We recently upgraded our long-term recommendation on
United Continental Holdings Inc.
) from Underperform to Neutral based on future growth prospects.
The largest U.S. airline retains the Zacks #3 (Hold) Rank for the
short term (1-3 months).
We believe United has resolved to a certain extent the
reservation glitches that had taken a toll on the demand for its
services in the first quarter, ensuing in higher costs and revenue
loss. Reservation glitches occurred in March due to the adoption of
a single loyalty program, Mileage Plus, and the transition of the
Continental website into the new United website.
The adoption of a single loyalty program has created a new
growth opportunity for the company's loyalty business. We believe
this segment will be the highest margin-producing business in the
long term as United capitalizes on all the benefits of
strengthening and expanding networks, widening new memberships and
launch of new products like MileagePlus Headliners and the Gift
Though the company's future growth prospects remain bright based
on improving air travel demand, expanding product and services,
fleet and network optimization, hedging strategy and the expected
merger benefits from Continental Airlines, we believe 2012 will be
a critical year owing to the successful integration of Continental
Airlines, surging fuel prices, uncertain economic conditions and
the threats of recession in Europe.
Additionally, United sees some inflationary pressure in salaries
and wages of employees, which will increase the operating cost of
the company in the near future. Further, ancillary business
(product introductions and improvements) expenses as well as fleet
rightsizing initiatives are expected to weigh on the near-term
On the liquidity front, United Continental, which gives strong
Delta Air Lines Inc.
Southwest Airlines Co.
), continues to have a healthy balance sheet. The company had $7.3
billion in cash and short-term investments, and $500 million in
undrawn revolving credit facilities as of March 2012.
Moreover, the Zacks Consensus Estimate projects earnings per
share of $3.99 for fiscal 2012, representing a substantial growth
of 14.40% annually. The Zacks Consensus Estimate moved up by 20
cents in the last one month, suggesting positive analyst sentiments
on the stock.
DELTA AIR LINES (DAL): Free Stock Analysis
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UNITED CONT HLD (UAL): Free Stock Analysis
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