U.S.

Research Comments
CALYON SECURITIES (USA) INC.
November 13, 2006

Ray Neidl
212 261 4057
ray.neidl@us.calyon.com
Christine Min
212 408 5645
christine.min@us.calyon.com
Sanaz Kafayi
212 408 5648
sanaz.kafayi@us.calyon.com

Airlines
The Revenge of the Legacy Airlines

We are projecting the U.S. airline industry to return to profitability for the first time since 9/11 this year with the industry
earning $2.3 billion for 2006 and $194 million for Q406. We expect the legacy sector, including bankrupt carriers Delta
and Northwest, to earn $565 million for the year and lose ($191) million for the quarter, while we forecast the low cost
carriers (LCCs) to earn $1.3 billion for the year and $274 million for the quarter. We anticipate the regional sector to
earn $433 million for the year and $111 million for the quarter.

Our outlook for 2007 industry earnings is more bullish even factoring in oil prices staying at their current high level of
around $60 a barrel; we expect the industry to earn $5.6 billion. Our estimates assume economic growth of 2% to 3%
and modest yield increases well below 5% with some ticket price increases in the first half of next year.

Almost all of the U.S. carriers should benefit from this scenario, but we believe that the legacy airlines will be able to
take the most advantage of the current developments. Lower non-fuel costs, broad worldwide systems/partnerships,
reduced cost structures, and a fine tuning of their business models, including a cut back in their growth, have made
them tougher competitors for the LCCs. You might say that it is the "revenge of the legacy airlines".

As we had predicted, most of the LCCs have cut back on their aggressive growth plans, and with current EPS
projections, we believe further cuts will be needed, taking the high growth out of the P/E multiple factor. Southwest is
expected to be an exception and will grow as fast as they can obtain aircraft, in our opinion.

We do not see any immediate danger of insolvency for any of the U.S. carriers that we follow. We expect all airlines to
participate in the early 2007 airline stock price rally. The two carriers currently in bankruptcy, Delta and Northwest, are
expected to emerge in the first half of next year as strong competitors, and even though their current stock is worthless,
the unsecured bondholders are expected to own the bulk of the new equity thus we believe that there is potential value
there.

The regional airlines should also benefit from this recovery, and with their legacy partners gaining financial strength, it
should translate into higher P/E multiples for their regional partners with fixed cost contracts.

Longer term, the industry is still subject to economic swings, but the legacy carriers should be in better shape to take
on the next weakening of the economic cycle. The other main risk is the potential of labor groups becoming more
aggressive with demands, which could once again danger the viability of their employers in the next down cycle.

Even though there may be a seasonal pullback in stock prices, on balance we would advise investors to take a hard
look at this industry and key in on a few of their favorites. Our top picks include Alaska Air Group, AMR, Continental
and US Airways.

See important disclosures on page 8 of this report.

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Summary

We are projecting the U.S. airline industry to return to profitability for the first time since 9/11 this year with the industry
earning $2.3 billion for 2006 and $194 million for Q406. We expect the legacy sector to earn $565 million for the year
and lose ($191) million for the quarter, while the LCCs are expected to earn $1.3 billion for the year and $274 million
for the quarter. The regionals are expected to earn $433 million for the year and $111 million for the quarter.

Our outlook for 2007 industry earnings is even more bullish even factoring in oil prices staying at their current high level
of around $60 a barrel with the industry earning $5.6 billion. Our estimates assume economic growth of 2% to 3% and
modest yield increases of less than 5% with some ticket price increases in the first half of next year.

There may be further attempts to increase ticket prices this year, but we doubt if any will stick during the weaker
"shoulder travel season". However, under our scenario for 2007, we expect to see ticket price increases early in the
year.

Almost all of the U.S. carriers should benefit from this scenario, but we believe that the legacy airlines should be able to
take the most advantage of the current developments. Lower non-fuel costs, broad worldwide systems/partnerships,
reduced cost structures, and a fine tuning of their business models, including a cut back in their growth, have made
them tougher competitors for the LCCs. You might say that it is the "revenge of the legacy airlines".

As predicted, most of the LCCs have cut back on their aggressive growth plans and with current EPS projections, we
believe further cuts will be needed, taking the high growth out of the P/E multiple factor. Southwest is expected to be
an exception and will grow as fast as they can obtain aircraft.

We do not see any immediate danger of insolvency for any of the U.S. carriers that we follow. All carriers should
participate in the expected early 2007 airline stock price rally. The two carriers currently in bankruptcy, Delta and
Northwest, are expected to emerge in the first half of next year as strong competitors, and even though their current
stock is worthless, the unsecured bondholders are expected to own the bulk of the new equity thus we believe that
there is potential value there.

