New UAL Has Rocky Start

Updated from 7:47 a.m. EST

The new shares of United Airlines parent UAL (UAUA) were off to a rough start on their first day of Nasdaq trading, dropping 8% in the first two hours.

After opening at $40 Thursday, the airline's new stock was lately at $36.71, down $3.29 from the first quote. Nearly 2 million shares traded by around 11:30 a.m. EST.

United's three-year stay in bankruptcy ended Wednesday. The company's old shares, previously listed on the New York Stock Exchange and relocated to the over-the-counter Bulletin Board when United went into Chapter 11, no longer have any value.

What's unclear is whether buying an airline stock is anything more than a bet that fuel costs will decline. Most experts agree that United came a long way during its bankruptcy. After all, the carrier secured $3 billion in financing and cut $7 billion in annual costs, pared nearly 28,000 jobs and retired 107 mostly elderly aircraft.

Experts also agree that United has the best system on the planet, featuring an expansive mix of great domestic hubs, near-priceless access to London's Heathrow Airport and Tokyo's Narita and a worldwide route system second to none.

And if brand recognition is still worth anything, United has one of the best-known names in the world, even if there was the ill-fated 1987 effort to replace it with "Allegis."

Airlines typically thrive on growth, but there haven't been spectacular gains at United since Stephen Wolf was forced out as chief executive in 1994. Current CEO Glenn Tilton will likely be remembered as the next great UAL chief, since until he came along, no one really had much success in reducing UAL's costs.

For that, and for an upbeat approach that helped carry the airline through some dark times, Tilton is widely, but not universally, applauded.

"The empty suits at UAL world headquarters are dropping their bags of money only long enough to pat themselves on the back for a job well done," said Randy Canale, who heads the United chapter of the International Association of Machinists. "The fact is that United survived in spite of its current leadership, not because of it. The true heroes of this shameful bankruptcy ordeal are the IAM members and other front-line employees who work every day at reduced rates while delivering a first-rate product."

Still, if fuel prices are favorable, and if United manages to distinguish itself with a top-notch product to complement its top-notch route network, Tilton and his employees will be entitled to plenty of applause.

In a recent research report, Goldman Sachs airline analyst Glenn Engel wrote that the airline's leading positions "in powerful hubs (54% of passengers in Chicago O'Hare, 62% in Denver, 58% in San Francisco, and 69% in Washington Dulles), coupled with its strong international franchise and broad/deep alliance partnerships, enable United to generate a significant revenue premium to the industry, but inconsistent service has prevented United from maximizing its advantage."

Engel said United's service has improved and noted that its revenue premium over low-fare carriers climbed from 36% in 2002 to 43% in 2005. But he says United still has unit costs that are too high and that it's likely to underperform peers such as AMR's (AMR) American Airlines and Continental Airlines (CAL). Goldman Sachs has an investment-banking relationship with UAL.

However, Helene Becker of Benchmark Capital wrote Wednesday that "United Airlines is actually well positioned compared to its peer group for growth, although we are concerned that the company's costs are still on the high side of the industry average." Becker initiated coverage of UAL with a buy rating. Benchmark has no business relationships with United.

Meanwhile, Standard & Poor's raised its corporate credit ratings on UAL and United to B from D after their reorganization plan was confirmed by a court. S&P analyst Philip Baggaley said the rating reflects the difficult conditions of the airline industry, including harsh competition and volatile fuel prices, as well as United's high leverage.

"These weaknesses are mitigated to some extent by United's extensive and well-positioned route system, which provides good revenue potential, especially on international routes, and by reductions in labor costs and financial obligations achieved in bankruptcy," Baggaley said.

"UAL should report gradually improving earnings and credit measures, but the extent of improvement will depend significantly on general airline industry conditions, in particular on fuel prices and the degree of price competition in the U.S. domestic market."

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