UAL Jonathan Bocanegra

Industry Trends Supply Trends: Capacity reductions industry wide along with consolidation and merger activity Provides Major airlines higher pricing power Reduction and streamlining fleets. UAL as well as other major airliners retiring older aircrafts while purchasing more efficient newer crafts at a slower rate.

Industry Trends Demand Trends Slow improvement in demand. UAL rose in revenues by .1% in 2012. Although they are aimed to do higher, sluggish demand and economic growth while strain future potential

Price Consolidation and capacity reduction will aid the airlines to raise fares and sustain higher fares if demand slips*. I’m optimistic on the pricing trends and possibilities. Although the industry is very price competitive as competitors match each other price, I think that as a trend, we’ll see overall fares rise for the next couple of years.

Earnings With a higher top line, UAL consolidation along with retiring older aircrafts and streamlining their flight patterns, it is my opinion that we’ll see an increase in EBIT higher than the top line. Fuel Expenses* * UAL is hedging to manage their fuel costs however with the volatility of fuel costs and dependence on global supply and demand, this is a very difficult thing to manage. For the short term, it appears gas prices are subsiding however, that can change very quickly. Quick rise in oil prices can cripple the US recovery as well as the already battered airline industry which is coming out of bankruptcy.

Bear vs Bull Bull Case: Oil prices remain restrained; US recovery continues and demand for air travel rises faster than expected. UAL merger sees benefits sooner than expected. Bear Case: Oil price rise sharply. Unfortunately, this one aspect can deal a “death blow”.

My Model I do not see a high probability in the bear case occurring to the extent that would cripple the US recovery. However my model does factor in expected rising global demand for oil in the next couple of years. This is why my LTG is quite less than the economy. I do not think Free Cash Flow will rise as fast as the bottom or top line.

My Model Cont. *See Excel Worksheet $ 32.54 14.94% Discounted Cash Flow Period 1.00 Year   2012 2013 2014 Net Sales 37152 38750 40493.75 Growth Rate 4.30% 4.50% EBIT 1362 1518.63 1632.527 EBIT Growth 11.50% 7.50% EBIT margin % 3.67% 3.92% 4.03% Tax Rate % 30.00% NOPAT 953.40 1,063.04 1,142.77 D&A 1522 1705 1670 % of Sales 4.10% 4.40% 4.12% less capex 2016 2490 1695 % of sales 5.43% 6.43% 4.19% FCF 459.40 278.04 1,117.77 FCF Margin 1.24% 0.72% 2.76% PV FCF 1,039.79 WACC LT Growth 1.50% 1,317.83 PV Terminal 17,329.75 Enterprise Value 18,647.58 Net Debt (6,133.00) Equity Value 12,514.58 Shares Outstanding 335.00 2yr Equity Value Per Share $ 37.40 Current Price 7/1/13 $ 32.54 Expected 2 year Growth 14.94% *See Excel Worksheet

Recommendation I think that given the nice price trend UAL is enjoying, I change my vote to continue to hold, but with caution. I will constantly monitor their performance and oil prices. If they miss earnings, FCF, or EBIT % change target, I will recommend we sell.