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'.