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On Feb 18, we upgraded our recommendation on United Continental Holdings Inc. (UAL - Analyst Report) to Neutral from Underperform, owing to a number of positive aspects like a smooth and reliable operational base, re-designing of fleet structure and efficient services. Management’s agreement with the pilot group is also expected to generate long-term benefits. The stock currently carries a Zacks Rank #3 (Hold).

Why the Upgrade?

Looking ahead, we believe that United Continental is poised to benefit from its industry-leading unit revenue growth, strong operational execution, competitive cost structure, capacity discipline plus fleet and network optimization. The company aims at strict capacity deployment to maintain a profitable balance between demand and supply. Management targets capacity reduction of about 1.5% for 2013, while for the first quarter, it is expected to decline 4.1% to 5.1%.

We appreciate the company’s progress in expanding its on-board products and services in both domestic and international fleets. The company continues to improve services and introduce novel features that will enhance value and profitability by rendering high customer satisfaction.

With the target to expand its operational wings far and wide, United Continental is extending its global route network. Recently, the company announced plans to operate twice-daily nonstop flights between Denver and Dickinson, North Dakota, starting Jun 6, 2013. Apart from this, the company will likely start operations across domestic markets including Fayetteville, North Carolina and Santa Fe, New Mexico.

However, fourth quarter loss plus not-so-favorable factors such as fuel price instability, high non-fuel expenses, competitive threats, fluctuations in passenger and cargo demand along with sluggish economic conditions make us cautious on the stock.

Other Stocks

Other stocks operating within the airline sector that are worth considering are Delta Air Lines Inc. (DAL - Analyst Report), Deutsche Lufthansa Aktiengesellschaft (DLAKY) and Republic Airways Holdings Inc. (RJET - Snapshot Report). All the 3 firms currently hold a Zacks Rank #1 (Strong Buy).

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