) was formed after the merger of United Air Lines and
Continental Airlines. The merger agreement was reached in May
2010, but it wasn't until October 2010 that the two airlines
started reporting the results together. With key global air
rights in the U.S, Europe, Middle East, Africa, Latin
American and the Pacific, United Continental (
) has the world's most comprehensive global route network.
UAL competes with Delta Air Lines (
), Southwest Airlines (
), American Airlines (
), and U.S. Airways (
Our price estimate for United Continental
stands at $27.89
, which is roughly 20% ahead of market price.
Launch of Coverage on United Continental ; $27.89
We've broken down our analysis of United Continental into
four main business segments:
United Continental US
2. United Continental International
3. Regional Affiliates
4. Cargo and Other Businesses
Airline Industry at a Glance
Commercial aviation helps generate more than $730 billion
in economic activity and supports almost 11 million U.S.
jobs. As the U.S. and world economies continue recovering
from the recent economic downturn, the aviation sector will
make a strong contribution towards revitalizing the job
market. The U.S. airlines industry suffered a major setback
in 2008 due to the recession that reduced both business and
leisure air travel.
Since then, the U.S. economy has slowly recovered leading
to an increase in demand for air travel in 2010 and
consequently higher average fares. Traffic demand is highly
correlated with economic growth and consumer spending
accounts for nearly 70% of economic activity in the U.S.
Based on expectations for the an economic recovery in the
coming years, we believe this will lead to strong demand for
Impact of Merger and Competition on Market
Over the past year, United Airlines has lost U.S.
market share to low-cost airlines such as Southwest
Airlines and JetBlue. Prior to the merger, United Airlines'
U.S. market share deceased form 11% in 2007 to 10% in
2009. Southwest Airlines pioneered the low-cost model
which enabled it to offer fares that were significantly lower
than those charged by traditional network airlines such as
Delta Air Lines, US Airways, American Airways, and United
Continental. UAL's U.S market share increased from 10% in
2009 to nearly 12% in 2010 due to the merger.
UAL expects the merger to deliver $1.0 billion to $1.2
billion in net annual synergies by 2013, including between
$800 million and $900 million of incremental annual revenues.
The increase in revenue, will largely come from expanded
customer options resulting from the greater scope and scale
of the network as well as fleet optimization. We expect UAL's
U.S. market share to increase from just under 12% in 2010 to
nearly 16% in 2011 and stay at that point thereafter as the
increase in market share due to expanded customers options
will be offset by decrease in market share due to competition
from low-cost airlines
Domestic Passenger yield (passenger revenue per revenue
passenger mile) for UAL has decreased slightly in recent
years due to competition from low-cost airlines and poor
domestic economic conditions. UAL and other traditional
network airlines rely upon the hub-and-spoke system, which
concentrates most of an airline's operations at a limited
number of central hubs and serves most other destinations in
the system by providing one stop or connecting flights
through a hub. Southwest Airlines, JetBlue Airlines and
other low cost airlines use a point-to-point system, which
allows for more direct flights.
Upgrading to Offer Premium Services
United offers first and business class seating on
transcontinental flights and United Economy Plus. United's
aircrafts offer international premium travel experience
featuring 180-degree, lie-flat beds in FirstBusiness class.
Certain aircrafts have been refitted with new premium seats,
entertainment systems and other product enhancements. United
has completed these upgrades on all of its 21 Boeing
767-300ER aircrafts, all of its 24 Boeing 747 aircrafts and 8
of its 46 Boeing 777 aircrafts. It expects to complete the
remaining aircraft updates by 2013.
Continental offers flat-bed seats on FirstBusiness class
on its Boeing 777 aircrafts and 31 of its 41 Boeing 757-200
aircrafts with approximately 6.5 feet of sleeping space,
laptop power and 15.4-inch video monitors. It expects to
complete the remaining Boeing 757-200 aircraft updates by
summer of 2011. It is also installing DirecTV satellite
programming on its entire fleet with more than 100 channels
of live television and previously recorded programming. It
has completed the installation of DirecTV on the majority of
its Boeing 737 Next-Generation aircrafts and expects to
complete the installation on its Boeing 757-300 aircrafts
See our full analysis for United
Continental's stock here