United-Continental Revs to Rise

United Continental Holdings Inc. (UAL - Analyst Report), the holding company for both United Airlines and Continental Airlines, said that it expects unit revenue or passenger revenue per available seat mile to rise 9.75% to 10.75% in the fourth quarter of 2010.

Consolidated capacity or available seat mile is expected to increase by 4.2% and 1.1% in the fourth quarter and full-year 2010, respectively. Consolidated unit cost or cost per available seat mile, excluding fuel and special items, is estimated to rise in the range of 2.25% to 2.75%. The company also expects to exit the year with $8.6 billion to $8.7 billion in cash and short-term investments.

United Continental is expected to cut capacity in cities such as Chicago and Denver in 2011. The company’s capacity in the U.S. will likely decline 1.9% in the first quarter while the other airlines in the U.S. will collectively boost capacity about 2%.

United Continental continues to expand its network. In order to optimize the combined route network of United Airlines and Continental Airlines, the company plans to launch its services on several new nonstop routes in 2011.

Most airlines are benefiting from the rebound in traffic as well as high fares. A week ago, the second largest airline, Delta Airlines (DAL), in the U.S., announced that it expects an operating margin of 6% to 7% for the fourth quarter of 2010, compared with its prior outlook of 6% to 8%. The company expects that the next concluding quarter will be profitable as softness in Trans-Atlantic ticket prices was offset by stronger growth in Delta's domestic business.

Like the other airlines in the country, United is also committed to continuously improve costs, revenues and operations to sustain and enhance a competitive margin. The company is benefiting from industry consolidation as well as improved economic conditions, including an increase in business travel and premium service demand.

In addition, United Continental is expected to generate net annual synergies of $1 to $1.2 billion by 2013, with $800 to $900 million in additional revenue and $200 to $300 million in cost savings.

Further, we expect United Continental to constantly perform better than its peers based on its high exposure to business travel, capacity cuts, industry leading unit revenue growth, solid on-time performance, strong execution, competitive costs, and strengthening of fleet and networks. However, we remain on the sidelines due to high unionization, time-taking integration process and competitive threats.

We are currently maintaining our Neutral recommendation on United Continental, supported by the Zacks #3 Rank (Hold).

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