Airlines Industry - 06-11-15 - Merger Mania

U.S. Research Comments CALYON SECURITIES (USA) INC. November 15, 2006

Ray Neidl 212 261 4057 [email protected] Christine Min 212 408 5645 [email protected] Sanaz Kafayi 212 408 5648 [email protected]

Airlines Merger Mania? Industry Update

Airline stocks responded to news of US Airways (LCC) takeover bid for Delta very favorably with many stocks in the group up 10% - 15% on the day. This note summarizes our recommendations in light of today's news. In our view, investing around potential mergers is tricky at best. Therefore, we are maintaining our fundamental recommendations on the stocks reflecting our views on favorable industry prospects. Specifically, we continue to rate the shares of AMR, CAL, LCC and AAI as Adds, and UAUA as Neutral. The attached table summarizes our ratings on these stocks, our current 2007 EPS estimates and potential price targets assuming a PE multiple of 10X and 12X for the legacy carriers and 15X and 18X for AAI, a low-cost carrier. We would point out that the P/E multiples used in the attached table are indicative of where the shares could trade as earnings recover. We would refer investors to our individual company notes for our current price targets and valuation methodologies. The reaction to the reaction. While we believe that rating stocks using fundamentals is most appropriate, we would expect that today's strong price reaction will be met with short-term weakness as the euphoria subsides, which will create trading opportunities with these shares. As such, investors may want to consider taking short-term profits in these shares in expectation of short-term weakness as reality settles in. Airline mergers are tricky. In our industry thesis summary published on Monday, we again pointed out why we believe that investing in this sector for potential M&A activity is difficult. Importantly in this situation, we believe that the biggest stumbling block could be political and regulatory opposition. We handicap this potential impediment as a 30% 40% probability, particularly in light of the recent mid-term elections. Equities of bankrupt carriers are still worthless. We maintain on Sell ratings on the equities of the two bankrupt carriers, Delta and Northwest, as we believe these shares are highly likely to be worthless in any restructuring. The shares of Delta are up 10% and Northwest traded up 51% today. Any investor benefits associated with M&A on emergence from Chapter 11 will go to the creditors, in our opinion.

See important disclosures on pages 3 - 4 of this report. Page 1

U.S. Research Comments CALYON SECURITIES (USA) INC. November 15, 2006

Price Target

Company AMR CAL UAUA LCC

AAI

Rating Add Add Neutral Add

Add

Current 2007 EPS Price Estimate $ 32.45 $ 4.32 $ 42.92 $ 5.33 $ 40.37 $ 3.59 $ 58.89 $ 7.59

10X Multiple $ 43.20 $ 53.30 $ 35.90 $ 75.90

12X Multiple $ 51.84 $ 63.96 $ 43.08 $ 91.08

$

15X Multiple $ 15.90

18X Multiple $ 19.08

13.00

$

1.06

Source: Calyon Securities (USA) Inc.

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U.S. Research Comments CALYON SECURITIES (USA) INC. November 15, 2006

Other Companies Mentioned AirTran Holdings (AAI; $11.07; ADD) ACE Aviation Holdings (ACE-B.TO; $38.12; BUY) Alaska Air Group (ALK; $41.63; BUY) AMR Corporation (AMR; $30.68; ADD) Continental Airlines (CAL; $38.36; ADD) Copa Holdings SA (CPA; $41.41; BUY) Delta Air Lines (DALRQ; $1.47; SELL) Embraer-Empresa Brasileira de Aeronáutica S.A. (ERJ; $41.85; ADD) Frontier Airlines (FRNT; $8.25; NEUTRAL) GOL Linhas Aereas Inteligentes S.A. (GOL; $29.38; BUY) JetBlue Airways Corp. (JBLU; $14.09; NEUTRAL) US Airways (LCC; $50.93; ADD) Lan Airlines S.A. (LFL; $48.92; BUY) Southwest Airlines (LUV; $15.24; ADD) Mesa Air Group (MESA; $9.20; ADD) Northwest Airlines (NWACQ; $0.90; SELL) Pinnacle Airlines Corp. (PNCL; $9.41; NEUTRAL) Republic Airways Holdings (RJET; $18.24; BUY) SkyWest, Inc. (SKYW; $28.05; BUY) TAM SA (TAM; $30.00; BUY) UAL Corporation (UAUA; $36.70; NEUTRAL) WestJet Airlines Ltd. (WJA.TO; $11.22; ADD) ExpressJet Holdings, Inc. (XJT; $7.56; NEUTRAL)

