In reaction to current record high oil prices, United Air Lines, Inc. (NASDAQ: UAUA) has announced that their passengers are going to have start paying a little extra to cover the airlines rising fuel costs.

Domestic travelers are going to see a fuel surcharge increase of between $10 and $20 for round trip tickets. Prior to this increase, passengers were already paying up to a $35 surcharge on their tickets. Depending on what market you would be traveling in, the increase will vary. For example, in markets where United is in head to head battle with low cost airlines, there was previously no surcharge at all, and those markets will now see a $5 charge each way.

This is the second time this month that United passengers were hit with fee increases. Earlier this month the carrier announced that it would be lifting its rates on its round trip tickets between $4 and $30 in response to the current high fuel costs.

If you have a trip planned on United Air Lines, Inc. (NASDAQ: UAUA) over the next couple of days, you may want to call ahead and verify that your flight is still on schedule. According to news reports today, the airline is going to be performing comprehensive inspections of 52 of its 777 aircraft.

Air travelers have been dealing with delays for the past week as all the major airlines are working to get all their planes inspected and given the "all clear" by the FCC. Last week, we saw major cancellations and delays for travelers flying American Airlines (NYSE: AMR) and Delta (NYSE: DAL) as those two carriers were having scores of planes inspected for potential problems with their wiring bundles.

The United inspections are looking at the fire suppression system in the cargo bays. The company wants to make sure that this system is working correctly, and notified authorities when it discovered that one of the five bottles in the suppression system was skipped over during the last inspection of the system.

MAJOR PAPERS:

• The Wall Street Journal reported that KKR Financial Holdings LLC (NYSE: KFN), a unit of Kohlberg Kravis Roberts, revived concerns of a credit crunch after it asked for a restructuring of billions of dollars in short-term debt.

OTHER PAPERS:

• According to sources, the Chicago Tribune reported that Deutsche Lufthansa AG (OTC: DLAKY) could look to take an equity stake in a merger between Continental Airlines Inc (NYSE: CAL) and UAL Corporation's (NASDAQ: UAUA) United Airlines.
• The Associated Press reported that the pilots' unions of Delta Air Lines Inc (NYSE: DAL) and Northwest Airlines Corporation (NYSE: NWA) are unable to agree on how seniority for the companies' pilots would work under a combined carrier. The impasse puts the deal in "serious jeopardy," inside sources reported.

WEB SITES:

• Electronics retailer Sharper Image Corporation (NASDAQ: SHRP) has filed for bankruptcy, citing declining sales and profitability, Bloomberg reported.

Continental (NYSE: CAL) closed at $28.70 Thursday.

CAL and United Airlines (NYSE: UAUA) are in advanced negotiations and could complete a combination quickly if Delta (NYSE: DAL) and Northwest Airlines (NYSE: NWA) strike a deal, says Dow Jones.

WTI Crude oil is recently up .12% to $95.57 according to Bloomberg.

CAL March option implied volatility of 71 is above its 26-week average of 58 according to Track Data, suggesting larger price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

MAJOR PAPERS:

• Within two weeks a merger between Delta Air Lines Inc (NYSE: DAL) and Northwest Airlines Corporation (NYSE: NWA) is expected to be announced. Not far behind may be one between UAL Corporation's (NASDAQ: UAUA) United Airlines and Continental Airlines Inc (NYSE: CAL), the Wall Street Journal reported.

WEB SITES:

• Bloomberg reported that Berkshire Hathaway Inc (NYSE: BRK.A) Chairman Warren Buffett forecast that the dollar's value is likely to decline if policies remain unchanged and said he believes a credit crunch is not under way.
• Tech Crunch reported that either Google Inc (NASDAQ: GOOG) or News Corp's (NYSE: NWS.A) MySpace is likely to announces a social space acquisition in the near-future. According to industry sources, the acquisition could be in the $1B-$1.5B range and may involve Bebo.

Merck (NYSE: MRK) has been upped to "buy" from "neutral" at UBS according to MarketWatch.

Kellogg (NYSE: K) and General Mills (NYSE: GIS) were upped to "buy" at Citicorp according to MarketWatch.

UAL (NASDAQ: UAUA) was upgraded to "buy" from "hold" at Soleil with a target price of $45, according to Briefing.com.

Bear Stearns upgraded Caterpillar (NYSE: CAT) to "outperform" from "peer perform," reports Briefing.com.

