(UAL) United Continental Holdings Earns FAA Certification

The largest U.S. airline United Continental Holdings Inc. (UAL), created by the merger of United Airlines and Continental Airlines last year, received a single operating certificate from Federal Aviation Administration (FAA).

So far, United and Continental were operating as separate entities and their integration is progressing well. As of September, United and Continental’s check-in and ticket counter facilities have been relocated at 53 airports and more than half the fleet, including the first Boeing Co. (BA) 747-400 has been repainted in the new United colors.

The combined company is yet to integrate the passenger services. This is the major milestone in the integration process. United Continental expects the implementation of a single loyalty program, Mileage Plus, in the first quarter of next year.

Going forward, United Continental will continue to benefit from merger synergies of $1 billion to $1.2 billion by 2013. Merger synergies would be in the form of $800 million to $900 million of additional revenue and $200 million to $300 million in cost savings. Approximately 25% of total synergies are expected to be realized this year.

With the sector’s best cash position, industry-leading revenues and a competitive cost structure, the merger provides improved access from Continental hubs to United’s strong Asia network and from United’s hubs to Continental’s international network in Latin America and Europe.

Post-merger, United Continental is making continued progress in expanding its on-board products and services in both domestic and international fleets. The company plans to invest more than $550 million to upgrade its aircraft interiors.

In this context, United Continental is adding flat-bed seats to all international premium cabinets and Economy Plus seats on the Continental fleet that will likely double the overhead storage space of the aircraft. Further, United Continental is improving its in-flight entertainment options by installing advanced broadband Wi-Fi services in its mainline fleet as well as introducing streaming wireless video in the Boeing 747-400 aircraft.

Although the merger benefits from Continental Airlines bode well for United Continental’s future growth, the successful integration, competitive threats from its peers Delta Air Lines Inc. (DAL) and AMR Corporation (AMR) and unionized workforce might limit the upside potential of the stock.

We are currently maintaining our long-term Neutral rating on United Continental. For the short term (1-3 months), the stock retains a Zacks #3 (Hold) Rank.

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