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Rating Action:

Moody's upgrades UAL to B2, affirms Continental at B2; outlooks stable

29 Sep 2010

Approximately $12 billion of rated debt and Enhanced Equipment Trust Certificates affected

New York, September 29, 2010 -- Moody's Investors Service raised its debt ratings of UAL Corporation ("UAL"): Corporate Family and Probability of Default each to B2 from B3. Concurrently, Moody's affirmed its ratings of Continental Airlines, Inc ("CAL"): Corporate Family and Probability of Default each at B2. The ratings for certain of CAL's EETCs were lowered in consideration of continuing weak secondary market values for regional aircraft: Series 2003-1 A tranche to Ba3 from Ba2: Series 2004-1 A tranche to Ba3 from Ba2 and Series 2005-1 A tranche to Ba3 from Ba1.

Moody's affirmed the SGL-2 Speculative Grade Liquidity ("SGL") ratings of each company. The respective ratings outlook for each carrier is stable. The rating actions on UAL conclude the review for possible upgrade initiated on May 3, 2010, upon the joint announcement of the stock-for-stock merger of the two airlines. The companies have completed the necessary steps to close the merger which is expected to occur on October 1, 2010.

The upgrade of the UAL ratings reflects our expectation of further strengthening of credit metrics and liquidity in upcoming quarters. "We believe that industry demand will remain stable, supporting traffic and yields," said Moody's Airline Analyst, Jonathan Root. We also anticipate little pressure on the cost of fuel and modest capital expenditures as there are no near term aircraft deliveries. These factors should lead to the generation of free cash flow at UAL in upcoming periods.

Improving liquidity and modest strengthening of credit metrics also support the affirmation of CAL's B2 Corporate Family rating. While CAL maintains higher leverage than that of UAL or Delta Airlines, Inc. (B2, Stable outlook), its operating trends continue to show strength as business and consumer travel increases, and cash flow and coverage metrics continue to support the B2 rating. Continental's ongoing reinvestment in its fleet and less exposure to trans-pacific routes with relatively higher operating leverage slow the rate of improvement in its credit metrics, relative to that its two peers are currently experiencing.

Moody's plans to maintain separate Corporate Family, Probability of Default and SGL ratings on UAL, to be renamed United Continental Holdings, Inc. ("UCH"), and on CAL until the combined group receives a single operating certificate ("SOC") from the Federal Aviation Administration. Receipt of the SOC, which is not expected for at least 12 months, is important because it will allow the airline operating companies to merge as a single carrier. During the interim period, neither company will provide a guarantee of the other's debt obligations. When the SOC is received and the airline operating companies merge, the surviving entity will become the contractual obligor of the debt (including EETC-related equipment notes and leases) of both predecessor airlines. At that time the ratings will be combined under a single Corporate Family and Probability of Default assessment. UHC and CAL will continue to provide separate financial reporting at least until the airline operating companies are merged. Moody's will maintain distinct Corporate Family ratings for the two companies until their operations are combined under a SOC, as long as adequate financial information remains available.

Moody's current expectation is that at the time the operating companies are merged the combined company will maintain a B2 credit profile. The combined operation will be the world's largest carrier, with an improved business profile and competitive position. The merger integration is not without execution risks, principally related to the conversion to single airline operating systems. Given that integration will occur over an extended period, we believe that management will have ample time to prepare primary and contingency plans that mitigate integration risks. The combination of pro forma unrestricted cash approaching $8.5 billion at June 30, 2010 and Moody's estimate of free cash flow approaching $2.0 billion for the full year of 2010 also provide sufficient cushion to fund non-recurring merger-related costs and debt maturities in the event of an unexpected weakening of demand, or larger than anticipated one-time payments to labor upon reaching new labor agreements. Some increase in labor costs is likely, particularly at UAL that will offset some of the anticipated cost synergies. Capacity discipline by most industry players is also likely to remain in place, limiting additional pressure on yields.

