Fitch Rates United's Proposed 2014-2 Class A Ctfs 'A(EXP)' & Class B Ctfs 'BB+(EXP)'

Fitch Ratings assigns the following expected ratings to United Airlines' (UAL, rated 'B'; Outlook Positive by Fitch) proposed Pass Through Trusts Series 2014-2:

--$823,071,000 Class A certificates due in September 2026 'A(EXP)';

--$238,418,000 Class B certificates due in September 2022 'BB+(EXP)'.

The A-tranche ratings are primarily driven by a top-down analysis incorporating a series of stress tests which simulate the rejection and repossession of the aircraft in a severe aviation downturn. The 'A' level rating is supported by a high level of overcollateralization and high quality collateral which support Fitch's expectations that A tranche holders should receive full principal recovery prior to default even in a harsh stress scenario. The ratings are also supported by the inclusion of an 18 month liquidity facility, cross-collateralization/cross-default features and the legal protection afforded by Section 1110 of the U.S. bankruptcy code. The structural features increase the likelihood that the class A certificates could avoid default even if United were to file bankruptcy and subsequently reject the aircraft.

The initial A-tranche LTV, as cited in the prospectus, is 55.1%, and Fitch's maximum stress case LTV (the primary driver for the A-tranche rating) through the life of the transaction is 90.4%. This level of overcollateralization provides a significant amount of protection for the A-tranche holders.

The 'BB+' rating for the B-tranche represents a four-notch uplift (maximum is five per Fitch's EETC criteria) from United's Issuer Default Rating (IDR) of 'B'. The four-notch uplift primarily reflects Fitch's view of the affirmation factor for this collateral pool (the likelihood that United would choose to affirm the aircraft in a potential default scenario). Secondary factors for the B tranche rating include the presence of an 18 month liquidity facility and Fitch's view of recovery prospects in a stress scenario. Fitch considers the affirmation factor for the aircraft in this portfolio to be high as the 737-900ER, 787-9, and ERJ-175LR are considered key strategic elements of UAL's fleet. The affirmation factor is also a supporting consideration for the A-tranche rating.

Transaction Overview

UAL plans to raise $1,061,489,000 in an EETC transaction to fund 27 new aircraft that are expected to be delivered between November 2014 and July 2015.

The A-tranche will be sized at $823,071,000 with a 12.1 year tenor, a weighted average life of 8.8 years and an initial LTV of 55.1% (per the prospectus). Fitch calculates the initial LTV at 58.2% using values provided by an independent appraiser.

The subordinate B-tranche will be sized at $238,418,000 with an 8.1 year tenor and a weighted average life of 5.9 years. The initial prospectus LTV for the B-tranche is 71%. Fitch calculates the initial LTV at 75.0%.

Collateral Pool: The transaction will be secured by a perfected first priority security interest in 27 new delivery aircraft including 11 Boeing 737-900ERs, 4 787-9s, and 12 Embraer 175LRs. Fitch classifies the 787-9 as Tier 1 collateral while the 737-900ERs and ERJ-175LRs are considered low Tier 1/high Tier 2 collateral. All three types are considered strategically important to UAL's fleet. Aircraft to be included in the collateral pool will be selected from 40 eligible aircraft scheduled for delivery between November 2014 and July 2015. The eligible aircraft consist of 17 Boeing 737-900ERs, 5 787-9s, and 18 Embraer 175LRs.

ERJ-175LRs to be Leased: As was the case in the recent UAL 2014-1 transaction, the Embraer 175LRs in this pool will be leased to a regional partner from the inception of the transaction rather than being operated directly by United. EETCs generally incorporate the legal flexibility to lease the collateral aircraft during the life of the transaction, but most recent transactions have not included leases from the inception. The leases will be with Mesa Airlines, Inc.

Importantly, according to the transaction documents the leases to Mesa will be subject and subordinated to the note indentures. This means that if United were to default, creditors should be able to repossess the aircraft despite the fact that they are being operated by a third party. For this reason, Fitch does not believe that the leases materially affect the credit profile of the transaction.

Liquidity Facility: The Class A and Class B certificates benefit from a dedicated 18-month liquidity facility which will be provided by BNP Paribas (rated 'A+'/'F1' with a Stable Outlook).

