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TEXT-Fitch affirms United Continental Holdings ratings
September 13, 2012 / 4:06 PM / 5 years ago

TEXT-Fitch affirms United Continental Holdings ratings

Sept 13 - Fitch Ratings affirms the Issuer Default Rating (IDR) of United
Continental Holdings, Inc. (UAL) and its two airline operating
subsidiaries, United Air Lines Inc. and Continental Airlines Inc. at 'B'. The 
Rating Outlook is Stable. The ratings apply to approximately $4.2 billion in 
outstanding debt. A list of all rated debt is provided at the end of this 
release. 

UAL's credit profile is supported by its leadership positions across its 
extensive global route network, strong liquidity profile and growing 
unencumbered asset base. Year-to-date operating results have weakened due to 
ongoing challenges with its merger integration, and rising fuel prices. When 
combined with higher capital expenditures (for necessary fleet renewal and other
investments) and a softening macro environment, Fitch expects free cash flow 
(FCF) to be negative in 2012. Nonetheless, UAL remains on track with its 
deleveraging plan as evidenced in the $2.6 billion debt reduction since the 
merger. Management also remains committed to maintaining capacity discipline as 
reflected in the third round of capacity reduction announced last week. 

UAL is going through the teething pains of its merger with Continental. The 
company had a slow start as it received its single operating certificate in 
November last year (approximately a year after the merger closed) but has 
reached quite a few milestones since then. Notably, the company has moved to a 
single passenger service system (SHARES), website and loyalty program; is 
redeploying aircraft for gauge optimization; beginning to harmonize maintenance 
programs; and reached an agreement in principle for a joint pilot contract. 

While these are necessary steps to creating a strong combined entity, they 
depress near-term results. Specifically, UAL's monthly year-over-year passenger 
revenue per available seat mile (PRASM) has significantly lagged the solid 
growth the rest of the industry has enjoyed year-to-date, while operating costs 
have been trending higher due to integration costs and fixing its service woes. 
Fitch expects non-fuel operating expenses to increase as the new pilot contract 
likely imposes higher wage rates, somewhat mitigated by productivity gains and 
cost efficiencies from the merger. United maintains a deep and conservative 
hedging program for fuel, but longer-term Fitch expects the induction of new 
aircraft (737-900ERs, 737 MAX 9s and 787-8s) to improve the airline's fuel 
costs. 

As of June 30, 2012, UAL's total liquidity was $8.2 billion including a new $500
million revolving credit facility (issued Dec 2011). At 22% of revenues, UAL's 
liquidity is currently one of the strongest amongst its peers, but is expected 
to decline by year-end 2012, as the company continues to pay down debt through 
the integration period. To that end, UAL has about $7.2 billion in scheduled 
debt and capital leases over the next four years, including $4 billion of 
non-aircraft debt which the company intends to pay down as they come due. On the
other hand, Fitch expects UAL to fund its sizeable orderbook in the EETC market 
over the next few years. Fitch expects UAL to stay on track with its debt 
reduction plans, notwithstanding a severe fuel shock or collapse in air travel 
demand that is not accompanied with further capacity cuts. Over time, UAL's 
capital structure will likely mirror legacy Continental where the majority of 
secured debt will be comprised of aircraft financing. 

Importantly, as the company pays down its upcoming maturities, UAL is expected 
to shore up a sizeable pool of unencumbered assets. By year-end 2012, the 
unencumbered pool is estimated to be about $3 billion but is expected to 
approach levels similar to Southwest (the only investment grade rated carrier in
the U.S.) in just two years. This is an important consideration for UAL's 
ratings that could significantly boost the carrier's credit ratings over time. 

Fitch's rating on UAL's, United's, and Continental's secured debt is 'BB' (three
notches higher than the IDR) with a Recovery Rating of 'RR1', which reflects 
Fitch's expectations for very high recovery (91%-100%) in the event of a 
potential default. Effective Aug. 10, 2012, Fitch updated its Ratings 
Definitions, expanding the application of '+/-' to corporate issue ratings at 
the 'CCC' level. These designations are limited to instrument ratings and will 
not be used for IDRs, leaving 'CCC' as the sole issuer rating within the 'CCC' 
category. Accordingly, 

United's and Continental's unsecured debt has been revised to rated 'CCC+' (two 
notches lower than the IDR) from 'CCC' with a Recovery Rating of 'RR6', which 
suggests recovery in the 0%-10% range. UAL's senior unsecured debt is rated 
'CCC', three notches lower than the IDR, highlighting the lack of guarantees 
from the two operating subsidiaries. 

What Could Trigger a Rating Action

The Outlook remains Stable as the margin and FCF degradation expected this year 
are primarily driven by UAL's integration issues and mitigated by the company's 
strong liquidity position. Once the company moves past its integration issues, 
Fitch expects UAL to demonstrate significant earnings power with industry 
leading operating margin and sizeable FCF capability.  

As an industry leader with the most extensive global network, Fitch expects UAL'
revenue potential to (at least) match Delta's solid top-line trajectory post its
merger with Northwest. The company's plan to strengthen its balance sheet also 
supports positive ratings action going forward. Fitch believes that UAL could 
see for further ratings momentum once its top-line performance starts reflecting
the revenue synergies from the merger and FCF turns positive again.

On the other hand, if the integration issues persist longer than Fitch's 
expectations, a Negative Outlook would be warranted specifically, if unit 
revenues do not catch up to industry levels or if FCF erosion is worse than 
Fitch's estimates next year. A large fuel shock or weakness in demand without 
further capacity reductions, or fare hikes would also exacerbate UAL' 
operational challenges and limit leverage reduction, possibly resulting in a 
negative action.   

Fitch has taken the following rating actions:

United Continental Holdings, Inc.
--IDR affirmed at 'B';
--Senior Unsecured ratings affirmed at 'CCC/RR6'.

United Airlines, Inc.
--IDR affirmed at 'B';
--Secured Bank Credit Facility affirmed at 'BB/RR1';
--Senior Secured Notes affirmed at 'BB/RR1';
--Senior Unsecured rating revised to 'CCC+/RR6' from 'CCC/RR6'.

Continental Airlines, Inc. 
--IDR at 'B';
--Senior Secured Notes at 'BB/RR1';
--Senior Unsecured rating revised to 'CCC+/RR6' from 'CCC/RR6'.

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