With any major rally in airline stock prices, look for carriers to go to the equity markets. In the case of the legacy
airlines, the reasons would be to raise cash for further liquidity but more importantly to bring down the debt to
capitalization ratios to more reasonable levels, i.e. the low- to mid-70% area. The LCCs would want to raise equity and
cash to fund their still aggressive growth programs.

Longer term, the industry is still subject to economic swings, but the legacy carriers should be in better shape to take
on the next weakening of the economic cycle. The other main risk is the potential of labor groups becoming more
aggressive with demands, which could once again danger the viability of their employers in the next down cycle.

The regional airlines should also benefit from this recovery with their legacy partners gaining financial strength, which
should translate into higher P/E multiples for their regional partners with fixed cost contracts.

The Latin carriers that we follow, GOL, TAM, LAN and COPA are all high growth vehicles that are producing
substantial profits and earnings growth. We would recommend that investors buy any or all of these carriers even with
recent steep price appreciation that these stocks have experienced.

What a Difference a Year Makes for the LCCs:

Legacy airlines are the big interest this year with investors. LCCs, if not out, are not the darlings they were last year.
For the LCCs, business models that worked at $20 or $30 a barrel for oil do not work as well at $60. The LCCs have

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limited ability to improve themselves through cost cutting since they are already low cost, and their ability to raise
revenues is limited even in a strong environment because they do not have the many seat buckets to play with to
improve yields. They are more dependant on the old fashioned way of raising ticket prices, which is more difficult for
them since their big selling factor is low simple fares plus the fact that as they grow rapidly, they have to fill all of the
new seats. In the past, investors have given the LCCs high P/E multiples on high profit projections because of high
growth. Profitability has plummeted for most of them (with the exception of Southwest) forcing most of the LCCs to
curtail some of their aggressive growth. As a result, we believe investors will be putting lower P/E multiples on their
outlook for these carriers, which will put further pressure on their stock prices. The revitalized legacy carriers have
added to the situation by offering stiffer competition in many of the longer distance markets in which the LCCs were
beginning to aggressively grow. With the current earnings forecast for most of the LCCs, we predict that there will be
further cutbacks in the rapid expansion of the LCCs with the exception of Southwest, which we believe will grow as fast
as they can obtain aircraft.

Individual Airline Outlook:

Legacy Carriers:

AMR and Continental remain our two favorite picks in a sector where we believe that all stocks will rise sharply over the
next six months. US Airways, we believe has the highest risk/reward ratio. Even though their current stock is worthless,
we believe that both Delta and Northwest will be out of bankruptcy by mid-year with low unit costs and as a tough
competitor not only with the other legacy carriers, but also with the LCCs and the international competition as well.

AMR (ADD) – produced Q306 earnings per diluted share of $0.45 and we expect the company to earn $0.43 per share
in Q4 and $1.62 for full year 2006. More importantly we are forecasting 2007 earnings per share of $4.32.

Advise: ADD rating with a target price of $30. If our scenario is right, the stock price should go significantly higher by
spring on both a possible increase in earnings projections and P/E multiple expansion.

Continental Air Lines (ADD) - produced Q306 earnings per diluted share of $1.36 and we forecast earnings per share
of $0.26 in Q4 and $3.21 for 2006. More importantly, we are forecasting 2007 earnings per share of $5.33

Advise: ADD rating with a target price of $40. If our scenario is right, the stock price should go significantly higher by
spring on both a possible increase in earnings projections and P/E multiple of where it would be trading.

Delta Air Lines (SELL) – should emerge from bankruptcy, mainly caused by the company's inability to service an
overly leveraged balance sheet by mid-year with non-CASM expected to be in the mid 6 cent area. This is not as low
as the LCCs but low enough to enable the carrier to be competitive, especially with its other strengths, which include a
powerful hub operation in Atlanta and JFK, a broad worldwide system with powerful partnerships, and a good yield
management system. Delta should be exiting bankruptcy just at the right time to maximize value for its new equity
holders, which will primarily be the unsecured creditors and bondholders.

Advise: Sell the stock.

Northwest Airlines (SELL) - should emerge from bankruptcy, mainly caused by labor costs being too high, by spring
with non-CASM expected to be below 7 cents. This is not as low as LCCs but low enough to enable the carrier to be
competitive, especially with its other strengths, which include powerful hubs in Detroit and Minneapolis/St. Paul, a
broad worldwide system with powerful partnerships, and a good yield management system. Northwest should be
exiting bankruptcy just at the right time to maximize value for its new equity holders, which will primarily be the
unsecured creditors and bondholders.

