U.S. Airline Industry Coverage Initiation

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS

OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors

should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single

factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION™

Client-Driven Solutions, Insights and Access

U.S. Airline Industry Coverage Initiation Network Carriers Flying on Course for Continued Outperformance

We initiate coverage of the U.S. Airline sector at Overweight. Based on structural changes to the industry, a strong demand & pricing environment, and ongoing margin enhancing initiatives, we have a favorable bias toward the three U.S. network carriers. Our out-of-consensus top pick is UAL, as we expect self-help initiatives to propel momentum over the next 6-18 months, and see a string of catalysts and tailwinds in 2015 that should drive upside to both earnings & valuation. We rate JBLU Underperform based on the view that incremental strategy/management change in 2015 will disappoint relative to elevated expectations.

Cyclical juice remains on structural industry shifts. We are in the fifth year of industry profitability and while operating margins have approached historical peak levels of ~9%, we expect a healthier, more rational airline industry will reach midteens EBIT margins by 2016. Unit revenue (PRASM) growth and margin expansion is moderating mid-cycle, but we see further upside potential from continued pricing gains, evolution of revenue and cost initiatives, and as merger synergies are fully realized.

However, yields bear watching after four years of growth. While upward pricing trends appear intact domestically, pockets of competitive tension are building in certain markets and the battle for high-yielding corporate travel is intensifying following industry consolidation. In this report, we take a close look at capacity and pricing trends in certain regional markets. Comps are getting tougher and international trends are mixed, but network carriers have been quick to adjust capacity and restructure where needed to protect yields. Going forward, we see the most opportunity for UAL to catch-up.

Stock calls. We initiate coverage with Outperform ratings on UAL, DAL, and AAL, a Neutral rating on LUV, and an Underperform rating on JBLU.

September 8, 2014

RESEARCH TEAM

Julie Yates

Research Analyst

212-325-3706

[email protected]

Krishna Vege

Research Analyst

212-325-6949

[email protected]

mailto:[email protected]






1

Table of Contents (Click on Titles to Navigate Through Note)

Executive Summary

Industry Themes

Stock Picks & Company Tearsheets Valuation & Risks

Regional Detail

Asia

Domestic

Transatlantic

Latin America

Appendix

Executive Summary

3

Coverage Universe Ratings, Target Price, and Tag Lines

We are Recommending United, Delta and American

Source: Thomson Reuters, Credit Suisse estimates, Bloomberg

Ratings Outperform Neutral Underperform

Company Rating

Target

Price

Upside /

(Downside)

vs. Current

Share Price

Target

Price

Multiple

on 2015

EBITDAR

Target Price

Multiple on

2015 EPS

(Fully Taxed) CS Tag Lines

United (UAL)

Best self-help story. Margin recovery efforts shld drive ~400-500 bps of margin improvement by 2016. UAL has yet to fully realize benefits from structural industry changes and its merger with CAL, but the

carrier is on track for a turnaround and we expect it to transition unit revenue outperformance in 2015. We see a string of catalysts and tailwinds in 2015 that should drive earnings and valuation upside. We see no

structural impediments to UAL achieving a low double-digit EBIT margin, which is not priced into the stock. O/P $68.00 34% 6.0x 14.0x

Delta (DAL)

O/P $56.00 43% 6.6x 14.4x Best-in-class. A key holding for airline investors given index presence, lower debt levels, a fully integrated

merger, an established shareholder return program, top-level management, the best FCF generation in the group, and a leading position in the corporate market share that yields a 13% domestic unit revenue

premium to the industry. The December 11th investor day gives management another opportunity to remind investors why they should own DAL in 2015.

American (AAL)

O/P $52.00 37% 7.2x 10.6x Merger integration upside outweighs risk. Relative underperformance since Q2 report offers longer-term investors an attractive entry point with shares off 17% from the 52-week high. A conservative $1.4B synergy target, structural improvements to legacy American post-integration, and upside to capital deployment drive our above consensus 2015 estimates. Long-term, we think AAL can exceed DAL margin levels. Expect re-rating

as integration progresses in 2015.

Southwest (LUV)

N $32.00 (3%) 6.1x 15.7x Fewer levers for margin expansion. Despite a strong brand and leading domestic footprint, rising unit cost pressures and labor tensions, decelerating yield growth, premium valuation and leading YTD performance

temper our enthusiasm on shares. Limited ancillary opportunity given customer friendly policies and low-fare

brand bound yield potential, in our view.

JetBlue (JBLU)

U/P $11.00 (12%) 6.1x 12.9x Unlikely to see major strategy shift investors are waiting for. Share outperformance (+66%) and multiple analyst upgrades since late April have centered primarily on optimism for a CEO / strategy change and earnings upside from fare unbundling, but we see little change to JBLU’s hybrid growth strategy. We

are less bullish on the level of incremental earnings from fare family/ancillary revenue. We think

disappointment on the latter two, combined with lagging returns and more limited margin upside will make

JBLU a relative underperformer.

Company Rating Target Price

Upside/

(Downside) vs. Current Share Price

TargetPrice

Multiple on 2015

EBITDAR

TargetPrice

Multiple on 2015 EPS

(Fully Taxed)

UAL O/P $67.00 39% 4.89x 13.78x

DAL O/P $57.00 41% 6.34x 14.20x

AAL O/P $53.00 34% 6.38x 10.97x

LUV N $32.00 (0%) 5.47x 15.70x

JBLU U/P $10.89 (13%) 5.34x 12.80x

TOP PICK

4

Executive Summary & Conclusion

Structural industry changes make industry investable

Key Investable Theme. U.S. airlines represent a key investable theme within

industrials as structural industry changes are driving unprecedented profitability

& S/H returns in what historically has been a capital-destructive industry.

Earning Cost of Capital, Returning Cash to S/H & Avoiding Prior

Cycle Sins. Management teams are avoiding prior cycle sins, with an intense

focus on improving financial metrics, not just land grabbing for market share.

Balance sheets are cleaner, debt loads are reduced, and U.S. airlines are

finally generating returns above capital cost. Managements are leveling new

aircraft spend, taking a more balanced approach to capital deployment. Five of

the six largest U.S. airlines are returning cash to shareholders as of July.

Oligopolistic Structure has Lead to Pricing Power: Five major mergers

since 2005 have consolidated the domestic airline industry to 4 carriers that

control more than 80% of capacity. This oligopolistic structure and consistent

capacity discipline is driving sustainable pricing power. Domestic capacity

remains 6% below 2007 levels. International trends remain mixed, but we

think recent Transatlantic excess capacity fears are overdone and note that

84% of trunk routes between the U.S. and Europe are a duopoly, greatly

reducing the risk of irrational capacity or pricing decisions.

Margin Expansion Moderating, but Still Room to Go. The pace of margin

expansion is moderating mid-cycle, but we see further upside at network

carriers as revenue & cost initiatives bear fruit, and merger synergies are fully

realized. Airline profitability is extremely dynamic, driven by (1) pricing, (2) load

factors, and (3) unit costs. Since 2010, yields have risen 20% representing

real pricing gains above inflation for the first time since the late 1990s.

System load factors of 80%+ are at all time highs. Carriers are steadily

refleeting & eliminating structural costs to keep unit cost growth sub-inflation.

Re-rating Upside: Network carriers trade at a significant discount to leisure

carriers, industrial transports, and the S&P 500. We expect an upward re-

rating as structural industry shifts, sustained pricing and cost control drive mid-

teens operating margins & capital is returned to S/H, similar to the “Rail

Renaissance”.

Where are We Different?

Favorable bias to network carriers, less positive on leisure carriers

Out of Consensus Top Pick is UAL; Underperform on JBLU.

Our Neutral rating on top YTD performer Southwest (LUV) is also less-

consensus. We initiate at Outperform on Delta (DAL) and American (AAL) given

our favorable bias to network carriers on structural industry changes post

consolidation, as well as stock specific reasons. DAL and AAL are more

consensus longs, but we think valuation remains attractive for both.

UAL Turning it Around. Self-help initiatives should propel momentum over the

next 6-18 months, and we see a string of catalysts and tailwinds in 2015 that

should drive upside to both earnings and valuation. Sentiment on UAL has

improved since the Q2 report, but Delta’s performance since early 2013 has

doubled that of that of United. We expect near-term outperformance as sidelined

investors gain confidence in an inflection.

JBLU Change Optimism Overdone: We rate JBLU Underperform based on a

view that incremental upside from management / strategy change and ancillary

revenue in 2015 will disappoint relative to elevated expectations, following

multiple analyst upgrades and rising 2015 consensus (+10% in last 3 months).

DAL Remains Key Holding: We see DAL as a key holding for airline investors

given its S&P presence, lower debt levels, fully integrated merger, established

shareholder return program, and leading margin and return profile. DAL is

successfully executing a lower risk, differentiated strategy with its approach to

fleet, fuel, and maintenance.

AAL May Take Longer to Play Out: Our Outperform call on AAL has a longer-

term horizon and we think strong YTD stock performance, Venezuela PRASM

headwinds in H2 and merger risk has sidelined some. Despite these challenges,

we see significant upside potential in margins as management executes on the

merger, and optimizes legacy AMR over the next 18-36 months.

LUV Fully Valued on Our Estimates: LUV has a strong brand and leading

domestic footprint, but we see fewer levers for margin expansion & relative share

outperformance given it is the best YTD performer (+73%) and is now the only

airline in our converge that trades at a premium to the S&P 500 on FY2 P/E.

Flying High on Structural Shifts

5

Following significant outperformance since early 2013, we think the market will be more

discriminating in H2 of 2014 and 2015

Innovative revenue management, heightened cost control, greater focus on ROIC, and shareholder friendly capital deployment are key themes that have

primarily been shaped by industry consolidation

Following a decade wrought with the worst industry downturn since deregulation, fuel volatility, bankruptcies, and five major mergers, the U.S. airline

industry has emerged stronger than ever as reflected by sector's appreciation since early 2013

We subscribe to the bullish view that the industry is now investable, and think the next leg of the story will be driven by further margin expansion, improving ROIC

and consistency in capital allocation.

U.S. airlines are in the 5th year of current upcycle, but cyclical juice remains on structural industry shifts

We are in the 5th year of industry profitability and while operating margins are approaching (and some have exceeded) historical peak levels of ~9%, we expect a

healthier, more rational airline industry can exceed prior peaks and reach midteens. If current macro trends hold (or improve) and fuel is stable (or declines), we think

this cycle's peak may not be until 2016 / 2017, suggesting two to three more years of improving profits, cash and shareholder returns.

The industry remains beholden to fuel, but Brent crude prices are stable despite pockets of geopolitical instability, and we think the price trend is gradually down given

supply growth in the U.S. and steady demand.

Multiple re-rating on improved industry performance

Post-consolidation, the U.S. network carriers are now a functioning, disciplined oligopoly earning returns above capital costs. We believe the airlines can re-rate

similar to the rails, on the back of a pricing renaissance that drove improved returns and shareholder-friendly capital allocation. While the evolution of the shareholder

base is well underway, we think the group is still under owned with network carriers trading at 9.5x fully taxed P/E versus the S&P at 15.7x and transports at 17x.

Sector 2015 EV/EBITDAR of 5.7x is below where we think airlines should trade mid-cycle (between 6-7x EV/EBITDAR).

More Runway to Go, but Selectivity Key

Source: Company data, CS estimates, Bloomberg

We still see upside in airline stocks given the following factors:

1. Capacity Discipline - supply/demand dynamics remain strong on capacity discipline

2. Durable pricing gains with room to go - Yields should continue to grow ahead of inflation on better revenue management & strong domestic demand

3. Increasingly attractive shareholder returns, improving ROIC and inexpensive valuations - The paradigm shift to shareholder-friendly capital allocation and

improving ROIC should drive a sector re-rating

Sector valuations reasonable versus prior peak (late 90s) and relative to other industrials.

6

82.9%

83.6%83.9% 84.0%

85.1%

14.57¢

15.85¢

16.41¢

16.80¢17.09¢

12.50

13.50

14.50

15.50

16.50

17.50

81.0%

82.0%

83.0%

84.0%

85.0%

86.0%

2010 2011 2012 2013 H1 2014

Domestic Load Factor Domestic Yield

$12.00

$13.00

$14.00

$15.00

$16.00

$17.00

$18.00

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Domestic YieldJet Fuel

Jet Fuel 6 Mth MA A4A Avg. Domestic Yield 6 mth MA

0.87 correlation & 0.75 R squared between Jet Fuel & Airline Pricing

from 2010-2013...

... Since then, that relationship has broken

down with R squared and correlation

falling to 0.05 and -0.23, respectively

Network Carrier Operating Margins & Expansion

(bp/%)

Key Charts Record Domestic Load Factors & Strong Yields

(%/¢)

Jet Fuel Pricing vs. Domestic Yield

Source: Company data, CS estimates

Trailing 12-month ROIC vs. WACC & Company Targets

Correlation between yield & fuel decoupling as fundamentals strengthen…

Sustainable pricing on tight supply / demand balance ROIC > WACC at 3 of 5 top U.S. airlines

ROIC a key driver of share prices

Pace of expansion slowing, but more upside on pricing, revenue initiatives and unit cost control

8.0%7.0%

9.0%7.5% 7.0%

15-18%

No target

10%

15%

7%

DAL

(pre-tax)

AAL

(pre-tax)

UAL

(pre-tax)

LUV

(pre-tax)

JBLU

(post-tax)

ROIC (Q2 2014) WACC Target (in bold)

4.8%

7.4%

10.1%

12.2%

13.6%

97 bp

254 bp270 bp

210 bp

141 bp

2%

4%

6%

8%

10%

12%

14%

0 bp

50 bp

100 bp

150 bp

200 bp

250 bp

300 bp

2012 2013 2014E 2015E 2016E

EBIT Margin

Y/Y Margin Expansion

Average Op Margin (Network Carriers)

Y/Y margin expansion

7

Number of Competitors on Top 25 Domestic Routes

Oligopolistic structure ensures more rational behavior

Capacity and Market Share Analysis

Transatlantic Trunk Route Market Share by Immunized JVs

(% Share)

Percentage of Top 25 U.S. Routes where Carrier is Dominant (>45% share)

Market Share of Domestic Seats

(% Share)

84% of transatlantic trunk routes are duopolies; 50% are monopolies

Today, 4 carriers control 83% of domestic seats vs. 8 in 2007

United has dominant share on ½ of the top 25 U.S. city pairs 3 or fewer players control 60% of the top 25 U.S. city pairs


14% 13% 13% 13% 13% 13% 13%25%

14% 13%21% 22% 21% 21% 21%

21%17% 18%18% 18% 22% 22% 22%

21%11% 11%

11% 11%17% 17% 17%

16%44% 44%36% 36%

26% 27% 27%16%

2007 2008 2009 2010 2011 2012 2013 2014

American Airlines Delta Southwest United Other

26% 27% 26% 26% 26%19% 25%

26% 28% 26% 28%37%

36% 35%35%

100%

81% 75%

48% 45%

12% 11% 2%

2007 2008 2009 2010 2011 2012 2013 2014

STAR JV SkyTeam JV oneworld JBA Other

United53%American

35%

Delta12%Duopoly

24%

3 competitors36%

4 competitors24%

5 competitors16%

8

We equally weight EV/EBITDAR with P/E

Our Valuation Approach

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

Discount to S&P Bloomberg US Airline Index FY2 P/E

Source: Bloomberg, company data, CS estimates

EV/EBITDAR on 2015 Consensus

Price-to-Earnings on 2015 Consensus (fully-taxed earnings)

