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United Sends Mixed Signals to Investors

CHICAGO -- ( TheStreet) -- United (UAL - Get Report) provided disappointing guidance on Thursday, leading to a 3% decline in the share price as some analysts declared consensus third-quarter earnings guidance to be too high.

Still, the bad news was tempered by recent improvement in operational performance, which perhaps is a signal that the carrier is emerging from a clumsy integration following its 2010 merger with Continental.

S&P Capital IQ analyst Jim Corridore downgraded United to hold from buy following the carrier's second-quarter earnings call in July.

"Our downgrade reflects our view that UAL's merger integration issues are leading it to underperform peers," Corridore wrote then. "While we think long term the merger will bring great benefits, we have less confidence in management's ability to manage the integration in the near term."

On Tuesday, United disclosed that its on-time performance metric, measuring arrivals within 14 minutes of schedule, improved from 64% in July to 72% in August to above 80% in September. If you are going to fix a struggling airline, is there a better place to start than within on-time performance?

In an interview, Corridore called the improvement "a good sign that they are addressing the issues. When I downgraded, it was because I didn't feel management was expressing the right kind of urgency."

Still, Corridore said, "I need to see more from the company. It's good news to see operational performance improving, but it's more important to see revenue performance improve." He also noted that the post-Labor Day period is "a softer seasonal period when there are fewer people flying, so it's a lot easier to be on time."

United's guidance, released Thursday, showed a third-quarter passenger revenue per available seat mile decline of 1% to 2%. Shares declined 3%, closing at $19.36, and are flat for the full year, while shares in competitor Delta (DAL - Get Report) are up 12% in 2012 and the NYSE Arca Airlines Index is up 15%.

In a research note on Thursday, JP Morgan analyst Jamie Baker wrote that United's PRASM guidance implies a September PRASM decline between minus 2% and minus 4%, worse than his estimate of minus 1%. As a result, Baker cut his third-quarter earnings estimate to $1.35 a share.

Analysts surveyed by Thomson Reuters have a consensus estimate of $1.85 a share.

"We believe consensus third quarter needs to come down," wrote Dahlman Rose analyst Helane Becker on Thursday. Her estimate is $1.41 a share, while Maxim Group analyst Ray Neidl estimates $1.45. Baker wrote: "On the topic of consensus, we would note that close to half of contributing forecasts appear to have ignored fuel's recent rise, showing no updates since July reporting season."

Still, Baker maintained an overweight rating for United, and a price target of $28. Neidl has a $25 price target. Becker has a hold rating. She wrote, however, that United's "forward bookings are better than what we were thinking and impressive in a weak economic environment." The carrier's filing indicates that domestic load factors for the next six weeks are up 3.5%, while international load factors are up 1.2%; both numbers reflect an expected fourth-quarter capacity decline of 3.5%.

An improving labor climate could also benefit United, as pilots from Continental and United seem to be moving toward a common contract.

"There appears to be some continuing concern as to when such a common contract can be initiated and when this benefit along with the merger will be realized," Neidl wrote. A recent report by consultant The Leading Edge said the current agreement in principle between United and its pilots has a good chance to lead to a contract.

"Our Early Bet is on Ratification," the firm said. "Much like the Delta pilot contract, the United agreement in principle represents a significant gain for both pilot groups, reversing the 10 year trend of degradation of pay and benefits in the industry. Although a cadre of pilots will likely balk at the liberalized scope clause, we believe that the majority will be swayed by the increased compensation, better quality of life, and improved retirement and vote to ratify the agreement. Our early take is a two to one vote in favor of ratification."

Meanwhile, Imperial Capital analyst Bob McAdoo wrote Thursday that "UAL's merger headwinds will pass and the company will be left with one of the strongest networks of any legacy carrier.

"The benefits of the merger are on the horizon, but costs are still negatively impacting near-term EPS," McAdoo said. "We would capitalize on any weakness in the shares to accumulate a position of UAL. Despite headlines of United's challenges, we believe the company's operations will improve this fall and that its best-in-class network will begin to outperform in the coming quarters."

McAdoo lowered his third-quarter earnings estimate to $1.60 a share and estimates a third-quarter RASM decline of 1.5%, but retained an outperform and a $31 price target.

-- Written by Ted Reed in Charlotte, N.C.

>To contact the writer of this article, click here: Ted Reed

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