Cross-default & Cross-collateralization Provisions: Each note will be fully cross-collateralized and all indentures will be fully cross-defaulted from day one, which Fitch believes will limit UAL's ability to 'cherry-pick' aircraft in a potential restructuring.

Pre-funded Deal: Proceeds from the transaction will be used to pre-fund deliveries expected between November 2014 and July 2015. Accordingly, proceeds will initially be held in escrow by BNP Paribas, the designated depositary, until the aircraft are delivered.

Fitch notes that this transaction features a 35 day replacement window in the event that the depositary should become ineligible. This is inconsistent with Fitch's counterparty criteria which generally stipulates a maximum 30 day replacement period. However, Fitch does not consider the longer replacement window to be material to the ratings given that the additional time period is not significant. In addition, the transaction's exposure to the depositary is a short-term risk given that the depositary function terminates once all aircraft have been delivered. Risk is also mitigated by BNP's 'A+/F1' rating, which is above the current rating of the class A certificates.

KEY RATING DRIVERS

Stress Case: The ratings for the class A certificates are primarily based on collateral coverage in a stress scenario. The analysis utilizes a top-down approach assuming a rejection of the entire pool in a severe global aviation downturn. The analysis incorporates a full draw on the liquidity facility, and an assumed repossession/remarketing cost of 5% of the total portfolio value. Fitch then applies immediate haircuts to the collateral value.

The 787-9s in this pool receive a 20% haircut representing the low end of Fitch's Tier 1 stress range (20 - 30%) reflecting Fitch's view of the 787 as a top quality aircraft. The 737-900ERs receive a more severe haircut of 30%, which incorporates the 737-900ER's limited user base, which could translate into a more difficult remarketing process if the aircraft had to be repossessed and sold. The Embraer 175LRs also receive a 30% haircut consistent with Fitch's view of the aircraft as a low Tier 1/high Tier 2 model.

These assumptions produce a maximum stress LTV of 90.4%, suggesting full recovery for the A-tranche holders. The highest stress LTVs are experienced early in the life of the transaction and are expected to decline gradually as the deal amortizes.

High Collateral Quality: The quality of the collateral pool underlying the transaction is considered solid.

737-900ER (38% of the collateral pool based on Fitch's third party appraiser): Fitch views the 900ER as a low Tier 1/high Tier 2 aircraft due to its attractive operating economics which make it an ideal replacement for older narrow bodies. However, the aircraft has a somewhat limited user base concentrated among a few large carriers. In particular, Lion Air and United together operate more than 70% of the current fleet. The 900ER has a sizeable backlog of 269 aircraft, but its user base remains small, with orders from only 15 airlines and two leasing companies. This compares to nearly 70 users for the competing Airbus A321-200. In addition, new orders may be pressured in the coming years if potential customers instead order Boeing's re-engined 737-9 Max, the first of which is expected to enter into service in 2019. For these reasons Fitch applies the top end of its Tier 1 value stress range (20 - 30%) in its analysis.

787-9 (38%) Fitch considers the 787 Dreamliner to be a high-quality tier one aircraft. Despite technical issues early in the life of the smaller 787-8, backlogs for the aircraft family remain strong and delivery slots are scarce, which would support strong re-sale values if any of these planes were to come on to the market. For that reason Fitch applies the low end of its Tier 1 stress range to both the 787-8 and the 787-9. The -9 variant has built up a sizeable order book of 408 aircraft as of June 2014, with a total of 26 customers. Carrying 250 passengers in a standard arrangement, the 787-9 acts as a bridge in Boeing's product line between the 787-8 (typical capacity of 224 passengers), and the 777-200ER (300 passengers). In addition, the 787-9 is capable of a similar range as the 777-200ER, but at an improved fuel burn rate.

Embraer 175LR (24%): Fitch considers the E-175LR to be a low Tier 1/high Tier 2 aircraft, reflecting the plane's highly successful production run over the past decade, offset by its relatively limited user base. Embraer has delivered 211 E-175s to date and has a current backlog of 167. This represents a sizeable fleet but does not compare with higher quality Tier 1 aircraft such as the 737-800 and A320-200 with fleet sizes in the thousands.