We Equally Blend EV/EBITDAR and P/E

We look at CFROI Using Credit Suisse HOLT® to Cross Check

5.0x

4.2x 4.3x

5.6x

4.6x

DAL AAL UAL LUV JBLU

10.0x

8.1x

10.5x

15.9x

13.8x

15.8x

DAL AAL UAL LUV JBLU S&P 500 0%

2%

4%

6%

8%

10%

AAL DAL LUV JBLU UAL

CFR

OI

CFROI 10-Yr Median CFROI LFY CFROI Forecast Market-Implied CFROI

EBITDAR = EBITDA + Aircraft Rents

Normalizing aircraft financing across carriers

Target

Price

Target EV/EBITDAR

multiple

Target P/E

multiple

Explanation

of multiples

Delta $56 7.0x 13.5x

implied price $59.94 $52.55

United $68 6.5x 12.5x


American $52 6.0x 11.0x


Southwest $32 7.0x 13.5x


JetBlue $11 6.0x 13.0x


Premium for higher quality,

lower debt

Discount for execution risk

Discount for merger

integration, higher leverage

Premium for Investment

Grade B/S, Consistency

Discount to LUV for lagging

returns and B/S

9

U.S. coverage rounds out existing Latin American, European & Asian airline coverage

Credit Suisse Global Airline Coverage

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x



U.S. Carriers trade at a discount to Asian and Latin American Airl ines on EV/EBITDAR

Company Reuters Share price Rating Target Last Close Upside Mkt Cap

Name Ticker curncy Price Price /Downside (%) (US$ mn) EV / EBITDAR ROIC

U.S. Airlines - Analyst: Julie Yates 7.1x 15%

American Airlines AAL.OQ USD OP $52 37.85 37% 27,259 7.6x 14%

Delta Air Lines DAL.N USD OP $56 39.22 43% 33,063 6.1x 20%

United Continental UAL.N USD OP $68 50.73 34% 18,951 6.9x 13%

Southwest Airlines LUV.N USD N $32 32.83 -3% 22,493 7.8x 17%

JetBlue JBLU.OQ USD UP $11 12.54 -12% 3,722 7.2x 10%

Latin American Airlines - Analyst: Bruno Savaris, CFA 9.7x 13%

Copa Holdings CPA.N USD OP $181 124.75 45% 5,439 9.4x 19%

Gol Linhas Aerea GOLL4.SA USD N $5 15.10 -65% 1,891 11.4x n/a

LATAM Airlines LFL.N USD OP $24 13.03 84% 7,109 8.4x 7%

European Airlines - Analyst: Neil Glynn, CFA 5.4x 12%

Air France AIRF.PA EUR N € 9 8.61 2% 3,343 4.7x 5%

Deutsche Lufthansa LHAG.DE EUR N € 14 13.81 -2% 8,237 3.5x 7%

IAG ICAG.L GBP OP £6 3.69 59% 12,233 3.5x 12%

EasyJet EZJ.L GBP OP £18 13.77 33% 8,839 7.2x 20%

Ryanair RYA.I EUR OP € 8 7.48 13% 13,401 8.0x 15%

Asian Airlines - Analyst: Timothy Ross 8.3x 14%

Singapore Airlines SIAL.SI SGD UP 9 10.12 -7% 9,685 5.0x 11%

Cathay Pacific 0293.HK HKD OP 17 14.36 18% 7,289 6.9x 10%

Korean Air 003490.KS KRW N 34500 37900 -9% 2,171 7.8x 10%

Asiana Air 020560.KS KRW UP 4300 4780 -10% 911 9.2x 16%

China Airlines 2610.TW TWD UP 9 10.05 -6% 1,748 8.4x 9%

EVA Airways 2618.TW TWD OP 18 15.20 18% 1,656 6.2x 13%

All Nippon Airways 9202 JPY OP 275 258.00 7% 8,568 6.0x 14%

Japan Airlines 9201 JPY OP 6525 5870 11% 10,126 2.6x 26%

Thai Airways THAI.BK THB UP 13 15.20 -14% 1,037 8.5x 8%

Malaysia Airlines MASM.KL MYR UP 0 0.26 -22% 1,343 12.0x 15%

Tiger Airways TAHL.SI SGD UP 0 0.42 -24% 331 10.5x 17%

AirAsia AIRA.KL MYR OP 3 2.46 18% 2,157 6.7x 17%

Cebu Pacific CEB.PS PHP UP 45 66.55 -32% 926 8.4x 16%

Asia Aviation AAV.BK THB UP 3 4.74 -30% 718 8.9x 14%

Garuda GIAA.JK IDR UP 430 437.00 -2% 964 9.8x 12%

AirAsia X AIRX.KL MYR UP 1 0.77 -9% 575 16.2x 13%

Industry Themes

11

Consolidation has led to a paradigm shift where airlines are focused on profits and returns

instead of market share

Capacity discipline and revenue management

3 network carriers have demonstrated commitment to sub-GDP capacity growth; 4 largest carriers control more than 80% of domestic capacity

Yield improvement prioritized over capacity growth drives real pricing gains. Growth decelerating following four years of strength

Robust corporate & leisure demand driving record load factors and enhancing pricing power

Fare unbundling & innovative ancillary merchandising initiatives driving high-margin revenue

Continuous network optimization and improving yield management practices

Cost control

Structural cost reductions keeping ex-fuel unit cost growth below inflation

Operational improvements include productivity, sourcing & distribution initiatives

Full realization of merger synergies should drive margin upside

Improved fuel efficiency driven by refleeting, up gauging, interior reconfiguration

Capital discipline and improving profits are driving returns above cost of capital

Carriers are smoothing capital expenditures through slower fleet replacement and used aircraft strategies to avoid prior cycle peaks and valleys

Healthier balance sheets post bankruptcies and significant debt reduction lowers interest burden and improves credit profile

Management teams are stepping up commitment to shareholder returns

– As of July, 5 of 6 largest U.S. airlines now returning cash to shareholders through share repurchase; 4 have dividends

Structural Industry Shifts Alter Competitive Dynamics…


We subscribe to the bull ish view that the industry is now investable, and think the next leg of the story wil l be driven by further margin expansion, improving ROIC and consistency in capital allocation.

12

Still a highly cyclical industry sensitive to macro and fuel

Are pricing and loads peaking, limiting further margin expansion?

PRASM/Yield growth deceleration following 4 years of strength; pockets of international weakness (Asia (China), LatAm (Brazil, Venezuela), Transatlantic)

We believe any deterioration in the domestic pricing story is the biggest risk to the bull thesis

Domestic load factors of 85% peaking, International load factors at 80% under pressure due to competitive capacity additions from non-U.S. airlines

Renewed concern over fuel price volatility given geopolitical unrest

Fuel is the single largest cost for the industry averaging over 30% of operating expenses; level of hedging varies among airlines

Macro environment

Sustainability of GDP growth

Rising interest rates will drive up aircraft financing and leasing costs

Currency risk includes further devaluation of Yen, repatriation of Venezuelan Bolivar

Consolidation

Merger integration risk

– Still significant for American; lingers at United and Southwest to a lesser extent

Labor negotiations unresolved

Wages represent 25% of operating expenses on average and as industry profits improve, employee wage expectations elevate

Benefits from restructuring post-bankruptcy diminishing with open negotiations, expiring contracts, and pending unionization posing risk for some carriers

Disruptors remain key question for skeptics

Skeptics remain focused on the PRASM / yield deceleration, signs of international overcapacity, the durability of profits and cash during a recession, or fuel spike

and international capacity discipline and the yield environment.

The industry has significantly de-levered and structurally reduced costs and capacity, putting it in a much stronger position to weather a recession,

or fuel spike.

… But Potential Disruptors Sideline Some Investors


While the industry remains deeply cyclical, it is less so than pre-consolidation.

13

Pre-2005:

8 CARRIERS

Four carriers now control over 80% of capacity, down from 8 in 2005

We Prefer Network Carriers Given Structural Improvements

and Ongoing Margin Enhancing Initiatives

Source: US DOT Form 41 via BTS, schedule T2, CS estimates

3 NETWORK CARRIERS + Southwest

CONSOLIDATION

60%

65%

70%

75%

80%

85%

90%

Network

LCC

Other

2014: 3 NETWORK CARRIERS

+ Southwest

CONSOLIDATION Carrier Reduction

Total System Load Factor (% of Seats Filled)

Favorable industry environment

The four major U.S. carriers should

continue to benefit from a favorable

industry environment, where the

landscape has been significantly

improved by consolidation. Capacity

and capital discipline are now

paramount

Strong demand is producing record

load factors. Revenue optimization

initiatives combined with structural

cost reductions should drive industry

operating margins to the mid-teens,

above the prior peak of around 9%

despite much higher fuel costs

Three immunized JVs control 98% of

key routes on the Transatlantic,

promoting rational decision making;

50% of trunk routes are monopoly

markets while 84% of trunk routes

U.S.-Europe are duopolies

60% of top 25 domestic city pairs are

controlled by 3 airlines

Global Alliances

United Star Alliance

Delta Sky Team

American One World

Load factors are at record highs

14

Margin expansion slowing mid-cycle, but we still see >300 bps of upside

Airline Profitability is Extremely Dynamic with 3 Key Variables

Avg. Network Carrier Unit Cost Growth vs. Load Factor

Variable

Unit Costs

(CASM - Cost per Available Seat Mile)

Pricing

(Yield – revenue per passenger carried)

Capacity Utilization

(Load Factor)

Primary Lever Reduce non-fuel operating costs

Network optimization, distribution, sourcing

Reduce fuel expense

Re-fleeting with more efficient aircraft, hedging

Increase labor productivity

Better IT, part-time flexibility

Increase aircraft density

Add more seats to existing aircraft

Better yield management

IT, variable scheduling, re-banking

Avoidance of marginal cost pricing

Driving higher value mix

Corporate market share, upselling

Ancillary revenues

Fare unbundling, merchandising, monetization of extras

Code sharing / JV coordination

Accurate demand forecasting

Booking curve, inventory control

Revenue management

Balance load factor versus yield

Source: Company data, CS research and estimates, A4A

80%

81%

82%

83%

84%

85%

0%

2%

4%

6%

8%

10%

2011 2012 2013 2014E 2015E 2016E

LoadFactor

Growth, Yield& Inflation

Average Unit Cost Growth (Network Carriers)

A4A Yield

Inflation

Average Load Factor (Network Carriers)

Network Carrier Operating Margins and Expansion

4.8%

7.4%

10.1%

12.2%

13.6%

97 bp

254 bp270 bp

210 bp

141 bp

2%

4%

6%

8%

10%

12%

14%

0 bp

50 bp

100 bp

150 bp

200 bp

250 bp

300 bp

2012 2013 2014E 2015E 2016E

EBIT Margin

Y/Y Margin Expansion

Average Op Margin (Network Carriers)

Y/Y margin expansion

15

UPCYCLE DOWNCYCLE CONSOLIDATION UPCYCLE

EBIT margins should reach midteens by 2016

Network carrier average EBIT margin peaked at 9.3% in 1997 when fuel was only 11% of operating expenses

2014E network EBIT margin average is ~10.2%, with consensus forecasting another 100 bps of expansion in 2015 and 2016

Fuel is closer to 30% of operating expenses today

Network Carrier Margins are Reaching New Highs

Source: Company data, CS estimates, MIT

Profit Margin

(%)

7 CARRIERS 3 NETWORK CARRIERS + LUV 8 CARRIERS

US Network Carrier Operating Margin

Fuel as a % of OpEx

Middle of extended upcycle

2016-2017 Peak,

midteens margins

5%

10%

15%

20%

25%

30%

35%

(15%)

(10%)

(5%)

0%

5%

10%

15%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

1997 Prior peak

9% margins

9/11/2001 Terrorist attacks

Fuel costs average 11% of

operating expenses

Fuel costs average 30% of

operating expenses

2008 Fuel price

spike

16

Given our expectations for more muted yield growth and rising unit costs

We think margins at Southwest and JetBlue have less potential for the following reasons:

Cost advantage eroding with age, and as network airlines become more efficient and ultra-low cost carrier models evolve

Yield upside limited as customer base is more price elastic and competition from both network and ultra-low cost carriers increases; comps more challenging in

H2 2014 and 2015

Ancillary revenue potential capped as customer-friendly policies key to brand loyalty for LUV and JBLU

– Southwest’s “Bags Fly Free” marketing campaign and operational underperformance in our view make a bag fee unlikely; lack of upsell product limiting as well

– JetBlue is introducing “Fare Families” in 2015 including a bag fee for its no frills offering, but we think the incremental contribution will be lower than consensus

is forecasting as management implements the initiative a “JetBlue way” to minimize customer reproach

Limited Margin Expansion Potential for Leisure Carriers


Operating Margin, Adj.

(%) Operating Margin, Adj.

(%)

Margin expansion at LUV and JBLU more moderate DAL already best-in-class, but most upside at UAL and AAL

4.9%

8.2%

10.7%

11.9% 11.8%

7.5% 7.9%

8.9%

10.1%10.8%

2012 2013 2014E 2015E 2016E

LUV JBLU

7.1%

9.3%

12.4%

14.0% 14.1%

3.7%

8.1%

11.3%

13.8%

15.0%

3.7%

4.6%

6.4%

8.7%

11.4%

2012 2013 2014E 2015E 2016E

DAL AAL UAL

17

Domestic capacity discipline keeping supply and demand balanced;

Capacity growth has been below GDP since 2010

Schedule data shows total seat growth growing less than 3% in 4Q,

even with several carriers up gauging; even LCC growth only 3%

Domestic Supply, Demand, and GDP Total Seats (from US to RoW, incl. Domestic)

Capacity Discipline Remains Crucial

U.S. carriers continues to demonstrate commitment to sub-GDP capacity growth

Source: A4A, Diio Mi,Company data, CS estimates

Management Strategy

AAL “The domestic market, in particular, is mature. And so you certainly shouldn’t have growth that exceeds GDP in the domestic market.”

DAL “The goal over the next 5 years is for capacity growth of roughly 2% per year, which is well within our expectations of what the general economic forecasts for the future are.”

UAL “Over the next 4 years, we expect our consolidated capacity to grow less than GDP, or 1-2%.”

A4A Pax Yield Report Summary_2014-06_141file

in “ASMs” tab (line 703)

Capacity charts from Diio Mi – seats from US tab

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2010 2011 2012 2013 H1 2014

Domestic ASMs YY Domestic RPMs YY Domestic GDP-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14E 4Q14E

--Quote attributions?

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2010 2011 2012 2013 H1 2014

System ASMs YY System RPMs YY Global GDP

Domestic capacity is still 6% below 2007 levels

18

Pockets of competitive tension are building, comps are getting tougher

Matching capacity with demand is helping to circumvent unsustainable price competition, but, is yield growth sustainable?

We think so, as long as capacity growth is sub-GDP. That said, while upward pricing trends appear intact, pockets of competitive tension are building in certain

markets and the battle for high-yielding corporate travel is intensifying as the differentiation between network carriers wanes. Yields are up 20% over the last four

years, well ahead of inflation, on real pricing gains and record load factors.

PRASM growth deceleration is inevitable…we think UAL will transition to PRASM outperformance on easier comps and self-help

Comps are getting tougher and international trends are mixed with over capacity risk in the Pacific, Atlantic and Latin America. PRASM growth has averaged 5% since

2010 and going forward, we think PRASM outperformance will be driven by revenue management at the company level which is where UAL is poised to catch-up.

AAL should eventually outperform from integration upside, but near-term Venezuela issues and tough comps may cloud merger benefits for 6-9 months. DAL is now

challenged with protecting its 13% domestic revenue premium following successful corporate market share gains, while UAL is playing catch-up.

Ancillary revenues should continue to rise as airlines become more advanced at monetizing extras and enhancing distribution

We see further pricing upside & expect non-ticket revenues to drive continued yield improvement. New products, variable/dynamic pricing, distribution

enhancements, and different pricing methods are all contributing to higher ancillary revenues.

