Fitch Affirms UAL and United IDRs at 'B-'; Outlook Positive.

CHICAGO -- Fitch Ratings has affirmed the Issuer Default Ratings (IDR) of UAL Corp. and its principal operating subsidiary United Airlines, Inc. at 'B-'.

In addition, Fitch affirms United Airlines' secured bank credit facility (term loan and revolving credit facility) at 'BB-/RR1'.

Fitch has revised the Rating Outlook for UAL and United to Positive from Stable. The secured debt rating applies to United's recently amended $2.055 billion bank credit facility.

Ratings for UAL and United reflect the carrier's highly levered balance sheet, improving but still weak margins, and ongoing susceptibility to revenue and fuel price shocks in an industry that remains particularly vulnerable to event risk. Fifteen months after its exit from Chapter 11 and a three-year restructuring process, United's operating profile has improved modestly and its free cash flow generation outlook for 2007 is good. With no aircraft deliveries on the near-term horizon and reasonably strong international revenue fundamentals still in place, United is poised to strengthen its liquidity position again this year, while de-levering through scheduled debt amortization and better operating cash flow trends.

The revision of the Rating Outlook to Positive reflects the expectation that strong free cash flow (in excess of $1 billion for 2007) will allow de-levering to proceed, even in a challenging industry operating environment.

United took an important step on the road to balance sheet repair with the recent refinancing of its bank credit facility. The airline's liquidity position at year-end 2006 was very strong ($5 billion in total cash), allowing management to pay down $972 million on the original exit facility while reducing the total commitment under the new facility to $2.055 billion from $3 billion. Tighter credit spreads provided United with an opportunity to lower its annual interest expense by approximately $70 million as a result of the refinancing. The new credit facility was priced at LIBOR + 200 basis points. The transaction also freed up about 100 aircraft from the exit facility collateral pool, creating a larger base of unencumbered assets and improving the carrier's flexibility in responding to any future liquidity pressure. The credit facility pay-down, together with scheduled debt payments, drove approximately $1.4 billion of adjusted debt reduction in the first quarter.

The operating outlook for United and the rest of the U.S. airline industry is more uncertain in light of softer than expected domestic revenue trends reported for the first quarter. The outlook is further complicated by high and volatile jet fuel prices, which may increase in importance this summer if limited refining capacity fails to keep up with strong fuel demand. United has hedged approximately 23% of expected second-quarter fuel deliveries with three-way crude oil options with upside protection beginning at $59 per barrel of crude oil and capped at $69 per barrel.

Domestic available seat mile (ASM) capacity growth for the industry will exceed U.S. GDP and underlying demand growth this year, and passenger yield growth will likely be low (or even negative) in the second and third quarters as a result of slower U.S. economic growth. In international markets, higher capacity growth rates (particularly on trans-Atlantic routes) may put pressure on yields and revenue per ASM this summer. The timing of any softening in international markets will be an important trend to monitor in the second and third quarter in determining whether United and the rest of the industry can expand operating margins in 2007.

United reported a pre-tax loss of $236 million in the seasonally weak first quarter - a performance that stood in contrast to reported profitability at AMR and Continental. While the first quarter pre-tax loss was $70 million better than the comparable year-earlier number, operating trends were clearly weaker than expected as a result of soft domestic unit revenue patterns in the quarter. Much of the problem was related to excess capacity introduced by United and some of its competitors in January. Management identified the Denver hub as a particular problem with respect to pricing pressure. A large low-cost carrier presence at Denver, where Southwest began operations in 2006, appears to be contributing to yield weakness there. A shift in Mileage Plus revenue accounting policies drove approximately $107 million in reduced passenger revenue during the first quarter, but even adjusted revenue per ASM figures for the period were weak. This was especially true in North America, where yields and unit revenue both fell by about 4%. On the cost side, United is hitting its expense reduction goals; $265 million in additional cost reduction is targeted for all of 2007. However, inflationary pressures on the maintenance and airport rents lines will force non-fuel cost per available seat mile (CASM) up by 1% to 2% for the full year.

Softening domestic revenue trends this year will make it difficult for United to deliver solid improvements in operating margins; however, limited calls on operating cash flow for the year should allow the carrier to meet scheduled debt maturities and continue de-levering the balance sheet in a modestly weaker industry operating environment. An upgrade to 'B' for the IDR is possible within the next 12 to 18 months, but largely dependent upon the durability of the industry revenue recovery and the absence of further sharp spikes in jet fuel prices.

Management remains focused on the need to re-build its balance sheet through strong free cash flow generation and scheduled debt amortization. Beyond contractual commitments, management noted on its April 25 earnings call that excess cash flow could be targeted toward additional debt reduction. While the potential return of cash to shareholders is being analyzed, no plans are in place for a share repurchase in 2007. Any decision to launch a share repurchase or dividend program would require lender consultation under the terms of the amended credit facility.

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