The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.



) --

United Continental

(UAL) - Get Report

is reporting its second-quarter earnings today.

Over the past year, it has benefited from industry consolidation and improved economic conditions. Its earnings should reflect continued improvements from increased fares and ancillary revenues despite higher fuel prices and capacity cuts.

UAL was formed after the merger of United Airlines and Continental Airlines in May 2010. With key global air rights in the U.S, Europe, Middle East, Africa, Latin American and the Pacific, United Continental, which has the world's most comprehensive global route network, competes against

Delta Air Lines

(DAL) - Get Report


Southwest Airlines

(LUV) - Get Report


American Airlines



U.S. Airways



We have a

$27 price estimate

for United Continental, around 30% ahead of the current market price.

UAL expects the merger to deliver $1 billion to $1.2 billion in net annual synergies by 2013 including about $800 million to $900 million of incremental annual revenues. The increase in revenue will largely come from revived airline industry conditions, an expanded customer base and improved unit revenue growth and network and fleet optimization.

The company hedges its fuel position to protects itself from rising fuel prices. It expects its consolidated fuel costs to be close to $3.11 per gallon for this quarter that would have increased to $3.36 per gallon excluding hedging. It is also combating fuel inflation by resorting to higher fares and extra fees, reducing flight frequencies and scraping unprofitable routes and fuel-inefficient aircraft from its fleet.

United Continental has gone for more aggressive capacity cuts than its rivals like Delta Airlines and American Airlines. Further, the demand slump due to the massive Japanese earthquake and radiation leaks in March 2011 led United Continental to go for temporary capacity cuts of up to 10% to 15% in April and May for flights operating between Tokyo and major U.S. cities.

In April and May 2011, United and Continental's combined consolidated traffic in terms of revenue passenger miles (RPMs) increased 1.1% and 0.3% respectively while its consolidated load factor was down about 1.5 points compared year over year. While available seat miles (ASMs) increased in April 2011, it declined a little in May year over year. UAL expects its overall second quarter domestic ASMs to be down 1.4% and international ASMs to be up 4.3%, leading to net 1% increase in ASMs compared to the year-ago quarter.

The most important metric we watch is passenger revenue per available seat mile (PRASM), which increased an estimated 8% to 9% in April 2011 and 14% to 15% in May 2011 year over year. In June 2011, PRASM improvement could have slowed to 3% to 4% year over year. As the overall second quarter demand grew slowly but steadily, PRASM for the second quarter should have grown between 8.3% to 9.3% compared to the year-ago quarter. Cargo and other revenue should come in between $1 billion to $1.1 billion.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.