IMPORTANT DISCLOSURES Analyst Certification I, Ray Neidl, hereby certify that the views expressed in this research report accurately reflect my own personal views about the securities and/or the issuers and that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. I, Christine Min, hereby certify that the views expressed in this research report accurately reflect my own personal views about the securities and/or the issuers and that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. The member and/or analyst(s) involved in the preparation of this report have reason to know that an affiliate of Calyon Securities (USA) Inc. received compensation from Copa Holdings SA for non-investment banking products/services in the past 12 months. The member makes a market in the securities of Frontier Airlines. The member and/or analyst(s) involved in the preparation of this report have reason to know that an affiliate of Calyon Securities (USA) Inc. received compensation from GOL Linhas Aereas Inteligentes S.A. for non-investment banking products/services in the past 12 months. The member makes a market in the securities of JetBlue Airways Corp. Calyon Securities (USA) Inc. covered the predecessor companies of US Airways. Ray Neidl initiated coverage of US Airways (UAIRQ) on October 5, 2004 with a Sell rating and price target of $0.25 (price at initiation: $1.45), and the rating and target price remained until liquidation. Ray Neidl initiated coverage of America West Holdings (AWA) on October 8, 2004 with a Neutral rating and price target of $5 (price: $4.98); on April 20, 2005 the rating was lowered to Reduce and the price target was lowered to $4 ($4.81); on April 25, 2005 the rating was raised to Neutral and the price target remained $4 ($4.27). The rating and price target of AWA remained Reduce with a $4 price target until liquidation. The member makes a market in the securities of US Airways. Calyon or its affiliates participated in a public offering of Lan Airlines S.A.'s securities or received compensation for investment banking services from Lan Airlines S.A. in the past 12 months. Calyon or its affiliates managed or co-managed a public offering of Lan Airlines S.A.'s securities in the past 12 months. The member makes a market in the securities of Mesa Air Group. The member makes a market in the securities of Northwest Airlines. The member makes a market in the securities of Pinnacle Airlines Corp. The member makes a market in the securities of Republic Airways Holdings. The member makes a market in the securities of SkyWest, Inc. Ray Neidl initiated coverage of the TAM ord. (TAMM4; R$27) on October 25, 2005 with an ADD rating and R$31 price target. On

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U.S. Research Comments CALYON SECURITIES (USA) INC. November 15, 2006

November 11, 2005 we raised our price target to R$34 (price at the time: R$30.50). On November 17, 2005 we raised our price target to R$39 (R$35.50). On January 12, 2006 we raised our price target to R$53 (R$48.50). On March 13, 2006 we transferred our coverage to the newly-launched ADS with an ADD rating and US$23 price target. We initiated coverage of UAL Corp on October 5, 2004 with a Sell rating and Target Price of $0.25. We maintained that rating and target price until the company emerged from bankruptcy on February 2, 2006. The member makes a market in the securities of UAL Corporation. The member and/or analyst(s) involved in the preparation of this report have reason to know that an affiliate of Calyon Securities (USA) Inc. received compensation from WestJet Airlines Ltd. for non-investment banking products/services in the past 12 months.

RATING RECOMMENDATIONS (based on anticipated returns over a 12-month period): BUY, above 20%; ADD, 10%-20%; NEUTRAL, +/-10%; REDUCE, negative return, but by less than 20%; SELL, negative return of more than 20%. OVERALL RATING DISTRIBUTION for Calyon Securities (USA) Inc., Equity Universe: BUY - 51.3%, HOLD - 41.0%, SELL - 6.8%, Restricted - 0.9%. Data as of September 30, 2006. INVESTMENT BANKING CLIENTS as a % of rating category: BUY - 18.3%, HOLD - 16.7%, SELL 12.5%, Restricted - 100%. Data for 12-month period ending September 30, 2006. FOR A HISTORY of the recommendations and price targets for companies mentioned in this report, please write to: Calyon Securities (USA) Inc., Compliance Department, 1301 Avenue of the Americas, 15th Floor, New York, New York 10019-6022. CALYON SECURITIES (USA) INC. POLICY: Calyon Securities (USA) Inc.'s policy is to only publish research that is impartial, independent, clear, fair, and not misleading. Analysts may not receive compensation from the companies they cover. Neither analysts nor members of their households may have a financial interest in, or be an officer, director or advisory board member of companies covered by the analyst. ADDITIONAL INFORMATION on the securities mentioned herein is available upon request. DISCLAIMER: The information and statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by us as to accuracy or completeness. We do not undertake to advise you as to any change in our views. This is not a solicitation or any offer to buy or sell. We, our affiliates, and any officer director or stockholder, or any member of their families may have a position in, and may from time to time purchase or sell any of the above mentioned or related securities. This material has been prepared for and by Calyon Securities (USA) Inc. This publication is for institutional clients distribution only. This report or portions thereof cannot be copied or reproduced without the prior written consent of Calyon Securities (USA) Inc. In the UK, this document is directed only at Investment Professionals who are Market Counterparties or Intermediate Customers (as defined by the FSA). This document is not for distribution to, nor should be relied upon by, Private Customers (as defined by the FSA). © 2006 Calyon Securities (USA) Inc. All rights reserved.

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