Douglas A. McIntyre is an editor at 247wallst.com.

UAL Corporation (NASDAQ: UAUA) stock is falling this morning after being downgraded to Equal Weight from Overweight. The Lehman Brothers analyst cited concerns about the stock price being overly inflated due to merger speculation. This negative stock action comes despite lower oil prices today, which are generally a bullish sign for airlines. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on UAUA.

After hitting a one-year high of $51.60 in October, the stock has declined over the past two months. This morning, UAUA opened at $40.27. So far today the stock has hit a low of $39.70 and a high of $40.66. As of 10:55, UAUA is trading at $40.19, down $0.75 (-1.7%). The chart for UAUA looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bearish hedged play on this stock, I would consider a January bear-call credit spread above the $55 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 6.4% return in 7 weeks as long as UAUA is below $55 at January expiration. United would have to rise by more than 36% before we would start to lose money.

UAUA hasn't been above $55 at all in the past year and has shown resistance around $42 recently. This trade could be risky if the price of fuel comes down dramatically, but if that happens, it will probably mean we are in a recession, which is not good for UAUA anyway.

Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in UAUA.

Earlier this month, rumors hit the market that United Airlines (NYSE: UAUA) and Delta Air Lines (NYSE: DAL) were considering a possible merger. Shortly afterward, Delta officially denied the rumors, but not surprisingly, United Airlines CEO Glen Tilton did not deny that they were considering merger options, as many industry analysts believe that United is the perfect company for a possible merger.

The airline, which took flight in 1930, filed for bankruptcy following the 2001 terrorist attacks and has appeared to be preparing for a sale ever since emerging from its bankruptcy proceedings. United came out of bankruptcy last year, but the company is still up to its eyeballs in debt, and boasts a miserable 2% profit margin over the past year.

When looking at United a couple of factors jump out at you pointing to the notion that the company feels a merger is the best avenue to explore:

MAJOR PAPERS:

• According to the Wall Street Journal's "Heard on the Street," as the economy continues to slow and the credit markets face further turmoil, high-profile companies like Countrywide Financial Corporation (NYSE: CFC) and The Home Depot Inc (NYSE: HD) are cutting back on buybacks as their shares drop.
• The New York Times reported that BlackRock Inc (NYSE: BLK) is expected to be the main asset manager for a $75B fund being created by Bank of America Corporation (NYSE: BAC), Citigroup Incorporated (NYSE: C), and JP Morgan Chase & Co (NYSE: JPM) to help stabilize the market fJor asset-backed securities, according to a source. The Bank of New York Mellon Corporation (NYSE: BK) is reportedly a leading contender to be a custodian of the fund.

OTHER PAPERS:

• A ruling in Vodafone Group Plc's (NYSE: VOD) favor may cause Apple Inc (NASDAQ: AAPL) to rethink its business model for the iPhone device. The injunction against Deutsche Telekom AG (NYSE: DT)'s T-Mobile unit may force Apple to "unlock" its iPhones, the UK Times reported.
• Struggling airline UAL Corporation (NASDAQ: UAUA), along with its unit United Airlines, is struggling, but finding a carrier willing to merge may be a problem, BusinessWeek speculated.

In another bit of good news for the airline sector, UAL Corp. (NASDAQ: UAUA) said earlier today that third-quarter profit rocketed almost 76% higher on a year-over-year basis to $334 million, or $2.21 per share. Excluding items, the parent of United Airlines (the country's number-two carrier as measured by passenger traffic) would have banked $295 million, or $1.96 per share, topping Wall Street's consensus expectations by eight cents.

Revenue rose 6.8% during the reporting period to $5.53 billion. This number also exceeded the consensus outlook, which came in at $5.36 billion. Revenue per available seat mile (money earned for carrying one passenger one mile) moved 8.2% higher in the quarter.

In a statement posted by the Associated Press, UAL Chairman/CEO Glenn Tilton noted that "We delivered excellent results this quarter driven by fundamental improvements across our core business." According to Dow Jones, the company benefited by adding international flights and reducing domestic seat capacity by 4.6% on mainline routes. Increasing demand allowed for an across-the-board lift in ticket prices, which helps offset record-setting fuel costs endured by all airlines.