Non-ticket revenue as a percentage of total operating revenue for major U.S.-based airlines rose to nearly 10% in 2013 and are a significant driver of profit.

Ultra-low cost carriers have led the way with ancillary revenue as a percentage of total revenue averaging 30% of total revenues.

Upward Pricing Trends Appear Intact, but Bear Watching Closely

Source: Company data, CS research and estimates

Quarterly PRASM Growth Y/Y Quarterly Yield Growth Y/Y

Airline Year 1Q 2Q 3Q 4Q

AAL 2013 6.0% 0.9% 3.4% 5.0%

2014 2.9% 5.9% 1-3%

DAL 2012 13.6% 8.2% 2.8% 4.1%

2013 3.9% -0.1% 4.0% 3.0%

2014 3.2% 5.7% 2-4%

UAL 2012 5.2% 2.9% -1.3% 0.6%

2013 5.9% 1.0% 2.7% 3.2%

2014 -2.0% 3.7% 2-4%

5.3%

3.2%

6.5%

3.8%

1.3%

3.9%

3.1%

-2.0%

3.0%

Q4'13 Q1'14 Q2'14

AAL

DAL

UAL

Comps most challenging for AAL among network carriers

Expectations are highest for DAL

Comps toughen over next 12 months for DAL and AAL

Airline Year 1Q 2Q 3Q 4Q

AAL 2013 6.0% 0.9% 3.4% 5.0%

2014 2.9% 5.9% 1-3%

DAL 2012 13.6% 8.2% 2.8% 4.1%

2013 3.9% -0.1% 4.0% 3.0%

2014 3.2% 5.7% 2-4%

UAL 2012 5.2% 2.9% -1.3% 0.6%

2013 5.9% 1.0% 2.7% 3.2%

2014 -2.0% 3.7% 2-4%

19

xxx

Improving Unit Cost Control

Carriers are getting smarter at keeping non-fuel unit costs sub-inflation

All Three Network Carriers Targeting Sub-Inflationary Unit Cost Growth 2014+

United has the most work to do but is showing progress on a $2B structural cost reduction program announced in late 2013

Source: Company data, A4A, MIT Airline Data Project CS estimates

Management Stated Goals

AAL 2015 non-fuel unit cost growth -1% - +1%, below inflation

DAL Goal to keep non-fuel unit cost growth <0-2%

UAL 2015 – 2017 non-fuel unit cost growth below inflation

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

AAL

DAL

UAL

Stage Length Adjusted CASM ex Fuel (LTM 2Q 14)

9.82¢

11.06¢ 11.19¢

7.49¢ 7.21¢

0.00¢

2.00¢

4.00¢

6.00¢

8.00¢

10.00¢

12.00¢

AAL DAL UAL LUV JBLU

Non-Fuel Unit Cost Growth Ex-Items

AAL DAL UAL

2015 non-fuel unit cost growth -1% - +1%, below inflation.

Goal to keep non-fuel unit cost growth <0-2%.

2015 – 2017 non-fuel unit cost growth below inflation.

Management Stated Goals

20

U.S. airlines are now earning their cost of capital

U.S. carriers are approaching & exceeding stated ROIC targets as managements shift to return-driven strategies; Management’s must balance re-fleeting

needs while limiting growth in the invested capital base

Delta is leading network carriers. DAL raised its ROIC target range to 15-18% in May, and achieved 18.3% in Q2 on a trailing 12-month basis

United met its 10% target in Q2 and will likely exceed the target by year-end; expect management to push target higher over next 6-12 months

Southwest exceeded its 15% ROIC target in Q2, marking the first time LUV exceeded its 15% target since mid-2001; expect management to issue a higher target

at November investor day

JetBlue states it is on track to meet its 7% (post-tax) target by YE; expect management to issue a higher target at November investor day

Ultra-low-cost carriers (SAVE, ALGT) have industry-leading margins and generate much higher ROIC. SAVE pre-tax ROIC in 2013 was 32%

Consolidation has created economies of scale and is leading to higher investor returns

The airline industry has generated one of the lowest ROIC among all industries over the last 30-40 years, but consolidation and more return-driven management

teams are driving ROIC above WACC

Structural Industry Changes Leading to Improving Returns

8 CARRIERS

Source: Company data, IATA, McKinsey & Company for IATA

WACC

ROIC

19930%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

% o

f In

vest

ed C

apita

l

Q2 2014 ROIC vs. WACC & Target

U.S. Airlines finally generating ROIC greater than cost of capital

Historical Average Airline Industry ROIC and WACC

(% of Invested Capital)

8.0%7.0%

9.0%7.5% 7.0%

15-18%

No target

10%

15%

7%

DAL

(pre-tax)

AAL

(pre-tax)

UAL

(pre-tax)

LUV

(pre-tax)

JBLU

(post-tax)

ROIC (Q2 2014) WACC Target (in bold)

21

Managements smoothing capital expenditures and balancing capital deployment Managements stepping up commitment to shareholder returns with 5 of 6 largest U.S. airlines now returning cash to shareholders through share

repurchase; 4 have dividends

Healthier balance sheets post bankruptcies and significant debt reduction

Capital intensive industry finding discipline; shifting to a returns-driven approach to fleet planning

The airline industry is extremely capital intensive and capital expenditures to purchase new aircraft have historically been the primary use of funds. In the good times

(late 80s, mid-late 90s), airlines have historically ordered too many aircraft and added more capacity than needed, resulting in heavy debt burdens and limited flexibility

in capacity. Today, U.S. airline management teams are maintaining discipline, smoothing out new equipment buys and making ROIC-driven aircraft purchase

decisions.

So far in 2014 alone, five carriers have announced a combined $5.6B in buyback authorizations

Since February of this year, Delta, Southwest and Alaska have all boosted their dividends and authorized larger share repurchase programs and American and United

followed course in July, each unveiling $1B share buyback programs with an accompanying dividend at American. The timeframe is more aggressive at American

(targeted completion end of 2015) versus United (three year targeted completion suggesting mid-2017) which is not surprising given their respective cash positions

and relative size versus market cap. Both indicated the initial programs were just the start and we expect 2015 will bring more of the same.

Three airlines (DAL, LUV, ALK) have increased their dividends by 40% on average, and the largest airline (AAL) recently declared the first cash dividend at the

company since 1980. United's management will continue to evaluate a dividend as earnings improve and debt is reduced.

A Paradigm Shift in Capital Allocation


Carrier Date Ann.

2014

Buyback

Authorization % of

Market Cap

Previous

Buyback

Authorization

Remaining

Authorization

as of Q2 Report Timeframe

for Completion

NTM

Dividend

Yield

Delta May-14 $2,000 6% $500 $1,800 2.5 yrs (YE 2016) 1.0%

American Jul-14 $1,000 3% n/a $1,000 18 mths (YE 2015) 1.1%

United Jul-14 $1,000 6% n/a $1,000 3 years (mid-2017) n/a

Southwest May-14 $1,000 6% $1,500 $780 no timeframe 0.85%

Alaska May-14 $650 10% $250 $623 no timeframe 2.3%

Stock Picks / Company Tear Sheets

23

Key Investment Highlights

This sector’s turnaround story. While UAL shares still embed substantial

execution risk, we see a string of catalysts and tailwinds in 2015 that should drive

earnings & valuation upside. (i) Maturing revenue initiatives should lead to 2015 unit

revenue outperformance by as much as 100 bps. (ii) Accelerating cost reductions

and easing wage inflation will permit flat to down ex-fuel unit cost growth despite

only modest capacity additions. (iii) We expect UAL to exceed buyback

expectations, reinforcing management’s confidence in the earnings trajectory.

Mind the gap, we think it's narrowing. UAL's margin progress in the 4 years

post-merger versus Delta's isn’t all that different. We think this consensus margin

expansion is overly conservative, and see no structural impediments to UAL

achieving a low double-digit EBIT margin by year 6 (2016 +500 bps vs. 2014E).

Since 2011, United's operating margin gap has averaged 500 basis points versus

peers, and lagged by 430 basis points in Q2. The consensus view is that UAL's

margin gap will widen as Delta and American continue to expand margins at a

faster pace, with few analysts projecting UAL will reach 10% by 2016 while

consensus has DAL and AAL EBIT margins in the mid-teens. Our EBIT margin

forecast is 161 bps ahead of the Street in 2015 and 284 bps ahead in 2016 as

we are more optimistic that UAL can transition to a PRASM outperformer and

recognize significant benefits from structural cost reductions.

Q2 performance is starting to restore confidence…strong Q3 performance

is crucial to the bull case. Management's tone improved markedly versus Q1,

and the $1B buyback announcement came earlier than expected, underpinning

management's confidence in ongoing earnings improvement. If Q3 continues to

show progress on cost control, and PRASM comes in at mid to high-end or ahead

of the 2-4% guidance, confidence should continue to re-build. We are expecting a

solid Q3.

Catalysts

(i) Investor update 10/7, (ii) Q3 earnings 10/23, (iii) fall conferences,

(iv) investor day 2015 (tbd), (v) buyback pace, (vi) potential for dividend in 2015,

higher ROIC target, margin or EPS guidance.

UAL — Outperform ($68 TP)

Top Pick: What’s right with United (link to full report)

Our 2015E are ahead of the Street on a combination of higher unit revenues and lower unit costs, as we are more optimistic that UAL can

transition to a PRASM outperformer and recognize significant benefits from structural cost reductions.


Credit Suisse versus Consensus

UAL Trades at a Significant Discount to the S&P and Leisure Carriers

We blend a 11.5x mid-cycle P/E multiple and a 6.0x EV/EBITDAR multiple on our 2015 estimates to yield our $68 target price

2014

EPS EBITDAR EPS*

CS Consensus ∆ CS Consensus ∆$4.68 $4.56 2.5% $5,063 $4,991 1.4%

10.8x 11.1x 5.0x 5.1x

2015

EPS* EBITDAR


6.7x 8.7x 4.1x 4.4x

* 2015 consensus is a mix of taxed and untaxed estimates; CS is untaxed

UAL INITIATION REPORT

RATING: OUTPERFORM

PRICE (Sept 05 2014): $50.73

TARGET PRICE: $68

10.2x

7.8x

10.4x

15.8x

13.6x

15.8x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

DAL AAL UAL LUV JBLU S&P 500

2015 P/E on fully taxed consensus

https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=ulg&format=PDF&document_id=806396000&serialid=AuKGZpiDPyXT0r5sUJmK0c6FRss8ThQJR8BvX9nOBXY%3d

24


Domestic

57%

AAL DAL UAL

Domestic 67% 59% 57%

Atlantic 14% 20% 19%

Pacific 4% 13% 16%

Latin America 15% 8% 8%

Transpacific

16%

Latin

America

8%

Transatlantic

19%

Regional Capacity (by ASMs)

2013A 2014E 2015E 2016E

Revenue $38,279 $38,866 $40,436 $42,021

Y/Y% Change 3.0% 1.5% 4.0% 3.9%

EBITDAR $4,394 $5,063 $6,150 $7,494

Margin 11.5% 13.0% 15.2% 17.8%

EBIT $1,769 $2,500 $3,532 $4,799

Margin 4.6% 6.4% 8.7% 11.4%

Pre-Tax Profit $1,059 $1,596 $2,886 $4,326

Margin 2.8% 4.1% 7.1% 10.3%

EPS $3.01 $4.68 $7.55 $7.45

Y/Y% Change 77% 55.3% 61.3% -1.3%

Income Statement

2013A 2014E 2015E 2016E

Traffic Growth -0.2% 0.8% 2.7% 1.2%

Capacity Growth -1.4% 0.5% 1.8% 1.1%

Load Factor 83.6% 83.9% 84.6% 84.7%

Unit Revenue Growth 3.1% 1.6% 3.4% 2.6%

Pax Yield Growth 1.8% 1.3% 2.5% 2.4%

Unit Cost Growth 2.4% -0.5% 0.4% -0.2%

Ex-Fuel Unit Cost Growth 6.2% 2.0% -0.2% 0.6%

Net Lease Adj. Debt $13,840 $14,540 $10,588 $7,267

Net Lease Adj. Debt/EBITDAR 3.15x 2.87x 1.72x 0.97x

Net Lease Adj. Debt/Equity n/a 3.23x 1.51x 0.77x

Key Performance Metrics

2013A 2014E 2015E 2016E

Operating Cash Flow 1,444 3,156 4,224 4,222

Gross CapEx (2,400) (3,100) (2,700) (2,700)

Debt Reduction (2,319) (2,405) (3,000) (3,000)

Incremental Pension Funding 0 (145) (125) (125)

Return Cash to Shareholders 0 (250) (213) (407)

Div idends 0 0 (38) (107)

Repurchase 0 (250) (175) (300)

Cash Remaining (Used) from OCF generated (3,275) (2,994) (2,028) (2,416)

% of FCF returned to shareholders 0.0% 442.5% 14.0% 26.7%

Capital Deployment

July 2014: Announced $1B share repurchase program to be completed in next three years

(before mid-2017) - 6% of market cap when announced. Evaluating a div idend at some

point.

Financial and operational snapshot


25

Bull versus Bear


Backstory Bull Case Bear Case CS View

UAL has lagged peers as it has

suffered from lingering integration

issues post its 2010 merger with

CAL.

However, better than expected Q2

performance on unit revenues and

unit costs, as well as the earlier than

expected buyback announcement

encouraged investors the carrier is

turning around.

Turnaround underway

Margin potential

underappreciated

Q2 progress on revenue

& cost initiatives will continue

and accelerate, allowing UAL to

start narrowing the RASM &

margin gap to DAL & AAL

Mgmt will boost ROIC target in

2015 and provide longer-term

margin or EPS guidance

Share buyback program

indicative of management

confidence of L-T targets; just a

first step, dividend to come

CapEx spend will be lower than

plan with used a/c plan

Valuation attractive

Substantial execution risk

Relative RASM / margin

underperformance will continue

into 2015

Margin gap vs. peers

(400 bps on pre-tax margin)

won’t close due to

structural issues with network /

hub structure

Lingering integration and

cultural challenges will impede

progress

Aggressive CapEx plan

pressures FCF and ROIC

Outperform, $68 Target Price

String of catalysts and tailwinds

in 2015 should drive earnings &

valuation upside

2015 earnings improvement

underappreciated due to (i) likely

PRASM outperformance, (ii)

better cost control/lower unit

costs, (iii) more aggressive

buyback pace

We see no structural

impediments to UAL achieving a

low double-digit EBIT margin in 2

years


26


Merger integration unlocks opportunity. Execution on key integration milestones

in 2015 is crucial for the stock to continue to outperform, but merger risk is difficult

to quantify. We favor shares with a longer-term bias as we: (i) see upside to the

$1.4B synergy target and expect a relatively smooth integration, (ii) believe there is

underappreciated opportunity in structural improvements to legacy AMR post-

merger, and (iii) see upside to capital deployment in 2015.

Decelerating PRASM concerns creates entry point. While AAL is +50% YTD

following a strong start post the December US Airways merger, shares have

relatively underperformed since Q2 despite the earlier than expected capital return

announcement. PRASM deceleration in H2 from Venezuela headwinds and tough

comps are contributors, but we think AAL unit revenues to outpace the industry

starting mid-2015 as synergies take hold. Recent weakness offers longer-term

investors an attractive entry point.

Shareholder returns likely to accelerate in 2015. We expect AAL will take a

DAL-like approach to shareholder returns and anticipate a quick pace on the

buyback with additional authorizations and a dividend raise in 2015.

