United Continental Holdings, Inc.

December 28, 2014 United Continental Holdings, Inc. (UAL-NYSE) NEUTRAL Current Recommendation Prior Recommendation Outperform Date of Last Change 12/26/2014 Current Price (12/26/14) $65.28 Target Price $69.00 SUMMARY United Continental reported mixed financial results in the third quarter of 2014 wherein the bottom line outpaced the Zacks Consensus Estimate while the top line missed the same. Low fuel prices coupled with increased air travel and fleet restructuring programs continue to boost profits for the company. Moreover, expansion of its global and domestic route network and rollout of several value-added services will likely propel growth moving ahead. However, the company is highly exposed to foreign currency exchange rate risk. Moreover, a highly leveraged balance sheet along with increased capital expenditure related to new fleet purchase may continue to dent its cash position. We, thus, downgrade our recommendation on United Continental from Outperform to Neutral. Our target price is $69.00 per share. SUMMARY DATA 52-Week High $67.40 52-Week Low $36.56 One-Year Return (%) 72.69 Beta 0.74 Average Daily Volume (sh) 6,165,989 Shares Outstanding (mil) 369 Market Capitalization ($mil) $23,959 Short Interest Ratio (days) 1.73 Institutional Ownership (%) 96 Insider Ownership (%) 1 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) 19.9 Earnings Per Share (%) -10.3 Dividend (%) N/A using TTM EPS 14.4 using 2014 Estimate 12.9 using 2015 Estimate 7.5 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page Risk Level * Above Average Type of Stock Large-Growth Industry Trans-Airline Zacks Industry Rank * 17 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 8,602 A 9,939 A 9,909 A 8,702 A 37,152 A 2013 8,721 A 10,001 A 10,228 A 9,329 A 38,278 A 2014 8,696 A 10,329 A 10,563 A 9,252 E 38,840 E 2015 8,908 E 10,514 E 10,890 E 9,439 E 39,418 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 -$0.87 A $1.41 A $1.35 A -$0.58 A $1.31 A 2013 -$0.98 A $1.35 A $1.51 A $0.78 A $2.66 A 2014 -$1.33 A $2.34 A $2.75 A $1.30 E $5.06 E 2015 $0.62 E $3.15 E $3.43 E $1.52 E $8.72 E Projected EPS Growth - Next 5 Years % N/A 2014 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606

OVERVIEW Based in Chicago, United Continental Holdings, Inc. is the holding company for both United Airlines and Continental Airlines. United Continental Holdings was formed by the merger of Continental Airlines with UAL Corp. on Oct 1, 2010. The merger created the world s largest airline, overtaking Delta Airlines, which had acquired Northwest Airlines in 2008. United Continental maintains a significant presence in Houston, the company's largest hub and has opened a new terminal there. United and Continental Airlines operations primarily comprise transportation of people, property and mail throughout the U.S. and overseas. United Continental transports people and cargo through their mainline operations which utilize full-sized jet aircraft, and regional operations which utilize smaller aircrafts operated under contract by three carriers United Express, Continental Express and Continental Connection. With key global air rights in the U.S., Pacific region, Europe, the Middle East, Africa, and Latin America, United Continental operates the world's most comprehensive global route network. The company, through United Airlines and Continental Airlines as well as their regional carriers, operates an average of more than 5,300 flights a day to 360 U.S. domestic and international destinations. The airline s departure hubs are located at Chicago, Cleveland, Denver, Guam, Houston, Los Angeles, New York/Newark, San Francisco, Tokyo and Washington D.C. REASONS TO BUY United Continental expects to implement appropriate network and fleet management strategies to accelerate its revenues, and is also exhibiting excellent cost control strategies. We believe that United Continental has already started its restructuring effort and plans to reduce the annual costs by $2 billion by cutting fuel and non-fuel expenses. Lower fuel prices coupled with increasing air travel demand has allowed Moody s rating agency to raise outlook on U.S. airports to positive from stable. Likewise, IATA also believes that the overall airline industry profits in 2014 are likely to increase 10.6% annually to $19.9 billion. Meanwhile, management is pleased with the progress of the initiative Project Quality which aims at generating $200 million in fuel savings and $300 million in non-fuel savings in 2014. United Continental is focusing on augmentation of ancillary revenues by $700 million to $3.5 billion by 2017. The carrier hopes to achieve this by offering new products to customers and increasing fees on the current ones. Recently, the carrier introduced a new application United app which allows passengers to access a wide range of movies and television shows while on board through Wi-Fi-enabled mobile devices and laptops. The carrier is also offering Mercedes-Benz tarmactransportation service in Denver to its premium passengers. The company continues to judge a passenger s destinations, travel pattern and prior purchases to provide appropriate ancillary products. United Continental is getting good response from its PerksPlus product a loyalty program for small to medium-based businesses. Economy plus seating remains a strong driver of United Airlines ancillary revenues. The airline has installed in-seat power on more than half of its mainline flights and has refreshed the interiors of most of its Airbus fleet. The company s single loyalty program MileagePlus provides growth opportunities by expansion of their business network through partnerships, membership addition and introduction of products. United Continental has paced up the installation of the satellite-based first ever Wi-Fi service for fliers and by the end of Equity Research UAL Page 2

