We See United Continental at $27 if Fuel Prices Cooperate

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United Continental Holdings ( UAL ) recently announced its Q2 earnings. While its earnings reflected some benefits from industry consolidation and improving economic conditions that resulted in higher fares and unit seat mile revenues, fuel prices continue to be a major concern for all airlines. UAL was formed after the merger of United Airlines and Continental Airlines in May 2010 though it should receive its final approval from regulators later this year. With key global air rights in the U.S, Europe, Middle East, Africa, Latin American and the Pacific, United Continental ( UAL ) has the world's most comprehensive global route network competing with the likes of Delta Airlines ( DAL ), Southwest Airlines ( LUV ), American Airlines ( AMR ) and U.S. Airways ( LCC ).

We have a $27 price estimate for United Continental , which is around 30% ahead of the current market price.

Fares and unit economics improve as demand picks

The average fares charged by United Continental increased 13% as demand for air travel continued to improve with the macro conditions. This also boosted the revenues by 10%. United Continental's continued capacity discipline along with improved fares resulted in improved unit seat mile economics as passenger revenue per available seat mile (PRASM) grew 9% and passenger yield increased 10%.

During the quarter, the United and Continental merger continued to be on track as they made steady progress integrating products, services and policies to provide a more consistent travel experience for its customers. Apart from the planned cuts for capacity discipline post merger, United Continental also had to temporarily reduce its capacity to and from Japan by 12% in the wake of earthquake and tsunami that led to a $100 million revenue loss.

Rising fuel costs still a concern

The fuel expenses continued to be a heavier burden despite hedging and increased by 30% during the quarter. Yet the company claims that had it not been hedging its fuel-prices, the fuel price increase would have exceeded 45%. This raises some concerns on the company's future fuel costs in the event fuel prices remain persistently high and the company has difficulty hedging or raising prices to offset these input costs.

See our complete analysis of United Continental



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AMR , DAL , LCC , LUV , UAL

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