Revenue synergies in early stages; ramping initiatives are PRASM tailwinds

in 2015. Management identified $400M in incremental synergies, up from the

original $1.05B estimate from (i) Rebanking of hubs (ii) Variable scheduling and

(iii) increasing the seat density of its fleet. We see upside to the $1.4B target, and

these initiatives will help drive PRASM growth in 2015.

Closing in on Delta margin levels; on track to potentially surpass DAL in

2015. AAL is well positioned to close the gap with DAL given its swift progress out

of the gate since the merger late last year both financially and operationally. Cost

synergies take hold in 2015, and AAL expects to keep its unit costs flat. The

experience of the former US Airways management team, and their willingness to

learn from others victories and failures bode well for margin potential.

Catalysts

(i) September traffic & Q3 investor update 10/8, (ii) Q3 earnings 10/23,

(iii) conference appearances, (iv) major merger milestones in 2015

AAL — Outperform ($52 TP)

Merger integration to unlock additional opportunity (link to full report)

Our 2015 estimates are ahead of consensus on a higher yield assumption

(driven by merger synergies) and on expectations for measured, sub-inflation unit cost growth.



AAL INITIATION REPORT

RATING: OUTPERFORM

PRICE (Sept 05 2014): $37.85

TARGET PRICE: $52

AAL Valuation

We blend a 11.0x mid-cycle P/E multiple and a 6.0x EV/EBITDAR multiple

on our 2015 estimates to yield our $52 target price.

2014

EPS EBITDAR EPS*

CS Consensus ∆ CS Consensus ∆$5.59 $5.54 0.9% $7,395 $7,554 -2.1%

6.8x 6.9x 4.8x 4.7x

2015

EPS* EBITDAR


5.1x 5.6x 4.0x 4.1x

* 2015 consensus is a mix of taxed and untaxed estimates; CS is untaxed

10.2x

7.8x

10.4x

15.8x

13.6x

15.8x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x



https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=ulg&format=PDF&document_id=806395870&serialid=N1LbJgglV3LMA2lBwns4MnEW44TKKT2Z4byNidsS1s8%3d

27



Domestic

67%

AAL DAL UAL



Pacific 4% 13% 16%


Transpacific

4%

Latin

America

15%

Transatlantic

14%


2013A 2014E 2015E 2016E

Revenue $40,419 $43,030 $45,326 $47,434

Y/Y% Change 4.7% 6.5% 5.3% 4.6%

EBITDAR $5,744 $7,395 $8,779 $9,678

Margin 14.2% 17.2% 19.4% 20.4%

EBIT $3,276 $4,848 $6,257 $7,107

Margin 8.1% 11.3% 13.8% 15.0%

Pre-Tax Profit $2,195 $3,991 $5,435 $6,262

Margin 5.4% 9.3% 12.0% 13.2%

EPS $2.62 $5.59 $7.49 $8.91

Y/Y% Change n/a 113.7% 34.0% 19.0%

TTM pre-tax ROIC at 6/30 was 13.7% vs. WACC of 6.5-7.5%

Income Statement

2013A 2014E 2015E 2016E

Traffic Growth 2.7% 2.2% 2.4% 2.1%

Capacity Growth 2.1% 2.3% 2.4% 1.9%

Load Factor 82.9% 82.8% 82.8% 83.0%


Pax Yield Growth 2.0% 3.4% 2.8% 2.8%

Unit Cost Growth -1.5% -1.3% 0.0% 1.3%

Ex-Fuel Unit Cost Growth -2.5% 3.6% -0.8% 2.0%





2013A 2014E 2015E 2016E

Operating Cash Flow 5,087 6,930 7,808

Gross CapEx (5,500) (6,250) (6,250)

Debt Reduction (2,383) (3,200) (4,000)

Purchase of aircraft off lease (1,000) (500) (500)

Incremental Pension Funding (600) (500) (500)

Return Cash to Shareholders (475) (1,175) (1,394)

Div idends (147) (325) (394)

Repurchase (328) (850) (1,000)

Cash Remaining (Used) from OCF generated (1,514) (1,257) (2,023)

% of FCF returned to shareholders -115% 173% 89%

Capital Deployment

On July 23, 2014, the Company’s announced a $1.0 billion share repurchase program to be completed

no later than December 31, 2015. AAL also called $900 million principal amount of 7.50% senior

secured notes due March 31, 2016, and announced it would make supplemental contribut ions of up to

$600 million to its defined benefit plans in 2014. These contribut ions would be above and beyond the

$120 million minimum required contribut ions for 2014.Source: Company data, CS estimates

28

Bull versus Bear



AAL merged with US Airways last

December and has American has

made a quick impression on

investors and the industry as

profitability from merely combining

the two carriers has improved

dramatically and cost and revenue

synergies are still to be realized.

Integration progress has been

strong, but 2015 is key for major

milestones including a single

operating certificate and IT

migration.

AAL announced a $1B buyback (3%

mkt cap) and $0.10/share qtrly

dividend (1% yield) with Q2 results in

July, displaying a S/H friendly

approach to capital deployment

despite the highest CapEx budget

and significant leverage

Once synergies in full swing, AAL

margins may exceed DAL; $1.4B

synergy target conservative

LatAm headwinds temporary;

should see PRASM

outperformance in 2015

Experienced mgmt will unlock

legacy AMR potential

Strong network with greatest

domestic exposure among

network peers

Upside to initial capital

deployment program

Multiple will expand as merger

risk retires

Potential addition to S&P at some

point over next 12-24 months

Merger integration risk

significant; still early days

Venezuela headwinds and

tough comps weigh PRASM

growth in H2 2014

Yield pressure in Dallas & D.C.

from LUV expansion

Higher leverage versus peers;

debt to remain flattish given

aircraft order book

Significant CapEx for new

aircraft (4x D&A, >2x peers)

limits flexibility

Sub-inflation Y/Y CASM past

2015 not sustainable. DAL and

UAL saw significant cost growth

around year 3-4 post close


We expect margin expansion to

outpace consensus in 2015, and

think margins can exceed Delta’s

in 2015 (we forecast 15% vs.

DAL’s 14%)

Recent underperformance offers

attractive entry point, esp. for L-T

investors looking past merger

Merger integration unlocks

opportunity for structural

improvements at legacy AMR

Synergy targets conservative

Accelerating capital returns;

upside in 2015


29


The industry leader. Despite the significant run in shares, we still see valuation

upside as Delta demonstrates its long-term goals are achievable, and leads the

network carriers in operating margin and FCF generation. In our view, DAL is the

highest-quality holding among network carriers for the following reasons: (i) merger

integration risk is retired; (ii) management is a respected, proven team successfully

executing a differentiated strategy (fuel, and ROIC focused approach to fleet), and

(iii) leading FCF and generous shareholder friendly cash returns.

Key holding for airline investors. We see DAL as a key holding for airline

investors given inclusion in the S&P, lower relative debt levels, a fully integrated

merger, an established shareholder return program, leading margins and a 13%

domestic revenue premium to the industry.

Differentiated approach. DAL’s differentiated approach to cost control through its

refinery investment and older fleet/maintenance strategy gives it the most flexibility

in a rising fuel environment or in the face of declining demand given greater capacity

flexibility with fully depreciated assets. DAL’s fuel price/gal is ~5% below peers.

Leading profitability. While many viewed the combined DAL-NWA network / hub

structure as inferior to peers, Delta has proven otherwise with its industry leading

profitability. We think this is primarily attributable to (i) dominant market share

at top hubs, (ii) the more efficient airports (ATL & MSP are top 3 in N. America),

and (iii) advantages from lower costs per enplaned passengers in top 3 hubs.

Committed to Shareholders We expect the Dec 11th investor day gives

management another opportunity to remind investors why they should own DAL in

2015. Management has proven its commitment to shareholders, and we see no

reason this will change. If the demand and pricing environment remain strong, we

expect DAL may nudge up its long-term operating margin / ROIC target again next

year.

Catalysts

(i) September traffic / PRASM & investor update 10/2, (ii) Q3 earnings 10/22,

(iii) fall conferences, (iv) NYC investor day 12/11

DAL — Outperform ($56 TP)

Setting the industry standard (link to full report)

Our 2015E are essentially in-line with consensus.



DAL INITIATION REPORT

RATING: OUTPERFORM

PRICE (Sept 05 2014): $39.22

TARGET PRICE: $56

Relative Valuation Still Attractive; at a Significant Discount on P/E

We blend a 13.5x mid-cycle P/E multiple and a 7x EV/EBITDAR multiple on our 2015 estimates to yield our $56 target price.

2014

EPS EBITDAR EPS

CS Consensus ∆ CS Consensus ∆$3.22 $3.21 0.3% $7,115 $7,211 -1.3%

12.2x 12.2x 5.5x 5.5x

2015

EPS EBITDAR


10.1x 10.3x 5.0x 5.0x

10.1x

15.8x

17.2x 16.7x15.8x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

20.0x

DAL LUV Air Freight Rails S&P500

https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=ulg&format=PDF&document_id=806395990&serialid=9YnoGPZGoqBzwi%2bR%2bWIbxmhEYQgu%2f7piq%2fqnkrJY6zU%3d

30



Domestic

59%

AAL DAL UAL



Pacific 4% 13% 16%


Transpacific

13%

Latin

America

8%

Transatlantic

20%


2013A 2014E 2015E 2016E

Revenue $37,773 $40,317 $41,944 $44,142

Y/Y% Change 3.0% 6.7% 4.0% 5.2%

EBITDAR $5,393 $7,115 $7,911 $8,481

Margin 14.3% 17.6% 18.9% 19.2%

EBIT $3,526 $5,028 $5,844 $6,306

Margin 9.3% 12.5% 13.9% 14.3%

Pre-Tax Profit $2,696 $4,144 $5,214 $5,774

Margin 7.1% 10.3% 12.4% 13.1%

EPS $3.14 $3.22 $3.89 $4.49

Y/Y% Change 72% 2.3% 21.0% 15.4%

Income Statement

2013A 2014E 2015E 2016E

Traffic Growth 1.0% 4.2% 2.2% 2.7%


Load Factor 83.8% 85.0% 85.2% 85.7%


Pax Yield Growth 2.5% 2.1% 1.8% 2.2%

Unit Cost Growth -1.3% -0.1% 0.4% 2.6%

Ex-Fuel Unit Cost Growth 2.4% 0.9% 1.2% 0.6%





2013A 2014E 2015E 2016E


Gross CapEx (2,568) (2,300) (2,500) (2,750)

Debt Reduction (1,461) (1,806) (1,247) (1,615)

Incremental Pension Funding (250) (250) (250) (250)

Return Cash to Shareholders (352) (1,027) (1,086) (1,194)

Div idends (102) (252) (336) (394)

Repurchase (250) (775) (750) (800)

Cash Remaining (Used) from OCF generated (127) (43) 347 (8)


Capital Deployment

May 6, 2014 - DAL announced new $2 billion share repurchase program, to be completed

no later than Dec. 31, 2016. In addition, beginning in the September 2014 quarter, the

company's quarterly div idend will increase to $0.09 per share from the current $0.06 per

share. Together, these two programs are expected to return an additional $2.75 billion to

shareholders through 2016.Source: Company data, CS estimates

31

Bull versus Bear



DAL has led the industry in operating & financial performance, and shareholder friendly capital deployment.

Management has significantly reduced debt and improved ROIC (18% TTM at Q2) since the Northwest merger.

Last fall Delta was re-added to the S&P 500.

Best-in-class margins, FCF generation & ROIC

Rising yields & below inflation unit cost growth supports

margin expansion

S&P inclusion, lower debt and

investment grade metrics

High exposure to strong domestic trends; 13% unit

revenue premium

domestically

Merger risk retired

Most likely airline to close valuation gap with transports

Best performer over 20-mth period, highest expectations

PRASM growth deceleration on tough comps and international weakness

Transatlantic capacity / yield concerns

Losing discipline in battle for Seattle, adding too much capacity

Trainer refinery adds risk


We see as key holding for airline investors given lower relative risk profile

PRASM growth sustainable, albeit at a slower pace

Expect positive December

11th investor day

JVs are reducing

Transatlantic capacity in Q4; rational market structure

Best positioned in pullback given lower debt and older fleet strategy


32


Strong domestic footprint, but fewer margin levers versus network peers.

LUV has a bright future given a strong brand and leading domestic footprint, but we

see fewer levers for margin expansion and relative share price outperformance given

(i) rising unit cost pressures & labor tensions, (ii) decelerating yield growth due to

capacity additions into competitive markets and more limited mix/ancillary opportunity,

and (iii) a premium valuation (15.8x P/E on 2015E vs. network average of 9.5x).

2015 capacity growth a key question. LUV remains on track to meet or exceed its

15% ROIC target this year and has pointed to a return to capacity additions next year

following two years of very modest growth. Management has cited its opportunity set as

50 destinations beyond the 48 states. Consensus is forecasting 3.6% ASM growth in

2015, and we expect guidance much above that would not be well received.

Historic cost advantage is eroding as network evolves post the AirTran acquisition

and expands to more competitive routes and congested and costlier airports.

Meanwhile, network carriers are becoming more efficient following bankruptcy

restructurings, merger-driven structural cost reduction initiatives, and new union

contracts. On the other side of the spectrum, ultra-low cost carriers have made

steady progress in competing with Southwest given much lower labor and

maintenance costs and unbundled fare structures.

While LUV has a strong domestic footprint, we see limited room for further

yield growth following pricing increases on par with the industry for the past 2.5

years as (i) 38% of LUV’s capacity growth is directed into highly competitive markets

where pricing will likely have to be sacrificed and (ii) limited ancillary revenue

opportunities due to “Bags Fly Free”, customer friendly fee policies, and no upsell

product.

Catalysts

(i) Sept. traffic & Q3 PRASM 10/8, (ii) Q3 Earnings 10/23, (iii) Dallas Investor day

Nov 10th, (iv) 2015 capacity growth plans, (v) changes to bag fee or fee structure or

addition of upsell product, and (vi) progress on labor negotiations.

LUV — Neutral ($32 TP)

Quality domestic exposure, but fully valued (link to full report)


LUV INITIATION REPORT

RATING: Neutral

PRICE (Sept 05 2014): $32.83

TARGET PRICE: $32


LUV trades at a significant premium to peers

Our estimates are lower than consensus, reflecting a more tempered increase

in yields and greater cost inflation as the carrier continues to grow its scale and loses some of its cost advantage

We blend a 13.5x mid-cycle P/E multiple and a 7x EV/EBITDAR multiple on our 2015 estimates to yield our $32 target price.