2014, the count is expected to reach 450. In order to enhance onboard services, the carrier plans to offer iphone 6 Plus to its flight attendants. Moreover, United Continental is redesigning its fleet structure for greater efficiency in operations. We appreciate the company s efforts to redesign its flight structure at Chicago, Denver and Houston hubs by the spring of 2015, which will increase its efficiency and shorten connection times. The company is reducing its domestic fleet count, retiring older and less efficient aircrafts and reconfiguring domestic aircraft for international service. The company bought seven Embraer 175 aircraft during the second quarter. United Continental also expects to take delivery of 35 new Boeing aircraft and 32 new Embraer 175 carriers. These advanced and upgraded aircrafts, coupled with the expected installation of Split Scimitar Winglets, are anticipated to enhance the performance level of the company by trimming fuel and operating costs, and rendering a comfortable flying experience. The carrier is also working with aircraft manufacturers and is exploring opportunities in the used aircraft market to reduce capex over the next four years. Further, the carrier scrapped its previous order for 12 single-aisle planes worth $1.08 billion from European aircraft manufacturer Airbus. The dropped orders include six A-319 and six A-320 narrow bodied aircraft. Withdrawal of this order is different from the earlier purchase order for 35 jets from Airbus. Per the agreement, Airbus will convert United Continental's existing order of 25 A350-900s into A350-1000s as well as deliver 10 new A350-1000s. The delivery will commence in 2018. Further, United Airlines entered into a deal with partner SkyWest Airlines an affiliate of SkyWest Inc. Per their Capacity Purchase Agreement, SkyWest will run 40 Embraer 175 aircraft under the United Express brand. The airplanes, scheduled to be delivered through 2014 and 2015, are the first 76-seat jets operating on a regional basis in the United Express fleet. Further, United Continental recently amended its agreement with Republic Airways Holdings Inc. to add 50 E-175 aircraft. The latter will determine the carriers that will run the aircraft under the United Express brand, deliveries of which will begin in Jul 2015. With the new airplanes, United Airlines will be able to save 10% fuel per passenger as well as emit less harmful gases. In order to reduce operating expenses, United Continental has undertaken several cost effective measures. Restructuring of premium cabin fares on its domestic and short haul domestic flights will boost its load factor, going forward. Additionally, United Continental has a risk management strategy to hedge a portion of its expected jet fuel requirements. In an attempt to improve its operational efficiency, the company is reducing its regional carriers in hub airports. This reduction in the number of flights will drive revenue and cost benefits through improved reliability and higher use of fuel efficient E-175 aircraft. The company is also adjusting its fleet size by swapping smaller aircraft with bigger ones in routes where demand is high, to optimize its capacity. Furthermore, the carrier is outsourcing more than 630 job roles, including gate agents, baggage handlers and customer service executives, across 12 airports in the U.S. to curtail costs and improve profitability. United Continental is also looking to increase its revolving credit facilities by $350 million and issue an additional $500 million of term loan debt, which is expected to reduce its balance sheet debt and interest expenses. REASONS TO SELL United Continental s future liquidity could be negatively impacted by decline in passenger and cargo demand owing to slowdown in certain economies. We also believe that continuous fleet restructuring coupled with share repurchase plans may dent the company s cash position and increase debts while going ahead. The company finds increased competitive pressure in the Pacific region, particularly China, a huge risk. It is currently the largest U.S. carrier flying to China, one of the most Equity Research UAL Page 3