Advise: Sell the stock.

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United Airlines (NEUTRAL) – produced earnings of $1.27 in Q306 and we project earnings of $0.21 per share in
Q406 and $0.40 per share in 2006. We are forecasting EPS of $3.58 in 2007.

Labor unrest may be showing its ugly head again with the pilots' union and other employee groups upset about recent
changes in management compensation. Our only comment on management compensation is that to retain airline
executives, compensation has to be competitive not only with other airlines but with management in other industries as
well. Fair or not, this is a fact of life, but in return, management should be held accountable and produce results for
investors to justify this compensation or if not, lose their jobs. On the other hand, employees have contributed to the
turn around and should be rewarded, but in the form of profit sharing and not by driving the fixed costs up to levels that
are not supportable in an economic downturn, which severely affects airlines. In the case of United, the pilots' contract
is not amendable until January 1, 2010, but as they have proved in the past, pilots can drive the carrier into bankruptcy
through job actions. A logical observer may say that the pilots are pointing a gun at their own heads and saying give
me what I want or I will pull the trigger. They took such actions in the fall of 2000, and it should not be counted out that
they may repeat the folly.

Advise: Results coming in line with other legacy carriers and we would expect to see their stock price strengthen with
other legacy carriers in any market rally which we expect early next year. We believe that it currently trades on the rich
side as compared to the other legacy airlines.

US Airways (ADD) – a strong revenue environment should enable the airline to make money in Q4 and for the year, in
our opinion. More importantly, we are projecting earnings of $7.59 per share in 2007. Although there will be limited
growth next year, we believe that the market will put a higher multiple on the stock. We believe of all the legacy
carriers, US Airways has the best risk/reward balance.

Advise: More volatile than other legacy carriers, probably has more upside potential in any sector rally but more
downside risk if oil prices were to go up or industry RASM down.

Low Cost Carriers (LCCs):

Even though the LCCs are now going through a period where almost all of them are re-evaluating their models and
growth plans, the sector should still benefit with an overall airline sector rally that we are expecting before spring.
Because of the shorter length-of-hop route structures that the LCCs have, they seemed to have been more adversely
impacted in Q306 by the "hassle factor" which resulted from the August London terrorist incident. Security was
clamped down through September, which seems to have driven away some traffic that would have traveled by air for
under 500 miles. In many cases, we believe that some form of ground transportation was substituted.

AirTran (ADD) – due to the "hassle factor", revenues were negatively affected in the second half of the quarter. We
are observing developments at Delta too, where the company is reorganizing in bankruptcy and we believe is also
becoming a tougher competitor in Atlanta, the main hub for AirTran. Delta has recently reversed course and begun to
put more capacity back into this hub. The airline has good flexibility, however, and continues to grow its non-Atlanta
operations through eastern focus cities and selective point-to-point markets. The airline continues to cut growth plans
to more reasonable levels, now in the mid-teen area, and we would not be surprised if the growth rate was cut further.

Advise: We continue to recommend the stock but have reduced our price target.

Frontier (NEUTRAL) – the carrier experienced disappointing Q306 results which the company primarily blames on the
"hassle factor" resulting from the mid-August London terrorist incident. Denver also has historically had a reputation as
being a "choke point" for airline security and this may have had an affect on revenues as well when combined with the
"hassle factor". We are more concerned longer-term with a rejuvenated United stepping up Denver capacity in what is
a key hub city for Frontier and Southwest entering the market with its main constraint being the acquisition of additional
aircraft.

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Advise: The carrier is in no immediate danger of illiquidity since it has ample unrestricted cash reserves at $221.2
million with projected positive cash flows even after maintenance CAPEX. However, our forecast does not have
Frontier returning to any significant profitability anytime soon. Until we can determine what the company will be doing to
combat what we perceive is the double threat form United and Southwest, we would be leery of owning the stock
despite the fact that it may strengthen in next year's expected industry rally.

JetBlue (NEUTRAL) – the carrier produced disappointing Q306 results but believes that it can produce a profit in
Q406 through its cost cutting efforts. An already very low cost airline, we are not sure how much more progress it can
make in this area and believe that it has to concentrate on the revenue side. It has already cut back a couple of times
on its very aggressive growth plans, well over 20% annually at one time, to levels in the mid-teens, but if it cannot
return to more significant profits, we believe this growth rate will have to be further cut. Many of the markets that the
company was planning on growing into are now facing stiffer competition from the re-invigorated legacy airlines.

