EFTA00751947.pdf

From: GIG Group JP Morgan To: Undisclosed recipients:; Subject: GIG Trade Update: Long Airlines Date: Thu, 18 Nov 2010 21:11:44 +0000 Attachments: GIO_Trade_Update_2010-11-10JUpdate).pdf Inline-Images: imagc007.png; imagc008.png; imagc009.png Global Investment Opportunities Group (GIO) Opportunistic Investments November 18, 2010 J.P.Morgan INVESTMENT IDEA: LONG AIRLINES Investors typically shy away from the airline sector given the group's volatility and history with leverage. However, we believe that there is currently an opportunity in airline stocks from both a trading and investment standpoint. JPMS LLC's airline equity analyst, Jamie Baker, highlighted in a report dated October 1 201Q the seasonality in airline stocks that investors could currently benefit from: over the past 30 years, buying airline stocks in September/October and holding until April/May has yielded a positive return 90% of the time with an average return of +35%. While we may be a little late (as it is now November), Mr. Baker's price targets on his top picks still suggest substantial upside from current levels. Furthermore, the industry is undergoing a number of structural changes that should support the sector longer term. Earnings reports for 3O were generally in line or beat estimates (with some companies raising 4O guidance) and confirmed some of the improving fundamentals the airline companies had guided towards earlier this year. The recent wave of consolidation in the space should help the industry manage capacity and pricing power and most management teams are also focused other profitability improvements: expense discipline has been exhibited through reduced aircraft orders and CAPEX plans and revenues are also benefiting from product unbundling (have you had to check in bags recently?). This focus on returns is leading to solid free cash flow generation with yields rising as high as 10.12% in 2011 for some companies. Lastly, the airlines are also focused on using their cash flow generation to repair balance sheets — notably, Delta intends to reduce its net debt from $15 billion to $10 billion by year end 2012 and Mr. Baker believes United Continental will likely follow. While this longer term theme will likely take time to play out, we believe the current opportunity afforded by both the secular changes and the calendar benefit should not be ignored. Risks: • Double dip recession or shock to revenues such as a terrorist attack or volcanic ash event. • Sharp increase in oil prices accompanied by low economic growth. • Negative bookings data. Implementation: • JPMS LLC Airline Equity Analyst Jamie Baker's top picks are AMR Corp (AMR). Delta (DAL). and United Continental (UAL). EFTA00751947 NYS C Ai Ina Index 200 180 160 140 120 100 80 60 40 20 0 2000 2001 2002 2033 2004 2005 2006 2007 2008 Lure 2010 Source: J.P. Morgan Securities. U_C. Bloomberg. Data as of 11118/10. IMPORTANT INFORMATION This presentation and the material contained herein is not a product of the J.P. Morgan Research Department and is not a research report. although it may refer to a research report or research analyst. This presentation should be reviewed in coniwiction with U.S. research published by J.P. Morgan Securities. Inc. to the extent that such research exists. The opinions and ideas expressed herein do not take into account individual client circumstances. objectives and needs. Transactions in any securities that may be referenced hereon may not be suitable for all investors. This presentation has been prepared for information purposes only. Nothing in this material is intended to be a solicitation for any product or service offered by J.P. Morgan's Private Bank or any of its affiliates. Information contained herein has been obtained from sources beieved to be reliable but we do not guarantee its accuracy or completeness and accept no responsibility for any drect or consequential losses arising from its use. The views and strategies described herein may not be suitable for all investors. This ',formation is not intended as an offer or solicitation for the purchase or sale of any financial instrument and is being provided merely to illustrate a particular investment strategy. EFTA00751948