2014

EPS EBITDAR EPS

CS Consensus ∆ CS Consensus ∆$1.71 $1.78 -3.9% $3,194 $3,406 -6.2%

19.2x 18.5x 6.6x 6.2x

2015

EPS EBITDAR


16.1x 15.8x 5.9x 5.6x

10.2x

7.8x

10.4x

15.8x

13.6x

15.8x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x



https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=ulg&format=PDF&document_id=1037985411&serialid=h%2fr0eHialXpShS3SFufuXv5RMqVXxiTyROTIQLsrJSs%3d

33

Chicago (MDW) 6.3%

Las Vegas 5.8%

Denver 4.4%

Phoenix 4.4%

Houston

(HOU) 4.1%

Dallas

(DAL) 3.5%

Baltimore 5.2%


Domestic Hubs (with % of ASMs)

6.3% Chicago (MDW)

5.8% Las Vegas

5.2% Baltimore

4.4% Denver

4.4% Phoenix

4.1% Houston (HOU)

3.5% Dallas (DAL)

2013A 2014E 2015E 2016E

Revenue $17,699 $18,466 $19,420 $20,155

Y/Y% Change 3.6% 4.3% 5.2% 3.8%

EBITDAR $2,675 $3,194 $3,620 $3,757

Margin 15.1% 17.3% 18.6% 18.6%

EBIT $1,447 $1,970 $2,316 $2,386

Margin 8.2% 10.7% 11.9% 11.8%

Pre-Tax Profit $1,291 $1,920 $2,247 $2,338

Margin 7.3% 10.4% 11.6% 11.6%

EPS $1.12 $1.71 $2.04 $2.17

Y/Y% Change 103% 52.3% 19.5% 6.6%

Income Statement

2013A 2014E 2015E 2016E

Traffic Growth 1.4% 2.1% 3.7% 2.3%


Load Factor 80.1% 81.4% 81.8% 81.1%


Pax Yield Growth 2.4% 2.6% 1.6% 1.5%

Unit Cost Growth -1.7% 0.6% 0.5% 0.7%


Net Lease Adj. Debt $2,195 $1,012 $184 ($660)

Net Lease Adj. Debt/EBITDAR 0.82x 0.32x 0.05x -0.18x

Net Lease Adj. Debt/Equity n/a 0.13x 0.02x -0.07x


2013A 2014E 2015E 2016E


CapEx (1,447) (1,800) (1,550) (1,400)

Debt Reduction (313) (559) (400) (500)

Incremental Pension Funding 0 0 0 0

Return Cash to Shareholders (611) (889) (786) (819)

Div idends (71) (139) (186) (219)

Repurchase (540) (750) (600) (600)

Cash Remaining (Used) from OCF generated 106 162 613 492


Capital Deployment

May 2014: LUV boosted its quarterly div idend by 50% in May to $0.06/share (from

$0.04/share). The board also authorized another $1B share repurchase (~6% of market

cap when announced) program and while no timeframe was given, the company did

implement a $200M /6M ASR (accelerated share repurchase) program.



34

Bull versus Bear



LUV is a pure-play on U.S. domestic

air travel where fundamentals have

never been better.

The strongest balance sheet among

large carriers, an investment grade

rating, combined with its presence in

the S&P500 are attractive to

investors.

Shares appreciated 86% in 2013

and have risen another 75% in

2014, making LUV best performing

airline in 2014

Best positioned to enjoy strength

of domestic market

AirTran integration complete

at end 2014

Management returning to growth

but maintaining return-driven

approach

S&P 500 inclusion & healthy

balance sheet with investment

grade credit rating

ROIC improvement 2015+

Consistent, shareholder friendly

capital deployment

Insulated from international

weakness and beneficiary of

structural changes in the industry

Unit cost inflation as scale

grows, erosion of LCC cost

advantages

IT transition risk

LUV adding capacity again in

2015 now that 15% ROIC target

reached; additions in competitive,

costlier locations; could pressure

margins

>20% of routes in development,

typically lower margin

Ceiling on yields given low-

fare, leisure brand and ULCC

pressure points

Deteriorating labor relations

Limited ancillary revenue

opportunity as “Bags Fly Free”

and no change/cancellation fees

or upsell product

Neutral, $32 Target Price

Fewer levers for margin

expansion

More modest earnings growth vs.

peers

Premium valuation captures high-

quality characteristics and strong

domestic backdrop

Below consensus estimates on

more tempered yields and greater

cost inflation

Deteriorating labor relations pose

risk to culture and brand and

industry leading employee

productivity, higher wages likely

We favor network carriers as we

see greater upside to margins

and multiples


35


Outperformance since late April prices in upside. Shares are up 66% since

late April primarily on optimism for a CEO transition and fare unbundling in early

2015. Our Underperform rating is based on our: (i) view that incremental

strategy/management change will disappoint relative to elevated expectations

following multiple analyst upgrades; (ii) below consensus 2015 forecast, and (iii)

concern that PRASM deceleration in H2 and competitive capacity in key growth

markets will pressure yields.

Unlikely to see major strategy shift. We expect JBLU will keep growing capacity

in the mid-single digits to capitalize on investments and place new, larger aircraft

into service, regardless of any management change. We fear the market has been

overly simplistic in extrapolating incremental earnings potential in 2015 from Fare

Families, which has pushed consensus too high. JBLU is still in early stages of

conceptualizing the idea, and its rollout may be slower and less impactful than the

market is expecting to carefully avoid customer reproach.

Growth at the expense of returns? Management asserts the carrier should

continue to expand on the belief that recent investments would be wasted if growth

was halted for the sake of improving ROIC in the short-term. The carrier is

scheduled to receive ~48 aircraft over the next 3.5 years, growing its fleet by 25%

from today's fleet of 197 aircraft. This is similar to its pace of aircraft deliveries over

the last three years (when capacity growth has averaged 7% Y/Y), but new aircraft

are larger A321s. We are concerned about the level of competitive capacity coming

into JBLU's growth markets and the potential impact on yields and returns.

Valuation not compelling. With shares are trading at 13.6x 2015 (just 2 turns or

12% below investment-grade LUV) and a 10% boost to 2015 consensus in the

last three months, we see shares as fairly valued.

Catalysts

(i) September PRASM 10/11, (ii) Q3 Earnings 10/23, (iii) NYC investor day

Nov 19th, (iv) greater clarity on CEO role in 2015, (v) fare family details

JBLU — Underperform ($11 TP)

Valuation reflects optimism for change (link to full report)

Our 2015 estimates are below consensus on conservatism around incremental earnings from ancillary revenues derived from “Fare Families”.

We blend a 13x mid-cycle P/E multiple and a 6x EV/EBITDAR multiple on our

2015 estimates to yield our $11 target price.



JBLU Valuation

2014

EPS EBITDAR EPS

CS Consensus ∆ CS Consensus ∆$0.67 $0.71 -6.0% $959 $957 0.2%

18.7x 17.6x 5.5x 5.5x

2015

EPS EBITDAR


14.7x 13.6x 4.7x 4.6x

JBLU INITIATION REPORT

RATING: Underperform

PRICE (Sept 05 2014): $12.54

TARGET PRICE: $11

10.2x

7.8x

10.4x

15.8x

13.6x

15.8x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x



https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=ulg&format=PDF&document_id=806395770&serialid=epTzJPM4wQS0v6HOwknrmMaIb3r3I%2bxsWHLEoqmQT8w%3d

36

San

Juan 4.9%


Domestic Hubs (with % of ASMs)

Boston 13.0%

L.A. Area 4.8%

Orlando

7.3%

Fort

Lauderdale

7.5%

New York

(JFK + LGA) 21.3%

New York-JFK + LGA 21.3%

Boston 13.0%

Fort Lauderdale 7.5%

Orlando 7.3%

San Juan 4.9%

L.A. Area 4.8%

2013A 2014E 2015E 2016E

Revenue $5,441 $5,887 $6,430 $6,925

Y/Y% Change 9.2% 8.2% 9.2% 7.7%

EBITDAR $846 $959 $1,106 $1,218

Margin 15.5% 16.3% 17.2% 17.6%

EBIT $428 $522 $650 $745

Margin 7.9% 8.9% 10.1% 10.8%

Pre-Tax Profit $279 $629 $480 $564

Margin 5.1% 10.7% 7.5% 8.1%

EPS $0.52 $0.67 $0.85 $0.99

Y/Y% Change 25.7% 30.0% 27.1% 16.1%

Income Statement

2013A 2014E 2015E 2016E

Traffic Growth 6.8% 4.3% 6.1% 4.6%


Load Factor 83.7% 83.2% 83.4% 83.5%


Pax Yield Growth 2.3% 3.9% 3.0% 2.8%

Unit Cost Growth 1.8% 2.0% 1.8% 2.3%






2013A 2014E 2015E 2016E

Operating Cash Flow 758 731 959 1,074

Gross CapEx (637) (500) (430) (493)

Debt Reduction (612) (822) (370) (555)

Incremental Pension Funding 0 0 0 0

Return Cash to Shareholders 0 0 0 0

Div idends 0 0 0 0

Repurchase 0 0 0 0

Cash Remaining (Used) from OCF generated 0 (591) 159 26


Capital Deployment

JBLU currently does not have a div idend or share repurchase program



37

Bull versus Bear



JBLU operates a primarily leisure-

focused airline in high value

geographies on the East Coast.

Lower returns and lagging

profitability due to upward pressure

on costs have weighed on the

stock’s relative performance up until

this Spring.

Since then, optimism about a CEO

transition / strategy change in 2015

has driven relative outperformance.

Also, the announcement that the

carrier would implement Fare

Families including a first bag fee has

pushed 2015 consensus higher.

Potential CEO transition in

2015 drives optimism for shift to

returns-driven strategy over

customer-driven strategy

Maturing network & more

modest capacity growth

boosts profitability prospects

Introduction of Fare Families /

first bag fee in 2015 drives

earnings upside

Potential return to all-Airbus

fleet = CASM benefit

Mint is a success & closes

RASM gap on Transcontinental

Impact of CEO transition

overstated; static strategy

Competitive capacity in key

markets pressures yields

Low corporate share limits yield

upside; greater demand

elasticity from leisure focus

Wage inflation; pilot unionization

Cost structure not low enough to

compete with budding ultra-low

cost carriers

Mint offering won’t close RASM

gap; business case flawed

July PRASM of 1% missed

guidance for 2-3% growth

Very tough September comp,

could see negative growth

Underperform, $11 TP

Valuation of 13.6x 2015E rich vs.

peers given lagging return and

cash profile

We are below consensus 2015E

as we expect Fare Family & Mint

impact to be nominal

We think incremental change in

2015 will disappoint relative to

elevated expectations that have

driven recent outperformance

PRASM deceleration in H2 on

tough comps & competitive

capacity in key growth markets

may limit investor enthusiasm


38

Summary of Credit Suisse Estimates versus Consensus

Coverage Universe and Comp Table


Target Upside / CS P/E Consensus P/E CS EV/EBITDAR Consensus EV/EBITDAR

Ticker Rating Mkt Cap Price (downside) 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E

DAL O/P $33.1B $56 43% 17.4x 14.4x 17.5x 14.6x 7.7x 6.6x 5.5x 5.0x

AAL O/P $27.3B $52 37% 9.3x 10.6x 9.4x 7.6x 8.6x 7.2x 4.7x 4.1x

UAL O/P $19.0B $68 34% 14.5x 14.0x 14.9x 11.7x 8.1x 6.0x 5.1x 4.4x

Network Carrier average 13.8x 13.0x 13.9x 11.3x 8.1x 6.6x 5.1x 4.5x

LUV N $22.5B $32 -3% 18.8x 15.7x 18.0x 15.4x 7.3x 6.1x 6.2x 5.6x

JBLU U/P $3.7B $11 -12% 16.4x 12.9x 15.4x 11.9x 7.1x 6.1x 5.5x 4.6x

Leisure Carrier average 17.6x 14.3x 16.7x 13.7x 7.2x 6.1x 5.8x 5.1x

Industry average 15.3x 13.5x 15.0x 12.3x 7.7x 6.4x 5.4x 4.8x

Valuation & Risks

40

We expect this to continue as long as yields are improving

Stocks Have Outperformed for 20 Months

Year Airline Stocks S&P 500 Airline Indices

AAL DAL UAL LCC CAL JBLU SAVE LUV Average SPX XAL BUSAIRL DJUSAR

2007 -54% -19% -73% -46% -58% -20% -45% 6% -41% -35% -36%

2008 -24% -23% -67% -47% -19% 20% -29% -27% -37% -29% -25% -28%

2009 -28% -1% 17% -37% -1% -23% 33% -6% 15% 40% 22% 21%

2010 1% 11% 85% 107% 21% 14% 40% 15% 41% 22% 21%

2011 -96% -36% -21% -49% -21% -34% -43% 2% -31% -30% -32%

2012 127% 47% 24% 166% 10% 14% 20% 58% 16% 38% 31% 30%

2013 133% 62% 49% 156% 86% 97% 32% 58% 79% 92%

2014 YTD 50% 44% 34% 47% 61% 75% 52% 10% 27% 40% 42%

Relative YTD share price performance


-20

-10

0

10

20

30

40

50

60

70

80

90LUV

AAL

JBLU

DAL

UAL

S&P500

S&P 500

UAL

DAL

JBLU

AAL

LUV

41

Returns must continue to improve to drive re-rating

EV / EBITDAR is the best valuation metric through the cycle

Removes distortions from taxes, capital structures and accounting polices

We apply a mid-cycle EV/EBITDAR multiple which we think is 6-7x

EV / Invested Capital is also a robust metric correlated with ROIC

Highest returns and cash flow generation warrant a premium

EV / EBITDAR and EV / Invested Capital Useful Metrics


EV/EBITDAR (TTM)

Current EV/IC and ROIC

EV/EBITDAR (2015)

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

LUV

DAL

JBLU

UAL

UAL

DAL

JBLU

LUV

(EV/IC) (ROIC)

1.5x

1.0x 1.0x

1.8x

0.9x

18%

14%

10%

18%

9%

0%

4%

8%

12%

16%

20%

0.0x

0.4x

0.8x

1.2x

1.6x

2.0x


EV/IC ROIC

5.0x

4.1x4.4x

5.6x

4.6x


42

We expect an upward re-rating

Multiples should re-rate as the structural industry shifts and cost control drive network carriers toward mid-teens operating margins

We expect a sector rerating similar to the “Rail Renaissance” as sector margins expand, ROIC improves, and capital is returned to shareholders

Airline valuation is challenging – P / E doesn’t capture Balance Sheet which can be misleading given higher leverage and pension deficits

Earnings volatility and leverage make it difficult to compare airline P/E to market or across industrials, so we incorporate EV/EBITDAR and cross check with balance

sheet value metrics including EV/Invested Capital and CFROI through the Credit Suisse HOLT® methodology.