Advise: The main threat to the carrier right now is not a lack of liquidity but the possibility of being forced to further
reduce its growth plans. Even if it were to return to good profitability, we do not believe that it can support the P/E
multiples that it once traded at or even Southwest multiples since we believe growth will be drastically curtailed in the
future.

Southwest (ADD) – although it missed Q306 by only a penny, historically this has meant that the company's stock
price would be hit and hit it was as some analysts and the media piled on with the usual arguments that Southwest was
running out of areas to grow. In our opinion, this is "guilt by association" and of all the LCCs this is the one that
probably every other airline wishes that they could be in Southwest's shoes. We believe that the only constraint on
Southwest's growth is its inability to get the number of aircraft that the company desires, aircraft that fits into its fleet
plan. It remains well hedged regarding fuel needs, though at higher average prices, and still owns the LCC market. We
recently raised our rating to ADD based on valuation since the stock is now trading at about 15x projected 2007 P/E,
high by legacy airline standards but at the bottom end of the 15x to 25x range that the stock usually trades at.

Advise: Southwest is the only airline that we would recommend to buy and hold long-term, and at current prices it is
looking very attractive.

Alaska Air Group (BUY) – although not technically an LCC, it is really not a legacy carrier either. Its unit cost structure
remains too high, but the company is making progress in reducing it. It has a unique niche in the North American West
Coast, which management is adequately exploiting, in our opinion. We believe both the company's operations and
stock price have significant upside potential and it remains one of our top picks.

Advise: Buy the stock and if it pulls back in price based on seasonality buy some more.

Risk to Industry Recovery

We believe that a longer-term threat to the industry, particularly the legacy carriers, could be labor. The airline business
is labor intensive, with highly skilled people that are highly unionized. Further, as demonstrated by the United pilots in
2000, at the first sign of profitability of their employers, they begin to demand outsized wage increases and their "fair
share" to make up for cuts previously made to turn their employers around. This is usually a sign that we are entering
the tail end of the economic cycle for the industry. In 2000, these demands came just as the industry was heading into
a major tail-spin (even before 9/11). Unfortunately, we are seeing these same negative trends reasserting themselves
now at the first sign of a return to profitability, as can be seen in the recent quote of one of the officials of the U.S.
Airways pilots union when he said, "the honeymoon is over". With U.S. Airways still in a very precarious position, its
future could be endangered. However, unreasonableness by employees at any other airlines could endanger these
airlines' futures as well.

It is only fair to share the fruits of success with employees since they were part of the process, even though it may

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have been under threat of their job survival. However, airline management has to be diligent in continuing to control
costs, particularly labor costs, and must remain conscious of continuing cost containment. It is, after all, a variable and
largely unpredictable industry.

Continuing profitability is needed by all the carriers; for the LCCs to fund growth and for the legacy carriers to enable
them to repair their shattered balance sheets after years of large losses. Also, being a cyclical industry, consistent
profitability can be elusive and fleeting, and so airline management, with the cooperation of its employees, must avoid
the trap of letting fixed costs rise. Negotiating labor contracts at the top of the economic cycle can lead to problems
when the down part of the cycle occurs. Trends must be resisted, and we believe that costs must actually continue to
come down in light of economic cyclicality, the continuing threat from expanding LCCs and new start-ups, and certain
carriers exiting bankruptcy with sharply reduced costs. Although major compensation cuts may not be necessary,
airline management and its employees must mutually continue to cooperate in gaining additional productivity to bring
unit costs down. Increased RASM will only be half the equation on the road to airline profitability and stability,
controlled CASM being the other half of the equation.

Summary of U.S. Airline Outlook Going Into Year End 2006

The legacy, or network carriers, have returned with a vengeance to the point where they are competitive with the LCCs
in many ways. Operating costs have been reduced by the legacy carriers. Costs are not as low as the LCCs, though,
and will not be for anytime in the foreseeable future because of the more senior employees the legacies have and
because their systems are more complex than the LCCs'. The legacies have vast national and worldwide systems, and
they are tied into extensive airline partnerships that enable the legacies to reach every area of the country and the
world. The legacies operate hub complexes, which still provide convenience to travelers through frequency of service
and some base economics of scale. These services should enable the legacy carriers to get a premium yield for their
product, and with the cost differential closing with LCCs, provide them with a competitive advantage in many theaters
of operation. The LCCs still have their market niche with their simpler product line and will dominate certain areas, but
they are now being squeezed in other areas where the legacy carriers can bring their advantages to full throttle.

