1. UAL
Jonathan Bocanegra

2. 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.

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

4. 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.

5. 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.

6. 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”.

7. 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.

8. My Model Cont. *See Excel Worksheet $ 32.54 14.94%
Discounted Cash Flow
Period
1.00
Year
2012
2013
2014
Net Sales
37152
38750
Growth Rate
4.30%
4.50%
EBIT
1362
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 $
Current Price 7/1/13 $
Expected 2 year Growth
14.94%
*See Excel Worksheet

9. 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.