Airline Sector Still at a Significant Discount to the Market and

Industrial Transports

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x



-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

11.0x

12.0x

Discount to S&P

Index FY2 P/E


Bloomberg US Airline Index vs. Discount to S&P

43

U.S. Airline Financials and Valuation

Overview

Price Upside/ 52 Week Range Market Cap EV Avg. 30D Vol Short Interest Beta Volatility Stock Performance (Total Return) Credit Rating

Company Ticker Rating 5-Sep Target Price (Downside) Low High (US$M) (US$M) # shares % of Float Cover Days 6-Month 6-Month 2013 YTD YTD Rel.* Past Week S&P Fitch

Delta Air Lines DAL O/P $39.48 $56 42% $20.76 $42.66 $33,282 $39,523 10,169,117 1.7% 1.8 1.5 33.4 132.6% 44.6% 32.5% (0.3%) BB- BB-

American Airlines AAL O/P $38.09 $52 37% $23.45 $44.88 $27,429 $35,113 9,530,739 1.6% 1.7 1.6 34.6 n/a 51.2% 39.0% (2.0%) B B+

United Continental UAL O/P $51.21 $68 33% $29.11 $51.70 $19,131 $25,655 5,217,513 2.1% 2.2 1.6 44.1 61.8% 35.4% 24.8% 7.6% B B

Southwest Airlines LUV N $32.94 $32 -3% $12.98 $33.14 $22,565 $21,329 5,167,687 3.1% 3.0 1.3 23.6 85.6% 75.9% 61.1% 2.9% BBB- BBB

Large Cap Average 2.1% 2.2 93.3% 51.8% 39.3% 2.0%

JetBlue JBLU U/P $12.53 $11 -12% $6.11 $12.83 $3,658 $5,247 7,686,412 6.1% 6.9 1.5 32.1 49.3% 46.7% 35.2% 2.5% B B

Alaska Air Group ALK N/R $47.35 N/A N/A $28.74 $50.49 $6,387 $5,736 1,368,390 7.7% 7.6 1.2 29.1 71.3% 30.2% 19.0% 2.2% BB+

Spirit Airlines SAVE N/R $73.68 N/A N/A $31.39 $73.98 $5,360 $4,793 582,406 3.6% 3.1 1.5 31.4 156.1% 62.3% 49.5% 4.7%

Allegiant Travel ALGT N/R $125.80 N/A N/A $81.19 $128.39 $2,247 $2,319 105,367 5.9% 5.5 1.2 30.0 46.7% 19.3% 10.0% 2.4% BB-

SMID cap average 5.8% 5.8 80.9% 39.6% 28.4% 2.9%

Industry Average 4.0% 4.0 87.1% 45.7% 33.9% 2.5%

Financials

Revenues (US$M) CAGR EBITDAR Margin EBIT Margin Pre-Tax Margin Adjusted EPS CAGR

Company Ticker 2013A 2014E 2015E 13-15 2013A 2014E 2015E 2013A 2014E 2015E 2013A 2014E 2015E 2013A CS 14E Street 14E** CS 15E Street 15E** (2yr Fwd)

Delta Air Lines DAL 37,773 40,317 41,944 5.4% 14.3% 17.6% 18.9% 9.3% 12.5% 13.9% 7.1% 10.3% 12.4% $3.14 $3.22 $3.20 $3.89 $3.84 11.3%

American Airlines AAL 40,419 43,030 45,326 5.9% 14.2% 17.2% 19.4% 8.1% 11.3% 13.8% 3.3% 9.3% 12.0% $2.62 $5.59 $5.52 $7.49 $6.85 69.2%

United Continental UAL 38,279 38,866 40,436 2.8% 11.5% 13.0% 15.2% 4.6% 6.4% 8.7% 2.8% 4.1% 7.1% $3.01 $4.68 $4.56 $7.55 $5.79 58.4%

Southwest Airlines LUV 17,699 18,466 19,420 4.7% 15.1% 17.3% 18.6% 8.2% 10.7% 11.9% 7.3% 10.4% 11.6% $1.12 $1.71 $1.78 $2.04 $2.09 34.9%

Large Cap Average 4.7% 13.8% 16.3% 18.0% 7.6% 10.2% 12.1% 5.1% 8.5% 10.8% 43.4%

JetBlue JBLU 5,441 5,887 6,430 8.7% 15.5% 16.3% 17.2% 7.9% 8.9% 10.1% 5.1% 10.7% 7.5% $0.52 $0.67 $0.72 $0.85 $0.93 28.5%

Alaska Air Group ALK 5,156 $5,387 $5,730 5.4% 23.8% 23.6% 23.8% 16.3% 15.5% 15.6% 15.8% 15.8% 15.6% $5.40 $3.82 $4.16 -12.2%

Spirit Airlines SAVE 1,654 $1,967 $2,502 23.0% 29.3% 31.0% 30.5% 17.1% 18.3% 18.3% 17.1% 18.5% 18.7% $2.43 $3.10 $3.98 27.9%

Allegiant Travel ALGT 996 $1,134 $1,290 13.8% 23.4% 25.7% 25.7% 15.5% 17.1% 16.9% 14.7% 15.4% 15.9% $4.82 $6.08 $7.33 23.3%

SMID cap average 12.7% 23.0% 24.2% 24.3% 14.2% 14.9% 15.2% 13.2% 15.1% 14.4% 16.9%

Industry Average 8.7% 18.4% 20.2% 21.2% 10.9% 12.6% 13.7% 9.2% 11.8% 12.6% 30.2%

**Bloomberg estimates

Valuation Yield Returns Liquidity

P/E Ratio EV/EBITDAR EV/IC Price/FCF PEG FCF Yield Div Yield ROIC ROIC/

Net lease adj.

debt

Net Lease Adj.

Debt/ Mkt. Cap

Net lease adj.

debt/ EBITDAR

Cash & STI

as a % of

Revenues

Company Ticker 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2015E 2014E NTM 2012 2013 2014 WACC 2014E 2014E 2014E 2013

Delta Air Lines DAL 12.3x 10.1x 12.5x 7.7x 6.6x 5.8x 2.1x 11.2x 0.9x 9.1% 0.9% 11.0% 15.0% 19.9% 1.4x 7,144 0.2x 1.0x 10.1%

American Airlines AAL 14.6x 5.1x 5.8x 8.6x 7.2x 6.5x 1.6x 6.7x 0.2x 10.4% 1.1% n/a n/a 13.9% 0.0x 25,094 0.9x 3.4x 22.9%

United Continental UAL 17.0x 6.8x 9.1x 8.1x 6.0x 4.4x 1.9x 13.0x 0.4x 0.3% 8.0% 10.0% 13.4% 0.2x 14,565 0.8x 2.9x 13.4%

Southwest Airlines LUV 29.4x 16.2x 14.7x 7.3x 6.1x 5.5x 1.9x 12.5x 0.9x 7.0% 0.7% 7.2% 13.1% 17.2% 1.0x 1,012 0.0x 0.3x 17.8%

Large Cap Average 18.3x 9.5x 10.5x 7.9x 6.5x 5.6x 1.9x 10.8x 0.6x 6.7% 0.9% 8.8% 12.7% 16.1% 0.7x 0.5x 1.9x 16.0%

JetBlue JBLU 24.3x 14.7x 11.1x 7.1x 6.1x 5.7x 1.2x 44.4x 0.9x -6.0% 4.8% 5.4% 10.2% 1.3x 2,888 0.8x 3.0x 11.5%

Alaska Air Group ALK 12.4x 11.4x 10.6x 4.5x 4.2x 4.3x 1.7x 12.3x 0.7x 8.1% 1.1% 13.0% 13.6% 3.4x 154 0.0x 0.1x 25.8%

Spirit Airlines SAVE 23.8x 18.5x 15.5x 7.8x 6.3x 4.9x 5.9x 50.9x 0.8x 2.0% 26.5% 31.8% 2.6x 764 0.1x 1.3x 32.1%

Allegiant Travel ALGT 20.7x 17.2x 14.5x 8.0x 7.0x 6.3x 3.5x -20.1x 1.2x -5.0% 15.6% 16.4% 1.7x 312 0.1x 1.1x 35.2%

SMID cap average 20.3x 15.4x 12.9x 6.9x 5.9x 5.3x 3.1x 21.9x 0.9x -0.2% 15.0% 16.8% 2.2x 1,030 0.3x 1.4x 26.2%

Industry Average 19.3x 12.5x 11.7x 7.4x 6.2x 5.4x 2.5x 16.3x 0.7x 3.2% 12.3% 15.0% 14.9% 1.4x 6,492 0.4x 1.6x 21.1%

Source: Credit Suisse Estimates, Bloomberg, Company Data

44

Operating Statistics, Fleet Details, and other

Operating Statistics

ASM Y/Y% Change RPMs Y/Y% Change Load Factors Ex. Fuel Unit Costs (Y/Y % Change) Unit Revenues (Y/Y % Change) Pax Yield Y/Y% Change %

Company Ticker 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E unionized

Delta Air Lines DAL 2.7% 1.9% 2.1% 4.2% 2.2% 2.7% 85.0% 85.2% 85.7% 0.9% 1.2% 0.6% 3.6% 2.1% 2.7% 2.1% 1.8% 2.2% 18.0%

American Airlines AAL 2.3% 2.4% 1.9% 2.2% 2.4% 2.1% 82.8% 82.8% 83.0% 3.6% -0.8% 2.0% 3.3% 2.8% 3.0% 3.4% 2.8% 2.8% 73.0%

United Continental UAL 0.5% 1.8% 1.1% 0.8% 2.7% 1.2% 83.9% 84.6% 84.7% 2.0% -0.2% 0.6% 1.6% 3.4% 2.6% 1.3% 2.5% 2.4% 80.0%

Southwest Airlines LUV 0.4% 3.2% 3.2% 2.1% 3.7% 2.3% 81.4% 81.8% 81.1% 2.9% 1.2% 1.4% 4.4% 2.0% 0.6% 2.6% 1.6% 1.5% 83.0%

Large Cap Average 1.5% 2.3% 2.1% 2.3% 2.7% 2.1% 83.3% 83.6% 83.6% 2.4% 0.4% 1.1% 3.2% 2.6% 2.2% 2.4% 2.2% 2.2% 63.5%

JetBlue JBLU 5.0% 5.8% 4.5% 4.3% 6.1% 4.6% 83.2% 83.4% 83.5% 4.3% 2.9% 3.5% 3.3% 3.3% 2.9% 3.9% 3.0% 2.8% 21.8%

Alaska Air Group ALK 7.1% 5.7% 6.8% 5.9% 85.6% 85.7% 85.5% -0.1% 1.3% 1.0% 0.4% 12.5% 0.2% 75.0%

Spirit Airlines SAVE 17.8% 26.4% 18.8% 26.0% 87.1% 86.7% 85.4% 1.8% 1.6% 0.4% -0.2% 59.0%

Allegiant Travel ALGT 9.6% 13.0% 8.4% 11.5% 88.8% 88.4% 6.7% 1.9% 5.9% 1.9% 50.0%

SMID cap average 9.9% 12.7% 9.6% 12.4% 86.1% 86.1% 84.8% 2.8% 1.6% 1.6% 1.2% 2.9% 7.4% 1.7% 2.8% 51.5%

Industry Average 5.7% 7.5% 2.6% 6.0% 7.6% 2.6% 84.7% 84.8% 84.1% 2.8% 1.1% 1.6% 2.5% 2.0% 2.3% 4.5% 2.0% 2.3% 57.5%

Fleet Details (as of Q2) Efficiency and Fuel (2013) Costs as % of Opex CapEx

Total Orders as Mainline Regional Avg FTE* ASMs* Fuel cost % hedged Fuel Wages Gross CapEx xD&A % of Sales

Company Ticker Fleet % Own* % Lease* Avg Age* On Order % of Fleet %Wide % Narrow Fleet Size %50 Seat /Aircraft /Gallon /Gallon Current FY 2013 2013 2014 2013 2013

Delta Air Lines DAL 916 77% 23% 16.9 yrs 217 24% 21% 79% 162 46% 102 60.8 $3.07 20.0% 27.4% 24.0% $2,568 1.5x 6.8%

American Airlines AAL 1539 49% 51% 13.0 yrs 544 35% 15% 85% 557 63% 96 60.5 $3.08 0.0% 29.9% 21.2% $5,500 3.1x 11.6%

United Continental UAL 1267 60% 40% 13.5 yrs 258 20% 23% 77% 561 65% 120 62.2 $3.13 24.0% 33.8% 23.6% $2,400 1.3x 5.7%

Southwest Airlines LUV 680 79% 21% 11.6yrs 285 42% n/a 100% n/a n/a 66 71.7 $3.12 30.0% 35.5% 31.0% $1,447 1.7x 8.2%

Large Cap Average 66% 34% 14 yrs 326 30% 96 63.8 $3.10 18.5% 31.7% 25.0% 1.9x 8.1%

JetBlue JBLU 196 67% 33% 7.5 yrs 133 68% n/a 100% n/a n/a 64 70.9 $3.14 21.0% 37.9% 22.6% $637 2.1x 11.7%

Alaska Air Group ALK 185 74% 26% 09 yrs 65 35% n/a 100% 51 n/a 44 75.3 $3.30 44.0% 34.0% 27.6% $566 2.1x 11.0%

Spirit Airlines SAVE 57 100% 0% 5.1 yrs 114 200% n/a 100% n/a n/a 60 80.6 $3.21 40.2% 19.1% $90 0.6x 1.2%

Allegiant Travel ALGT 81 98% 2% 22 yrs 8 10% n/a 100% n/a n/a 31 67.6 $3.20 45.8% 18.9% $178 2.6x 17.8%

SMID cap average 85% 15% 11 yrs 80 78% 50 73.6 $3.21 32.5% 39.5% 22.0% 1.8x 10.4%

Industry Average 75% 25% 12 yrs 203 54.3% 73 68.7 $3.16 23.2% 35.6% 23.5% 1.9x 9.2%

*Mainline used for three major network carriers

**As of year end 2013

Source: Credit Suisse Estimates, Bloomberg, Company Data

45

Highly cyclical industry sensitive to fuel prices and the health of the economy

Because consumer demand for travel is fairly elastic, any economic uncertainty or downturn in the macro environment could jeopardize leisure traffic.

Corporate spending on business travelers would also decline in a recession, which would further compress margins as business travelers pay higher

fares. The carrier is running at record load factors relative to history and any economic weakness would likely negatively impact loads and pricing.

Any terrorist attack or threat, epidemic, or natural disaster (real or perceived) would significantly reduce demand for air travel

Any terrorist attack or threat, epidemic, or natural disaster, real or perceived would significantly reduce demand for air travel and would significantly impact

airline operations. Similarly, an accident or crash, on any flight, irrespective of its operator, would create the perception that aircraft travel is dangerous

and would also negatively impact passenger traffic. The majority of many carriers’ labor forces are highly unionized and if an airline is unable to reach an

agreement with its unionized labor force regarding collective bargaining agreements or if additional employees were to become unionized, the company

may face flight cancellations and interruptions, which would adversely affect its operations and may increase labor costs.

Airlines are capital intensive, high fixed cost businesses with fuel and labor comprising 60% of operating expenses

Aircraft fuel prices fluctuate on a number of factors including supply/demand balance, inventory levels, geopolitical events, economic outlooks and

fiscal/monetary policies. Given the competitive nature of the industry, airlines may not be able to pass future fuel price costs to customers. Furthermore,

passengers frequently book flights in advance, thus fuel price increases occurring after the ticket purchase date must be incurred by the airline.

Airlines are highly competitive and if other major carriers lose capacity discipline, yields may come under pressure

With consolidation in the U.S. among network carriers, the differentiation between routes/networks has lessened. Network carriers are aggressively

pursuing corporate travel share and control of certain markets which could lead to price competition. Also, as ultra-low cost and low cost carriers pursue

aggressive growth plans, established carriers are at risk of market share erosion to low cost carriers, particularly in leisure markets. Furthermore, well-

funded, Middle Eastern airlines are competing with network carriers internationally and are also beginning to enter the U.S. market.

Government regulation and fees

The airline industry is heavily regulated and new or unexpected regulations may increase the company's operating costs. Future legislation mandating fuel

and noise efficient planes would also cause United to incur additional operating expenses. Additionally, taxes and fees are high and elevate the total ticket

price customers pay. Most recently, the Transportation Security Administration hiked fees, which could negatively impact leisure travel demand.

Key Industry Risks

Regional Detail Domestic Transatlantic Pacific Latin America

47

Record domestic load factors and strong yields

(%/¢) Southwest is the purest-play domestics; American has the most domestic

exposure among the network carriers

(% of Domestic — Revenues)

Domestic

Yield improvement prioritized over capacity growth Domestic capacity is still 6% below 2007 levels and 15% below 2001 levels. Since 2010, capacity has risen just 2% on 4% greater demand.

Domestic yields are up 17% over the same period (on a rolling 12 month basis)

Capacity data shows seat growth is greater in Q4, but still below GDP

(Domestic US Seat Growth YoY)

Domestic Market Structure

Domestic

A4A Pax Yield Report file_2014-

06_141 “LF tab”, and

Capacity charts from Diio Mi “Seats

from US” tab for pie chart

82.9%

83.6%83.9% 84.0%

85.1%

14.57¢

15.85¢

16.41¢

16.80¢17.09¢

12.50

13.50

14.50

15.50

16.50

17.50

81.0%

82.0%

83.0%

84.0%

85.0%

86.0%

2010 2011 2012 2013 H1 2014

Domestic Load Factor Domestic Yield

46.2%

57.7%64.1%

71.4%

98.8%

DAL UAL AAL JBLU LUV

American25%

United19%

Delta20%

Southwest18%

JetBlue5%

Other13%2.50%

1.60%

2.30% 2.20%

0.95%

2010 2011 2012 2013 H1 2014

Domestic ASMs YY Domestic RPMs YY Domestic GDP

-1.0%

0.7% 0.5%

1.1%0.9%

-0.2%

0.5%

2.3%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14E4Q14E

Domestic US seat growth Y/Y

Source: Diio Mi, A4A, company data, CS estimates

48

Transatlantic capacity creeping but yields holding in

(%/¢) Three JVs control 98% of US-LHR capacity

(% Market Share by Seats US-LHR)

Transatlantic

Structural positives but capacity decisions bear watching The Transatlantic is concentrated to three JVs, but AF and LHA profit warnings and signs of overcapacity worrisome. Based on our trunk route analysis,

we note that 50% of trunk routes are monopolies, while 85% of trunk routes are controlled by two JVs as duopolies.