The Embraer 175 is currently operated by 17 airlines. Although the total number of airlines operating the 175LR is limited, it has proven to be the popular choice for its size class compared to its direct competitor, the Bombardier CRJ 700. The 175LR has continued to receive sizeable orders over the past year compared to the CRJ 700. In addition, the 175 has a high level of commonality with its larger cousin the E-190. The 190's larger user base could provide a natural base of buyers for 175LRs in the secondary market.

Affirmation Factor: Fitch considers each aircraft type in this pool to be strategically important to United, which supports a high affirmation factor. The 737-900ER is the narrow body of choice for UAL and is becoming a major part of its domestic narrow body fleet, replacing the aging 757 - 200. The 737-900ER is expected to constitute around 17% of United's narrow body fleet by the end of 2014 (by plane count as opposed to capacity). The range of the 737-900ER makes it an ideal plane for longer distance domestic routes, while incorporating significantly lower trip costs than the less fuel efficient 757-200.

The 787s are expected to revamp UAL's international fleet, allowing UAL to serve city pairs that were not previously accessible with older 767s. For example United's first 787-9 will fly directly from Los Angeles to Melbourne, Australia, a service that previously required a stop in Sydney. In addition the 787s feature significantly lower estimated costs than the aircraft they replace, including some 20% lower fuel consumption, and 30% lower airframe maintenance costs, compared to similarly sized aircraft.

The E-175LRs play a significant role in United's publicly stated goal to reduce its annual cost base by $2 billion by 2017. Out of the $2 billion stated goal, $1 billion is expected to result from reduced fuel burn, and a major portion of that will come from the replacement of inefficient 50 seat regional jets with larger planes like the 175LRs featured in this transaction. The advantages of these planes over the 50 seat RJs that United currently operates make the likelihood of rejection in a bankruptcy scenario relatively low.

B-Tranche: The 'BB+' rating for the subordinate B-tranche is assigned by notching up from UAL's IDR of 'B'. Fitch notches subordinated tranche ratings from the airline IDR based on three primary variables; 1) the affirmation factor (0 - 3 notches), 2) the presence of a liquidity facility, (0 - 1 notch), and 3) recovery prospects. In this case, Fitch has assigned a three-notch uplift (the maximum) based on a high affirmation factor (as discussed above) and a one-notch uplift reflecting the liquidity facility.

Fitch generally only assigns an additional one notch of uplift for recovery prospects in situations where recovery is expected to be significantly better than for comparable existing B-tranches. In this case, recovery is roughly in-line with many recently issued B-tranches (in the 'RR1 - RR2' range in a stress analysis), thus no additional uplift has been assigned.

RATING SENSITIVITIES

Senior tranche ratings are primarily based on a top-down analysis based on the value of the collateral. Therefore, a negative rating action could be driven by an unexpected decline in collateral values. For the 737-900ERs in the deal, values could be impacted by the entrance of the 737-9 MAX, or by an unexpected bankruptcy by one of its major operators. Likewise the Embraer 175LRs could also affected by the entrance of the 175LR E-2. Concerns for the 787 values largely revolve around the potential for future maintenance or production issues on a scale above and beyond what has already been experienced. Fitch does not expect to upgrade the senior tranche ratings above the 'A' level.

Subordinated tranche ratings are based off of the underlying airline IDR. As such, Fitch would likely upgrade the B tranche to 'BBB-' if United's IDR were upgraded to 'B+'. Fitch's ratings for United currently have a Rating Outlook Positive. Likewise, if Fitch were to downgrade United's IDR, the B tranche ratings would likely be downgraded commensurately.

Fitch has assigned the following ratings:

United Airlines 2014-2 pass through trust:

--Series 2014-2 class A certificates 'A (EXP)';

--Series 2014-2 class B certificates 'BB+ (EXP)'.

Fitch currently rates United as follows:

United Continental Holdings, Inc.

--IDR 'B';

--Senior unsecured rating 'B/RR4';

--Senior unsecured convertible notes 'B-/RR5'.

United Airlines, Inc.

--IDR 'B';

--Secured bank credit facility 'BB/RR1';

--Senior secured notes 'BB/RR1';

--Senior unsecured rating 'B/RR4';

--Junior subordinated convertible debentures 'B-/RR5'.

The Rating Outlook is Positive.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Rating Aircraft Enhanced Equipment Trust Certificates' (Sept. 12, 2013).

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Rating Aircraft Enhanced Equipment Trust Certificates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=717763

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=841915

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