Even though they are still a major threat to the legacy carriers, the LCC momentum is slowing down as most of these
carriers have been cutting their growth plans. This is not unexpected since current profit projections for most of them
would dictate that a slowdown in growth is necessary. Further, with the legacy carriers becoming more competitive in
many markets, the growth opportunity for LCCs becomes less. With high fuel prices expected to be a factor for the
foreseeable future and with the LCCs having a more limited ability to yield manage their product than the legacy
carriers, they have to rely more on price increases to raise yields, which goes against the basic premise of their
business models, low simple fares structure to attract customers to their growing product.

Southwest remains the exception to the changing industry landscape for LCCs. The company's planned growth in the
high single digit area would be increased if it could get the additional aircraft at the right price that fits the company's
fleet needs. The carrier, which is one of the few airlines with significant fuel hedge protection, is the industry price
leader. Southwest has been a drag on the ability of the industry to raise ticket prices despite strong demand and fuel
cost pressures because of its hedge positions and its concern on the elasticity of demand, especially in the company's
shorter haul markets. The recent TSA related "hassle factor" increase related to the London terrorism scare increased
this concern by company management over the past few months. This concern now seems to be receding according to
company management. The airline has set a goal to grow earnings by 15% next year but admits that its non-fuel
CASM cannot come down significantly, and the average fuel cost will in fact go up as the average jet fuel hedge price
increases (assuming that oil prices remain at roughly current levels). Therefore, we believe that in order to achieve this
goal, the company has to make it up on the revenue side. Southwest is probably limited in its ability to do this through
yield management because of its low simple fare reputation, thus we believe that with strong demand, the company will
lead a price increase that will be followed by the other LCCs and ultimately by the whole industry.

If our strong 2007 industry scenario unfolds, the carriers will have to be aware that they will begin facing labor cost
pressure trends. Although most contracts are locked in for the next few years, it is a people intense service oriented
industry and disgruntled employees can negatively affect service. Even though all of the airlines have to be aware of
potential risks in this area, in our opinion, U.S. Airways faces the greatest risk as the pilots' contract soon becomes

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amendable at the old America West unit, and the company must also try to integrate the two pilot groups from the
merger between America West and US Airways.

Maintenance trends is another interesting area to watch as most U.S. carriers continue to outsource most if not all of
their heavy maintenance work plus some of their line maintenance work to independent contractors. AMR is the main
exception as it tries to work with its labor unions to make the work force more productive, which would enable the
airline to keep work in-house. At this point, we doubt if this will succeed, but both management and the workforce
should be commended and encouraged for the attempt.

Many industry observers are still maintaining that the airline industry is ripe for mergers. While we agree with this
premise, we do not believe that any merger activity is imminent. Presently, there are no major airlines in any immediate
danger of bankruptcy or liquidation, which could force a merger. Further, current leadership at all the carriers wants to
prove that its respective airline can make it on its own. Structurally, airline mergers are difficult as integrating unions,
cultures, and fleet types create problems for years after any merger. This is the reason we would prefer anti-trust
partnerships. However, in our opinion, the industry currently has too many airlines with too many hubs and as a mature
industry is ripe for consolidation. Financially, the airlines are not ready to merge, though, since they are trying to
recover financial strength after the five lean years since 9/11. However, there is the possibility of outside investors
injecting funds into a merger if they could be convinced that the surviving entity would be stronger than the two merger
partners would be individually, and if they could be convinced that the merger would go smoothly. We believe that the
government regulators and politicians are not ready for any major industry consolidation, however, since they like the
cheap airfares that currently exist, and there does not seem to be any industry crisis on the immediate horizon. We do
not believe that there will be any major consolidation until the next economic downturn, and if it does not occur through
mergers or anti-trust partnerships (less likely) it will be through liquidations.

In summary, we believe that the whole industry will benefit from what we believe will be a strong 2007 for the industry
and should affect most if not all stocks positively. We believe that this rally will not be driven by a sharp decline in fuel
prices but through stronger revenue trends including the probability of ticket price increases early in the year. We
believe that in a strong economy the elasticity of demand is low and that the market could thus support additional ticket
price increases. Needless to say any significant decrease in oil prices, if they were to occur, would further propel
expected industry profitability and stock prices in the first half of 2007. Despite an expected stock price pullback in the
later part of 2006, it may not be too early to begin buying airline stocks. However, we would not be buyers of this
industry on expectation of any imminent M&A activity.

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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.

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
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relied upon by, Private Customers (as defined by the FSA). © 2006 Calyon Securities (USA) Inc. All rights reserved.

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