Carriers are ratcheting back Q4 capacity to protect pricing

(US to Europe Transatlantic Seat Growth YoY) Transatlantic market

structure

Transatlantic

82.5%

80.5%

81.9%

83.2%

79.9%

12.83¢

13.73¢14.03¢

14.65¢14.89¢

8.50

9.50

10.50

11.50

12.50

13.50

14.50

15.50

76.0%

78.0%

80.0%

82.0%

84.0%

86.0%

2010 2011 2012 2013 H1 2014

Atlantic Load Factor Atlantic Yield

-3.7%

1.7% 2.0%

4.1%5.1%

6.1%

7.8%

5.5%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

US to Europe seat growth Y/Y

Three JVs control 98% of US-LHR capacity

(% Market Share on Transatlantic Trunk Routes)


26% 27% 26% 26% 26%19% 25%

26% 28% 26% 28%37%

36% 35%35%

100%

81% 75%

48% 45%

12% 11% 2%

2007 2008 2009 2010 2011 2012 2013 2014

STAR JV SkyTeam JV oneworld JBA Other

16% 17% 16% 17% 14%

7% 10% 10% 10%26%

56% 55%

58%77% 73%

18% 18%2%

2010 2011 2012 2013 2014

STAR JV SkyTeam JV oneworld JBA Non-alliance

STAR JV31%

SkyTeam JV

30%

oneworld JBA

23%

Other16%

49

Asian network restructurings addressing weak yields

(%/¢) United leads in the Pacific

(% of Asia — ASMs)

Asia

U.S. carriers restructuring Pacific networks to address weak yields and currency Accelerating industry capacity growth in China will pressure yields after the seasonal peak

Capacity additions to Asia are continuing, particularly to China

(US to Asia Seat Growth YoY) Asia Market Structure

Pacific

84.5%

81.1%

82.8% 82.5%81.8%

12.97¢

14.31¢

14.94¢

14.29¢ 14.11¢

8.50

9.50

10.50

11.50

12.50

13.50

14.50

15.50

76.0%

78.0%

80.0%

82.0%

84.0%

86.0%

2010 2011 2012 2013 H1 2014

Pacific Load Factor Pacific Yield

3.5% 3.9%

6.9%

4.9%

3.7%

8.3%

6.2%

9.2%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

US to Asia seat growth Y/Y

United Airlines

17%

Delta Air Lines

16%

Korean Air

Lines

10%

Japan Airlines

6%

Cathay Pacific

Airways

6%

American

Airlines

6%

4%

13%

16%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

AAL DAL UAL


-4.8%

-0.3%

5.6%8.7% 9.4%

18.4%

28.6% 29.9%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

US to China seat growth Y/Y

50

World Cup-driven weakness pressured H1, Venezuela to weigh on H2

(%/¢) American has the most extensive Latin America network

(% of LatAm — ASMs)

Latin America

Competitive capacity additions and Venezuela headwinds Ex-Venezuela, pricing is flat to down as competitive capacity additions continue

Capacity coming down as Venezuela flying pulled, but still seeing high-single

digit capacity additions to the Caribbean and Central America

(US to Latin America Seat Growth YoY) Latin America Market Share

Lat Am

79.6%

80.2%

81.2%81.8%

80.0%14.04¢

15.70¢ 15.80¢15.93¢ 15.81¢

12.50

13.50

14.50

15.50

16.50

76.0%

78.0%

80.0%

82.0%

84.0%

86.0%

2010 2011 2012 2013 H1 2014

Latin Load Factor Latin Yield

3.2%

1.6%

2.7% 2.5%

4.1%

8.8%

6.0%

4.1%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

US to Caribbean, Central & South America seat growth Y/Y

American

Airlines

21%

United Airlines

14%Delta Air Lines

12%

JetBlue Airways

11%

US Airways

7%

Southwest

Airlines

4%

Aeromexico

4%

15%

8% 8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

AAL DAL UAL


3.2%

1.6%

2.7% 2.5%

4.1%

8.8%

6.0%

4.1%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

US to Caribbean, Central & South America seat growth Y/Y

11.4%10.6%

12.6%

5.8% 5.6%

9.1%

0.5%

-2.0%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

US to South America seat growth Y/Y

Appendix

52

We subscribe to the bull case

Bull versus Bear for U.S. Airline Industry

Bull Case Bear Case CS View

Consolidation has created a rational,

capacity disciplined industry focused on

returns and profits instead of market share

Capacity discipline is short-lived;

managements will lose discipline as

financial targets achieved and the industry

reaches new margin peaks

Expect managements to maintain capacity

and capital discipline as they strive to become

viewed as an investable industry

Five of six largest U.S. airlines now returning

cash to shareholders

Buybacks and dividends not sustainable;

cannot endure a downturn

Cash returns to shareholders, more disciplined

CapEx, and improving ROIC should attract a

more stable investor base

Domestic demand and yield environment

remain strong enough to off set pockets

of international weakness; carriers are

managing mix better and driving high-

margin ancillary revenue

International overcapacity and weakening

yields signal pricing can’t rise forever;

unprecedented yield growth over last

four years not sustainable. Load factors

are at peak and no longer a driver of yield

Domestic yield strength likely to continue

as US carriers tightly manage supply.

International trends bear watching.

With record loads, further yield gains

need to be pricing driven. High-yielding

corporate traffic more important than ever

Earnings more sustainable and industry less

cyclical following substantial de-leveraging

and structural cost reductions from

bankruptcies and mergers

Still a highly cyclical industry beholden

to macro, fuel and exogenous events;

recession resistance unproven

Interest burdens substantially reduced

and liquidity very strong. Airline industry

still cyclical, but structural changes reduce

downside risk to some extent. Expect airlines

to be more nimble with capacity reductions

in face of any weakness

Geopolitical risk already high, oil prices

stabilize on supply

Fuel price volatility increases from

geopolitical instability

Brent oil prices range bound ~$100, plus or

minus $5, and long-term trend is gradually

down given supply growth in the U.S.


53

(6.0%)

(4.0%)

(2.0%)

0.0%

2.0%

4.0%

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E

Profitability lasted six years in the mid- to late 1990s; 2014 marks year five of this cycle

We are Mid-Cycle in What Could be the Longest Upcycle in History

Source: Credit Suisse Estimates, US DOT Form 41 via BTS, schedule T2.

Period: 1979-1983 1984-1986 1987-1989 1990-1993 1995-1998 2000-2005 2007 2008-2009 2010-Current

Status Deep crisis Profits improved Highly profitable Cyclical downturn Strong profitability Worst crisis in history Brief improvement Economic downturn Extended upcycle

Factors Dramatic

increase in fuel

(oil shock 1978),

followed by

Volker recession

(lower demand)

Higher loads, lower

costs, fuel declined,

economy improved

Improvement in global

demand and decline

in fuel costs

OECD economies began

weakening while fuel prices

increased, eventually

skyrocketing when Iraq

invaded Kuwait

Cost cutting measures

and improving demand

as a result of strong

economic growth

Overcapacity due to market share

war; strengthening $, rising

labor costs after renegotiating

contracts after years of profitability,

and increasing fuel prices

pressured profits. Economic

growth decline caused cyclical

downturn in 2000, exaggerated for

airlines by 9/11 & SARS epidemic

Favorable fuel

prices, cost

cutting measures

and strong

traffic growth

Fuel prices doubled

in H1 of 2008,

causing airlines to

hedge, costing $ in H2

when prices fell; banking

industry collapse and

broader recession hurt

traffic and yields

Slow recovery from

long-lasting economic

damage caused by

recession

Economic

Cycles

July ’81-Nov ’82

Recession

1983-1989

Expansion

1983-1989

Expansion

July ’90-Mar ’91

Recession

Mar ’91-Mar ’01

Expansion

March ’01-Nov ’01

Recession

Nov ’01- Dec ’07 Dec ’07-June ’09

‘The Great Recession’

June’10-

Expansion

US recession Stable inflation and oil

prices as well as

increased private

investment

Stable inflation and oil

prices as well as

increased private

investment

US recession due to oil

price shock, excess

leverage of 1980s

US expansion fueled

by technological

growth and

fiscal policy

US recession caused by dot-com

bubble bursting and 9/11

Home price bubble

drove construction

and financial services

Subprime

mortgage

crisis

Sluggish recovery

Federal fiscal support

S&P more than doubled

over course of recovery

Result Bankruptcies:

Braniff (US),

Laker (UK),

government

financial support

1986 – Chernobyl

nuclear disaster,

bombing of Libya

& terrorism in Europe

and ME impacted

N. American

travel

Highly levered industry

as debt was taken on

to cover losses from

previous cycles as well

as to finance new fleets

to take advantage

of traffic growth

Bankruptcies: Eastern

airlines, Air Europe, Pan

Am entered bankruptcy.

Scramble for share amidst

economic weakness

led to falling yields and over

capacity. Many airlines

received capital injections

Record profitability in

1997-1998, however

grab for market share

in strong times as well

as entry of LCCs

led to eventual

over capacity

and declining yields

IATA member airlines

collectively lose $29.5b.

Bankruptcies:

United, US Airways, Delta,

Northwest. US airlines

suffered the worst

LCC-AWA merger

10 largest US airlines

returned to profitability

after successive

losses

Top 10 US airlines

saw net income

decline from

$4.3b in 2007 to

$19.4b in 2008.

DAL-NWA begins

consolidation trend

Consolidation structurally

improves US airline

industry

UAL-CAL merger

LUV-AAI merger

AMR-LCC merger

Middle of extended up

cycle

Middle of extended up cycle

Middle of extended upcycle

Global Airlines Net Profit/(Loss) as a % of Total Revenue

54

# Years Since Close 1 2 3 4 5 6

# Months Since Close 12 mths 18 mths 24 mths 36 mths 48 mths 60 mths 72 mths

Calendar Close: Oct-2008 2011 2012 2013 2014E

Delta –

Northwest

SOC received Dec-2009 IT Integrated Feb-2010

Non fuel unit costs grew

3% YY

High water mark for non-fuel unit costs

grew 4.5% YY

$500M buyback

(3% mkt cap)

Dividend

$2B buyback

(6% mkt cap)

Dividend +50%

Op margin: 6.4% 7.1% Op margin 9.3% 12.6%

PT margin: 3.4% 4.2% PT margin 7.1% 10.3%

Net income: $770M $1B $2.5B $4.2B

ROIC: 10.7% 11.5% 11.9% 18%


Calendar Close: Oct-2010 2013 2014E 2015E 2016E

United-

Continental

SOC received Nov-2011

IT integrated Mar-2012

High water mark for non-fuel unit

cost growth +6.2% YY

Non-fuel unit costs growth of 1-2% Y/Y

Sub inflation non-fuel unit cost growth

$1B buyback

(6% mkt cap)

Op margin: 4.6% 6.1% Op margin 7.1% 8.6%

PT margin: 2.8% 4.5% PT margin 6.0% 8.1%

Net income: $1.1B $1.6B $2.2B $3.0B

ROIC: 8% 10% 11-12%


Calendar Close: Dec-2013 2014 2015E 2016E

American-

US Airways

$1B buyback

(3% mkt cap)

Dividend

Op margin: 11.3% SOC targeted mid'15 12.0% 14.3%

PT margin: 9.3% IT integration Q3'15 11.1% 12.5%

The UAL-DAL pretax profit margin gap is only 30 bps four years from merger close

Looking at United’s Margin Progress Post-Merger versus Delta’s…

Consensus only forecasting 240 bps of margin expansion, we forecast 500 bps

Note: Unreported years are Bloomberg consensus

Four years after merger close, Delta’s PTP margin and ROIC

were not that much higher than United’s in 2014

Source: Credit Suisse Estimates, Bloomberg

55

7.1%

4.2%

11.5%

6.4%

4.7%

11.0%

Op Margin Pre-tax margin ROIC

Delta - 2012 United - 2014E CS est

12.5%

10.9%11.4%

9.7%

8.6%8.1%

Op Margin Pre-tax margin

Delta - 2014 consensus United - 2016 CS est United - 2016 consensus

Consensus is only projecting 8% pretax margin in 2016

We Believe UAL Can Reach 10% Pretax Margins by 2016

United’s revenue and cost initiatives should drive significant margin expansion over the next 2 years

United unlikely to “catch” Delta and American, but we think they can close the gap

We expect UAL management to provide longer-term guidance in the next 12-months – this should reassure investors

Year 4 after Merger Close Year 6 after Merger Close

We forecast margins

at UAL will expand by 500 bps

over the next two years.

We are 160 bps ahead

of consensus.

Source: Credit Suisse Estimates, Bloomberg

56

UAL’s hub market share is lower than DAL and AAL, but it has the most relevant network

for global corporate travel

Top Domestic Markets and Market Share

Source: BTS website, Concur, Diio Mi, CS Estimates

Top Domestic Corporate Travel Markets

Rank Market (incl secondary airports) American United Delta Southwest

1 New York 22% 24% 26% 6%

2 Las Vegas 12% 10% 12% 39%

3 Chicago 29% 27% 8% 28%

4 San Francisco 12% 28% 10% 27%

5 Houston 11% 43% 7% 34%

6 Orlando 15% 10% 17% 35%

7 Atlanta 9% 3% 63% 21%

8 San Diego 15% 13% 12% 41%

9 Charlotte 67% 9% 18% 3%

10 Dallas 55% 5% 8% 20%

**Share calculated from % of passengers from O&D reports for YE 2013

Rank Market oneworld Star Alliance Sky Team

1 London 53% 20% 6%

2 Shanghai, China 10% 27% 40%

3 Singapore 11% 53% 7%

4 Beijing, China 5% 52% 24%

5 Tokyo, Japan 29% 43% 16%

6 Toronto, Canada 7% 58% 6%

7 Hong Kong 59% 18% 7%

8 Paris, France 10% 12% 63%

9 Mexico City, Mexico 14% 14% 46%

10 Montreal, Canada 9% 48% 13%

**Share calculated from schedule data for TTM July 2014, ASMs into market

Top International Corporate Travel Markets

Delta Mkt Share United Mkt Share American Mkt Share

Atlanta (ATL) 69% Houston 41% Dallas/Ft Worth (DFW) 70%

Minneapolis (MSP) 49% Chicago (ORD) 20% Charlotte 59%

Detroit (DTW) 46% San Francisco (SFO) 39% Phoenix 38%

New York (LGA & JFK) 22% Denver 24% Miami 71%

Salt Lake City (SLC) 46% Newark 49% Chicago 17%

Average 46% Average 34% Average 51%

Southwest Mkt Share JetBlue Mkt Share Alaska Mkt Share

Chicago (MWY) 24% New York 21% Seattle 40%

Las Vegas 44% Boston 39% Portland 19%

Baltimore 61% Orlando 14% Anchorage 62%

Denver 26% Fort Lauderdale 19% Los Angeles 4%

Phoenix 31% San Juan, PR 36% San Diego 8%


Spirit Mkt Share Frontier Mkt Share SkyWest Mkt Share

Fort Lauderdale 17% Denver 19% Salt Lake City 29%

Dallas/Ft Worth 4% Las Vegas 1% Los Angeles 10%

Las Vegas 6% Salt Lake City 2% Denver 9%

Chicago 3% Seattle 1% San Francisco 10%

Detroit 6% Orlando 1% Chicago 3%


Source: BTS website, data LTM January 2014

Netw

ork

Lo

w-C

ost

/ R

eg

ional

Top Domestic Markets & Market Share

57

Revenue Management Critical

Yield management can help maximize passenger revenue per flight

Fare increases are not the only way to drive unit revenue improvement

Implementing scheduling improvements such as rebanking of hubs and variable scheduling to efficiently capture demand

Expanding ancillary offerings and merchandising capabilities to drive incremental, high margin revenue and increase first-class paid load factors.

