will decline about 19.8-20.1%.

On a more positive note, at the end of the second quarter, UAL expects to be in full compliance with credit facility covenants, and increased its total cash balance during the quarter by $100 million to $2.8 billion.

Negatively, Fitch recently reduced its long-term credit rating on UAL Corporation to CCC from B-, citing the impact of the global recession on the company’s revenues, given the company’s exposure to the international and business travel markets, which are being particularly hard hit.

Separately, the IATA predicts a global airline industry loss of almost $9 billion (including $1 billion for North American air carriers), almost double its $4.7 billion estimate a few months earlier, due to a sharp 15% -- $80 billion -- drop in revenues (by comparison, global airline revenues dropped only 7% following the September 11, 2001 terrorist attacks in the US).

This reflects declines of 8% in passenger traffic and 17% in cargo traffic, as well as steep discounting of airfares due to excess capacity. The capacity supply imbalance will continue as about 4,000 new aircraft are expected to be delivered over the next three years.

We are maintaining our Hold recommendation on UAUA, noting that the current Zacks rank is 4, indicating near-term selling pressure on the stock. The shares are up about ½% in afternoon trading from yesterday’s closing price of $3.82.