Moody's downgraded the ratings of certain CAL EETCs because of continued pressure on secondary market values of the Embraer regional jets included in these transactions. The upgrade of the UAL EETCs reflects loan-to-values that are in the range of the similarly-rated CAL EETCs. Each of these UAL transactions is cross-collateralized, which reduces the likelihood of a rejection of the aircraft under a reorganization scenario. A mix of aircraft types comprised of Boeing and Airbus aircraft, also typically the younger vintages in UAL's fleet, composes the collateral. Moody's believes the relatively younger vintages also reduce the likelihood of a rejection under a reorganization scenario.

We anticipate little upwards pressure on the ratings while a SOC is being sought. EBITDA that is sustained below 4.5 times, Funds from Operations + Interest to Interest that remains above 3.5 times or free cash flow to Debt in excess of 10% could suggest some upward potential for the ratings or outlook. The ratings of each carrier could be downgraded if the cost of jet fuel was to significantly increase above $2.60 per gallon or if unrestricted cash was to fall below $2.5 billion at CAL or below $3.5 billion at UAL. Sustained negative free cash flow, Debt to EBITDA that is sustained above 6.5 times or Funds from operations + interest to interest of below 2.5 times could also negatively affect the ratings of either or both companies.

The principal methodology used in rating UAL and CAL is Moody's Global Passenger Airlines, published in March 2009 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these companies can also be found in the Rating Methodologies sub-directory on Moody's website.

The last rating action on UAL was on August 2, 2010 when Moody's upgraded UAL to B3 (Corporate Family rating) and left the ratings on review for upgrade. The last rating action on CAL was on August 2, 2010 when Moody's affirmed the B2 Corporate Family rating.

Downgrades:

..Issuer: Continental Airlines, Inc.

....Senior Secured Enhanced Equipment Trust, Series 2003 ERJ-1 Class A and 2004 ERJ- Class A Downgraded to Ba3 from Ba2, and Series 2005 ERJ-1 Class A Downgraded to Ba3 from Ba1

Upgrades:

..Issuer: Denver (City & County of) CO

....Senior Unsecured Industrial Revenue Bonds, Upgraded to B3 from Caa1

..Issuer: UAL Corporation

....Probability of Default Rating, Upgraded to B2 from B3

....Corporate Family Rating, Upgraded to B2 from B3

..Issuer: United Air Lines, Inc.

....Multiple Seniority Shelf, Upgraded to (P)Ba3 from (P)B3

....Senior Secured Bank Credit Facility, Upgraded to Ba3 from B1

....Senior Secured Enhanced Equipment Trust, Series 2009-1 and 2009-2, Upgraded to a range of Ba2 to Baa2 from a range of B1 to Ba1

....Senior Secured Pass-Through Certificates, Series 2007-1, Upgraded to a range of Ba3 to Baa2 from a range of B2 to Ba1

....Senior Secured Regular Bond/Debenture, Upgraded to a range of B3 to Ba2, LGD2, 22% from a range of Caa1 to Ba3, LGD2, 24%

Outlook Actions:

..Issuer: Continental Airlines Finance Trust II

....Outlook, Changed To Stable From Negative

..Issuer: Continental Airlines, Inc.

....Outlook, Changed To Stable From Negative

..Issuer: UAL Corporation

....Outlook, Changed To Stable From Rating Under Review

..Issuer: United Air Lines, Inc.

....Outlook, Changed To Stable From Rating Under Review

Confirmations:

..Issuer: Denver (City & County of) CO

....Senior Unsecured Revenue Bonds, Confirmed at LGD5, 71%

..Issuer: United Air Lines, Inc.

....Senior Secured Bank Credit Facility, Confirmed at LGD2, 27%

....Senior Secured Regular Bond/Debenture, Confirmed at LGD4, 64%

Continental Airlines, Inc. ("Continental") based on Houston Texas, is the world's fifth largest airline as measured by the number of scheduled miles flown by revenue passengers in 2009.

United Air Lines, Inc. ("United") and its parent UAL Corporation ("UAL") are based in Chicago, Illinois. United is one of the largest passenger airlines in the world.

REGULATORY DISCLOSURES Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information. Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Jonathan Root
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's upgrades UAL to B2, affirms Continental at B2; outlooks stable
No Related Data.
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