United Airlines (UAL) Corp. Ratings Affirmed by S&P; Action Taken on EETCs

Standard & Poor's Ratings Services affirmed most of its ratings, including its 'BB-' corporate credit ratings on United Continental Holdings Inc. (NYSE: UAL) and subsidiary United Airlines Inc. The outlook is positive.

At the same time, we raised our ratings on United Airlines' 1999-1 class B, 1999-2 class B, and 2000-1 class B enhanced equipment trust certificates (originally issued by Continental Airlines Inc.) and lowered our ratings on United's 2013-1 class B and 2014-2 class B EETCs, in each case because of changes in collateral coverage that were outside of our expectations.

United Continental reported much improved earnings and cash flow in 2015, compared with the previous year, and its first quarter 2016 earnings were roughly flat against the same period a year earlier. The airline narrowed its margin deficit against peers American Airlines Group Inc. and Delta Air Lines Inc., continuing a trend of the past two years.

"We expect earnings and credit ratios to level off in 2016 as lower fuel prices offset weaker pricing and rising non-fuel operating costs," said Standard & Poor's analyst Philip Baggaley. "We expect year-over-year fuel savings to narrow as the year proceeds, but the negative revenue comparisons should also lessen."

United Continental is the third largest U.S. airline, the result of a 2010 merger between UAL Corp. (parent of United Airlines) and Continental Airlines Inc. The company has major hubs at airports in Newark, N.J., Houston, Chicago, Denver, Los Angeles, San Francisco, and Washington (Dulles Airport), as well as a large presence in Asia. United Airlines has a good position in the markets where it competes and a comprehensive route network diversified across U.S. and overseas. However, the company participates in the cyclical and price-competitive airline industry. The largest four U.S. airlines, which now have a combined market share of more than 80%, have become more cautious about adding capacity in recent years, focusing on utilization and pricing, so as to maximize return on capital. However, the industry is still susceptible to the U.S. and global economic cycles, oil price fluctuations, and unforeseen events such as global terrorism and disease outbreaks.

United Continental recently made extensive changes to its board of directors that will result in half of the board turning over and the appointment of Robert Milton, former chief executive of Air Canada, as nonexecutive chairman. Two of the new directors represent investors that had pressed for changes to include greater airline industry experience on the board. The investors were dissatisfied with United Continental's underperformance against American and Delta (although that gap has narrowed over the past two years and the current CEO has led the company for only seven months). "We see no immediate credit implications from these changes, but will be monitoring the new board for any changes in strategy or financial policy," said Mr. Baggaley.

We could raise ratings over the next 12 months if United Continental's operating performance and financial policy enable it to maintain an FFO to debt ratio in the high-20% area or better, and we believe it will remain there.

We could revise the outlook to stable if weaker-than-expected earnings or more aggressive shareholder rewards lead us to conclude that the company's funds flow-to-debt ratio will slip back to the low-20% area or below over the next year.

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