Restructuring network to optimize fleet allocation and eliminate unprofitable routes/hubs

Improving mix (split between high-fare and low-fare passengers) incredibly important to driving unit revenue

– Business travel is price inelastic and accounts for the bulk of revenues

– Leisure travel is price elastic and makes up the majority of traffic volume

Source: Company data, A4A, MIT Airline Data Project CS estimates

(20.0%)

(15.0%)

(10.0%)

(5.0%)

0.0%

5.0%

10.0%

15.0%

Network Carriers LCCs

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

10.00¢

11.00¢

12.00¢

13.00¢

14.00¢

15.00¢

16.00¢

17.00¢

A4A Pax Yield Y/Y % change

A4A Industry Average Passenger Yield Y/Y% Change in Passenger Yield Network and LCC Average

58

Renewed concern over fuel price volatility given geopolitical unrest

Fuel Is Single Largest Cost at 30% of Operating Expenses


CS HOUSE VIEW

2014: $111/bbl 2015: $102.5/bbl 2016: $95/bbl We expect Brent crude to be range bound and for refining margins to continue to compress Long-term, expect Brent crude to gradually trend down given increasing supply in U.S. and stable demand

-0.20¢

-0.10¢

0.00¢

0.10¢

0.20¢

0.30¢

0.40¢

0.50¢

0.60¢

0.70¢

0.80¢

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

9/2009 9/2010 9/2011 9/2012 9/2013

Jet-

Cru

de S

pre

ad

Jet

Fue

l $/g

al

Jet Fuel p/gallon (NY) Jet - Crude Spread (cents, NY)

Delta’s fuel price/gallon is the lowest among U.S. carriers

Correlation between yield & fuel decoupling as fundamentals strengthen…

Rising fuel driving global re-fleeting Level of hedging varies by airline

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

-800

-600

-400

-200

0

200

400

600

800

1000

1200

1400

New Aircraft Deliveries Retirements Jet Fuel p/gallon (NY)

Fuel Hedging Strategy

AAL

Sold its remaining fuel hedges at the end of the second quarter, inline with US Airways policy of minimal hedging

DAL

Owns and operates a refinery and a hedge book that should reduce fuel expense by $350M for the year

UAL

More moderate hedging policy - 21% hedged for the rest of 2014, 19% hedged for 2015 as of 2Q

LUV

Previously had the one of the best hedging strategies in industry (saved $4B through hedging from 2000-2008). 41% hedged for rest of 2014 as of 2Q

JBLU

23% and 27% hedged for 3Q and 4Q, respectively. ~10% hedged for H1 2015 and 5% hedged for H2 2015.

If possible:

Resize left charts:

4w x 2h

8pt font

Paste 100%

Legend below

AAL DAL UAL LUV JBLU

Sold remaining fuel hedges at the end of the Q2, inline with US Airways policy of minimal hedging

Owns and operates a refinery and a hedge book that should reduce fuel expense by $350M for the year

21% hedged for the rest of 2014, 19% hedged for 2015 as of 2Q

41% hedged for rest of 2014 as of 2Q; previously had the one of the best hedging strategies in industry (saved $4B through hedging from 2000-2008)

23% and 27% hedged for 3Q and 4Q, respectively. ~10% hedged for H1 2015 and 5% hedged for H2 2015

$12.00

$13.00

$14.00

$15.00

$16.00

$17.00

$18.00

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Domestic YieldJet Fuel

Jet Fuel 6 Mth MA A4A Avg. Domestic Yield 6 mth MA

0.87 correlation & 0.75 R squared between Jet Fuel & Airline Pricing

from 2010-2013...

... Since then, that relationship has broken

down with R squared and correlation

falling to 0.05 and -0.23, respectively

$2.75

$2.80

$2.85

$2.90

$2.95

$3.00

$3.05

$3.10

$3.15

$3.20

$3.25

2013 1Q'14 2Q'14 3Q'14E

Fu

el P

rice p

er

Gallo

n

DAL

AAL

UAL

LUV

JBLU

59

Rate benefits from restructuring post-bankruptcy diminishing with open

negotiations, expiring contracts, and pending unionization posing risk

– Historically strong Southwest labor relations have deteriorated

– Pilot contract at Delta negotiable in 2016

– American requires single contracts to realize full merger synergies

– United flight attendants and mechanics still not under single contract

– JetBlue pilot unionization decision

Labor is Second Largest Expense at 25% of Operating Expenses

Labor negotiations unresolved

Wages represent 25% of operating expenses on average, and as industry profits improve, employee wage expectations elevate


Contract Amendable Dates for Pilots

Alaska

America

Delta

Hawaiian

jetBlue

Southwest

United

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

July 2014

ALPA certified as collective bargaining representative in April 2014

Average employees per aircraft Wages as a percentage of operating expenses

24.0%21.2%

23.6%

31.0%

22.6%


10296

120

66 64


60

At record low levels

Three primary financing options for aircraft—bank debt, capital markets (EETC), and operating leases.

Ample availability from all sources

Historically low aircraft financing costs

Aircraft Financing Costs Capital Providers 2007 2008 2009 2010 2011 2012 2013 2014F

Private Equity and

Hedge Funds

Tax Equity

Export CreditAgencies

New Sourcesof Funding

Airframe and EngineManufacturers

Capital Markets

Leasing Companies

Commercial Banks

• Satisfactory

• Cautionary

• Major Concern

Historical Aircraft Financing Costs

0%

5%

10%

15%

1985 1989 1993 1997 2001 2005 2009 2013

Aircraft Financing Environment

Range of All-in Cost

for Aircraft Financing

LIBOR

Satisfactory — Cautionary — Major Concern

Record low

levels

Source: Boeing, company data, CS estimates Source: Boeing

Capital Providers 2007 2008 2009 2010 2011 2012 2013 2014F

Leasing Companies

Commercial Banks

Capital Markets

Export Credit Agencies

Private Equity & Hedge Funds

Tax Equity

New Sources of Funding

Airframe & Engine Manufacturers

61

Interest Rates


THE CS HOUSE VIEW

The Fed could become more hawkish on rates once the following conditions are met:

1. US core inflation rising towards 2%

2. US employment on track to <6%

3. Global growth momentum increasing

4. Robust credit market conditions

With inflation recently rising significantly, all 4 conditions could be in place relatively soon.

CS Expects 1st Fed Funds Rate increase in 3Q15, with market likely to increase yields prior to that.

$698

$1,184

$762

$125 $162

26%

61%

70%

16%

96%

0%

20%

40%

60%

80%

100%

$0

$250

$500

$750

$1,000

$1,250


FY 13 Net Int. Exp ($M) FY 13 Net Int. Exp as a % of Adj. Net Income

FY 13 Net Int. Exp as a % of Adj. Net Income ($M)

Rising interest rates will drive up aircraft financing and leasing costs

62

Porter’s Five Forces

Hyper-Competitive Industry

Source: Michael Porter, IATA

Subsidies and export-

financing for aircraft manufacturers pushes capacity growth and entry

Labor market regulations

give power to unions and crate advantages for new entrants

Privatization of airports

and ground handling services has raised costs

Government-mandated fees

(over flight rights, air control, security fees) raise costs

Competition rules limit consolidation

Restrictions to FDI/M&A limit consolidation

Government ownership leads to uneconomic decisions, through privatization is increasing

Public service requirements require serving

unprofitable markets

Bankruptcy laws and bail-outs allow uneconomic carriers to persist

Environmental standards and taxes raise costs

Safety and air traffic control procedures reduce service quality and create costs

Safety guidelines and technical standards limit potential for differentiation

Consumer protection

laws on pricing transparency and delays raise airline costs

“Fly national” rules for

government employees and government contractors distort market choices

Some legal entry barriers remain (domestic,

international) which limit consolidation

Policies influence allocation of slots/gates

Safety standards create limited barriers

Government financing for substitutes (e.g., high-speed trains)

Inconvenience and delays for airline travel created by security

procedures and air traffic control

Threat of New Entrants

Threat of Substitute

Products or Services

Bargaining

Power of

Suppliers

Bargaining

Power of

Channels

Bargaining

Power of

Buyers

Rivalry Among

Existing Competitors

Disclosures

Companies Mentioned (Price as of 05-Sep-2014)

ANA Holdings (9202.T, ¥258) AirAsia (AIRA.KL, RM2.47) AirAsia X (AIRX.KL, RM0.755) Alaska Air Group (ALK.N, $47.14) Allegiant Tr (ALGT.OQ, $126.04) American Airlines Group Inc. (AAL.OQ, $37.85, OUTPERFORM[V], TP $52.0) Asia Aviation (AAV.BK, Bt4.82) Asiana Airlines (020560.KS, W4,780)

Cathay Pacific (0293.HK, HK$14.36) Cebu Pacific (CEB.PS, P66.85) China Airlines (2610.TW, NT$10.05) Copa Holdings (CPA.N, $124.75) Delta Air Lines, Inc. (DAL.N, $39.22, OUTPERFORM, TP $56.0) Deutsche Lufthansa (LHAG.DE, €13.66) EVA Air (2618.TW, NT$15.2) EasyJet (EZJ.L, 1366.0p) Gol Linhas Aerea (GOLL4.SA, R$15.1) International Airlines Group (ICAG.L, 368.7p) Japan Airlines (9201.T, ¥5,930) JetBlue Airways Corporation (JBLU.OQ, $12.54, UNDERPERFORM, TP $11.0) Korean Air (003490.KS, W37,900) LATAM Airlines (LFL.N, $13.03) Malaysia Airlines (MASM.KL, RM0.255) PT Garuda Indonesia Tbk (GIAA.JK, Rp432) Ryanair (RYA.I, €7.547) Singapore Airlines (SIAL.SI, S$10.1) Southwest Airlines Co. (LUV.N, $32.83, NEUTRAL, TP $32.0) Spirit Airlines (SAVE.OQ, $73.2) Thai Airways International (THAI.BK, Bt15.3) Tiger Airways (TAHL.SI, S$0.42) United Continental Holdings, Inc. (UAL.N, $50.73, OUTPERFORM, TP $68.0)

Disclosure Appendix

Important Global Disclosures

I, Julie Yates, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Fo r Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potentia l within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 44% (54% banking clients)

Neutral/Hold* 40% (51% banking clients)

Underperform/Sell* 13% (44% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other indivi dual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for American Airlines Group Inc. (AAL.OQ)

Method: Our $52 TP for AAL is the equally weighted average of (1) a 11x mid-cycle P/E multiple on our 2015E fully-taxed EPS, (2) a 6x mid-cycle EV/EBITDAR multiple on our 2015E EBITDAR.

Risk: Primary risks to our $52 target price for AAL include the health of the economy, fuel price volatility, event risk (terrorism, weather) and labor disruptions. Furthermore, AAL has significant merger integration risk as it completed its merger with US Airways in December of 2013 while peers such as DAL and UAL consolidated much earlier. Failure to complete certain steps necessary to begin realizing synergies, such as the issuance of single operating certificate and integration of reservation systems, could negatively impact investor sentiment on AAL.

Price Target: (12 months) for Delta Air Lines, Inc. (DAL.N)

Method: Our $56 TP for DAL is the equally weighted average of (1) a 13.5x mid-cycle P/E multiple on our 2015E EPS and (2) a 7x mid-cycle EV/EBITDAR multiple on our 2015E EBITDAR forecast.

Risk: Primary risks to our $56 target price include the health of the economy, fuel price volatility, event risk (terrorism, weather) and labor disruptions. While DAL's labor force is the least unionized out of network carrier, its pilots have a contract renegotiation in 2016, which, if unfavorable, could increase wage expenses. Furthermore, investor expectations on the company's performance are high, given that DAL has been the best performing network carrier for the longest period of time. Any failure to consistently execute could impact shares given elevated expectations.

Price Target: (12 months) for JetBlue Airways Corporation (JBLU.OQ)

Method: Our $11 target price for JBLU is the equally weighted average of (1) a 13x mid-cycle P/E multiple on our 2015E EPS; and (2) a 6x mid-cycle EV/EBITDAR multiple on our 2015E EBITDAR

Risk: Primary risks to our $11 target price for JBLU include the health of the economy especially given the carrier's focus on leisure travelers which makes its demand more price elastic. Other primary risks include fuel price volatility, event risk (terrorism, weather) and labor disruptions. Also, the carrier's growth strategy could lead to overcapacity and falling yields if competitors also add supply into those markets. Competitive capacity into JBLU's key growth markets (Fort Lauderdale, the Caribbean, and Latin America) has been increasing.

Price Target: (12 months) for Southwest Airlines Co. (LUV.N)

Method: Our $32 target price for LUV is the equally weighted average of (1) a 13.5x mid-cycle P/E multiple on our 2015E EPS; (2) a 7x mid-cycle EV/EBITDAR multiple on our 2015E EBITDAR.

Risk: Primary risks to our $32 target price for LUV include the health of the domestic economy, given that LUV almost exclusively serves the United States and is more focused towards leisure travelers, making its demand more price elastic. Other primary risks include fuel price volatility, event risk (weather, terrorism) and labor disruptions. Also the carrier is planning to expand internationally and while that will be a small proportion of the company's overall network, this will still pose some risk as LUV is relatively new to operating in geographies outside of the U.S.

Price Target: (12 months) for United Continental Holdings, Inc. (UAL.N)

Method: Our $68 target price for UAL is the equally weighted average of (1) a 12.5x mid-cycle P/E multiple on our 2015E EPS (fully taxed), and (2) a 6.5x mid-cycle EV/EBITDAR multiple on our 2015E EBITDAR.

Risk: Primary risks to our $68 target price for UAL include the health of the economy, fuel price volatility, event risk (terrorism, weather), execution and labor disruptions. UAL also has the most exposure amongst any of the domestic network carriers to Asia where overcapacity has resulted in weakening yields and loads. If these trends continue or if the Asian economy weakens, UAL could be adversely affected.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (AAL.OQ, JBLU.OQ, UAL.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (AAL.OQ, UAL.N) within the past 12 months.

Credit Suisse has managed or co-managed a public offering of securities for the subject company (AAL.OQ, UAL.N) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (AAL.OQ, UAL.N) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (AAL.OQ, JBLU.OQ, LUV.N, UAL.N) within the next 3 months.

As of the date of this report, Credit Suisse makes a market in the following subject companies (AAL.OQ, DAL.N, JBLU.OQ, LUV.N, UAL.N).

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (UAL.N).

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (AAL.OQ, DAL.N, JBLU.OQ, LUV.N, UAL.N) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (AAL.OQ, DAL.N, UAL.N) within the past 3 years.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

Important Credit Suisse HOLT Disclosures

With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report.

The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur.

Additional information about the Credit Suisse HOLT methodology is available on request.

The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur.

CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse.

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited (CIN no. U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

Copyright © 2014 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only

Date post:	26-Oct-2021
Category:	Documents
Upload:	others
View:	2 times
Download:	0 times

U.S. Airline Industry Coverage Initiation

Documents