Fitch Ratings-Chicago-23 January 2017: Fitch Ratings has assigned a rating of ‘BB/RR4’ to United Continental Holdings, Inc.‘s (UAL) unsecured note issuance. Fitch currently rates UAL and its primary operating subsidiary, United Airlines, Inc. at ’BB’.

UAL expects to issue $500 million in senior unsecured notes due in February 2024. The notes will feature a guarantee from United Airlines, Inc. and will rank equally with UAL’s existing unsecured issuance. Proceeds will be used for general unsecured purposes.

The debt issuance does not alter Fitch’s prior forecast that UAL’s adjusted debt/EBITDAR will remain in the mid-3x range over the intermediate term; a level that is supportive of the current rating.

KEY RATING DRIVERS

Fitch upgraded UAL to ‘BB’ from ‘BB-’ in October 2016. The ratings upgrade was supported by significant improvements in United’s credit metrics in recent years, Fitch’s expectations for the company to generate a meaningful amount of free cash flow (FCF) over the intermediate term, continued focus on cost control, and general improvements in the risk profile of the U.S. airline industry. Fitch also believes that United’s credit profile benefits from the new management team’s renewed focus on operational reliability and employee relations, which should have a positive impact on the company’s perception with its customer base.

The Stable Rating Outlook reflects Fitch’s view that the recent improvements in United’s credit metrics will likely pause or modestly reverse in the near term due to unit cost pressures created by new union contracts, the possibility of higher fuel prices, the absence of debt reduction, and a soft unit-revenue environment. FCF will also be limited by relatively high capital spending primarily related to a heavy aircraft delivery schedule over the next couple of years.

Other concerns include United’s share repurchase activity, which has directed a meaningful amount of cash to shareholders in recent years. United intends to remain flexible with its share repurchase program and does not anticipate repurchases to come at the expense of a healthy balance sheet, but a change to that policy could pressure the ratings. Weak unit revenues experienced over the past two years are not a material concern at this point as they have been largely offset by lower fuel costs. Longer-term revenue weakness would be a concern particularly if unit revenues were to remain pressured in a rising fuel environment. This risk has abated somewhat recently as the unit revenue environment has started to reverse the negative trends experienced over the past two years.

KEY ASSUMPTIONS
Key assumptions in Fitch’s rating case include:

—Capacity growth in the low single digits through the forecast period;
—Continued moderate economic growth in the U.S. over the near term, translating into stable demand for air travel;
—Jet fuel prices equating to roughly $55/barrel on average for 2017, increasing to approximately $65/barrel by the end of the forecast period.

RATING SENSITIVITIES
Future actions that may individually or collectively lead Fitch to take a positive rating action include:

—Adjusted debt/EBITDAR sustained around 3x;
—funds from operations (FFO) fixed charge sustained above 3.5x;
—FCF as a percentage of revenue sustained in the mid-single digits;
—Continued improvements in United’s operational performance;
—Evidence of improving unit revenues.

Future actions that may individually or collectively lead Fitch to take a negative rating action include:

—Adjusted debt/EBITDAR sustained above 4x;
—EBITDAR margins deteriorating into the low double-digit range;
—Persistently negative or negligible FCF.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following rating:

United Continental Holdings, Inc.

—Senior unsecured notes due 2024 ‘BB/RR4’.

Fitch currently rates United as follows:

United Continental Holdings, Inc.
—Issuer Default Rating (IDR) ‘BB’;
—Senior unsecured rating ‘BB/RR4’.

United Airlines, Inc.
—IDR ‘BB’;
—Secured bank credit facility ‘BB+/RR1’.