lucrative markets. However, increased travel demand in China has propelled capacity additions from competitors, thus challenging United Continental s dominance in the region. The company also expects the abovementioned capacity growth in China to put pressure on yields once the seasonal peak is over. United Continental was dealt a major blow in Nov 2014, which is considered one of the busiest travel months. In the month, RPM in the domestic region declined 3.7% year over year while ASM fell 3.8% in the U.S. Such an unexpected drop in vital operating metrics during the busy Thanksgiving season can be mainly attributed to the snowstorm Cato, which resulted in a significant number of flight cancellations. The airline industry has been struggling due to the slow pace of economic recovery around the world. Moreover, the industry is highly regulated, in particular by the federal government. All airlines engaged in air transportation in the U.S. are regulated by the Federal Aviation Administration (FAA), a division of the DoT, primarily in areas of flight operations, maintenance and other safety and technical matters. The carriers could face operational challenges from FAA s new initiative FAR 117, which reduces hour flexibility and pilot utilization in administering irregular operations. The new regulation is expected to hurt the regional partners of United Continental as mainstream passenger carriers hire pilots of the regional operators. The formation of American Airlines Group Inc. following the merger of U.S. Airways and American Airlines has removed United Continental from its position of the world s largest passenger carrier. The merger also poses further competitive threat to United Continental s future. The company is already coping with competition from the likes of Delta Air Lines Inc., Southwest Airlines Company and JetBlue Airways, both in domestic and international operations. Additionally, Southwest Airlines slot wins in LaGuardia (LGA) and Reagan National Airport (DCA) along with JetBlue s triumph in DCA, which is part of the mega merger deal between American Airlines and U.S. Airways, will increase competition for United Continental, particularly within domestic markets. Fuel price volatility continues to be one of the significant challenges, as fuel price is largely unpredictable. The company's ability to pass along the increased costs of fuel to its customers is limited by the competitive nature of the airline industry. Although crude oil is currently trading on the lower side, even a small change in fuel prices can significantly affect profitability. Moreover, the company is highly exposed to foreign currency exchange rate risk as it has global operations. We believe the carrier s effort to delegate some of its airport jobs could backfire in the form of poor customer service, leading to passenger churns. Further, the company expects non-fuel costs to increase in the upcoming quarter, leading to inflationary pressure on salaries and wages. This will likely increase the operating expenses of the company. In addition, ancillary business (several product introductions and improvements) expenses as well as fleet restructuring initiatives are expected to weigh on the near-term results. RECENT NEWS United Continental Beats Q3 Earnings, Misses Revenues Oct 24, 2014 United Continental posted adjusted earnings of $2.75 per share, ahead of the Zacks Consensus Estimate of $2.70. Moreover, reported earnings of $2.37 were substantially above $0.98 recorded in the comparable prior-year quarter. Quarterly total revenue improved 3.3% year over year to $10,563 million, but was below the Zacks Consensus Estimate of $10,623 million. On a year-over-year basis, passenger revenues increased 3.9% while cargo revenues rose 19.1% mainly buoyed by higher volumes. Other Equity Research UAL Page 4

revenues dropped 8.9% from the last-year quarter mainly affected by termination of a deal to sell fuel to a third party. Operating Statistics Airline traffic, measured in revenue passenger miles, spiked a mere 0.4% year over year to 56.1 billion while capacity (or available seat miles) grew 0.5% year over year to 65.4 billion, leading to a load factor (percentage of seats filled with passengers) of 85.8%, down 10 basis points. Consolidated passenger revenue per available seat miles (PRASM or unit revenue) rose 3.9% year over year. Operating Expenses Total operating expenses, excluding fuel, profit sharing, special charges and third party expenses, declined 1.9% year over year. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel, third-party business expenses and special items, increased 1% year over year to $0.92. Liquidity As of Sep 30, 2014, United Continental had $6.9 billion of unrestricted liquidity, out of which $1.35 billion was invested in revolving credit facilities. In the third quarter, United Continental s cash flow from operating activities totaled $574 million, while gross capital expenditures stood at $493 million. VALUATION United Continental s is currently trading at 12.9x our 2014 earnings estimate. This is at a discount to both the S&P 500 and the industry average. With respect to our 2015 earnings estimate, the stock is trading at 7.5x, is again at a discount to the S&P 500 and the industry average. We are encouraged by United Continental s efforts to accelerate revenues, improve customer and ancillary service, restructure network and enhance fleet, which could bolster its finances, going forward. Moreover, cost control efforts coupled with the falling fuel prices may bode well for the company. However, exposure to foreign currency exchange rate risk coupled with increased capital expenditure may expand balance sheet leverage for the company. We, thus, downgrade our recommendation on the company from Outperform to Neutral with the target price of $69.00 based on 7.92x of our earnings estimate for 2015. Equity Research UAL Page 5

Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low UNITED CONT HLD (UAL) 12.9 7.5 N/A 8.7 14.4 30.6 5.0 Industry Average 49.9 13.0 24.9 8.5 21.6 N/A 9.6 S&P 500 17.7 16.6 10.7 16.0 19.1 19.6 12.0 DELTA AIR LINES (DAL) 14.5 10.5 17.7 9.0 14.9 56.6 3.9 AMER AIRLINES (AAL) 9.0 5.7 17.2 9.0 8.5 6.2 AIR FRANCE-ADR (AFLYY) 1.5 38.8 9.7 INTL CONS AIRLN (ICAGY) 13.4 8.8 7.1 16.4 25.0 11.6 TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA UNITED CONT HLD (UAL) 5.8 N/A 2.6 56.5 2.8 0.0 10.0 Industry Average 2.8 2.8 2.8 16.6 0.3 0.6 10.1 S&P 500 7.2 9.8 3.2 23.3 1.9 Equity Research UAL Page 6

Earnings Surprise and Estimate Revision History Equity Research UAL Page 7

DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of UAL. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1139 companies covered: Outperform - 15.8%, Neutral - 77.8%, Underperform 6.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research UAL Page 8