UAL Corporation (NASDAQ: UAUA), the parent of United Airlines, got beat up pretty good along with the rest of the airline group yesterday.

However, investors should not stampede away from this sector, or more specifically, from UAL. As discussed in a Bear Stearns report released yesterday, the airline, which recently emerged from bankruptcy, continues to explore ways to utilize its massive cash hoard of $5 billion to maximize shareholder value, $1 billion of which management believes is excess cash.

Also, UAL is seeking ways to unlock value for its Mileage Plus program, a business that generates $800 million per year in revenue and has a large deferred revenue stream which provides some visibility for future revenue. Aeroplan, the Canadian-based loyalty marketing service business that was spun off from Air Canada's holding company, sells for a 60% premium to its former parent and a 200% premium on an enterprise value/EBITDA basis to the pure airline, Air Canada.

The Bear report places a $65 price target on UAL, with the asset break-up value of the company going as high as $80. Operational turnaround, huge free cash flow generation and the potential to realize value for the mileage plus business are all cited as reasons that could lead to a considerably higher stock price.

UAL Corporation (NASDAQ: UAUA), the holding company for United Airlines, reported some of the best results in the company's history, as it earned its highest net income in seven years.

• UAL generated operating cash flow of $1 billion for the quarter, versus a market cap $5.5 billion; year-to-date the company has generated $1.5 billion in free cash flow
• Revenue of $5.2 billion is the highest level in company history
• The highest profits in seven years comes despite higher energy prices
• Operating profit margins doubled and most impressive was the free cash flow yield of 20%, pretty amazing considering this industry has a history of never earning its return on invested capital. It appears this might be changing, at least for the short term.

The large net operating loss allows the company to keep most of the money it makes and not pay it to the government. We started blogging about this stock when it was selling for $25 as it emerged from bankruptcy. I'd stay with UAL, as there looks to be a lot more money to be made with this stock.

It's always an interesting feat when you see an airline have some really bad news, yet its stock rallies. UAL Corp. (NASDAQ: UAUA) did just that, with its shares rising yesterday by $0.74 to $38.67 on bad news. Yesterday was a partial wipe-out travel day if you were a passenger trying to go from point A to point B in the morning on a United Airlines flight, UAL's passenger unit. The company blamed a computer malfunction for delays and cancellations of nearly 300 flights from 9:00 to 11:00 a.m. EDT. Other than "computer glitch," there were no other explanations.

Did UAL hire Johnny from 'Airplane' for the "Just Kidding!" unplugging of the radar scene? No, obviously not. But it sure goes to show just how a problem that affected JetBlue Airways Corp. (NASDAQ: JBLU) over major delays can be a PR nightmare if not handled properly. The difference is that when a problem comes up with a regional or smaller discounter it can knock the entire system out of whack for days. When there are 3,600 flights per day with UAL, the complaining is a bit more diluted and a bit less permanent.

If this turns out to be an isolated event, nobody will even remember this in a few days. Airlines do have one thing going for them: Air travel is much more of a hassle compared to pre-9/11 when you could show up 30 minutes before and get through security lines easily. There are also fewer flights with empty seats. The airlines know they can get away with close to anything now.

Just two days before, the company had given a higher forecast for airline revenues and narrowed cost projections, although it is also seeing the same trend of strong international traffic and a softening domestic market.

Jon Ogg is a partner at 24/7 Wall St.; he does not own securities in any of the companies he covers.

Last December, over 100 stocks were featured in our Top Picks for 2007 report. Now, at mid-year, we turn to the 20 advisors whose picks showed the strongest gains to get an update on their previous picks, as well as a new favorite stock for the second half of the year.

David Fried, editor of the Buyback Letter, chose Big Lots Inc. (NYSE: BIG) as his favorite stock for 2007, which rose 39% as of 6/1/07. Please see his original recommendation and his current opinion on Big Lots.

Fried's new pick is SkyWest, Inc. (NASDAQ: SKYW). He explains, "SkyWest, the nation's largest independently owned regional airline, is a contract carrier for United Airlines, Delta Air Lines and, most recently, Midwest Airlines.

"Nimbler than the big legacy carriers and not burdened by their bloated labor costs, SkyWest has a steady earnings stream, good cash flow, and an attractive P/E of 11. Its reputation as an efficient, low-cost operator and as the best-managed regional airline in the business was enhanced with the 2005 acquisition of Atlantic Southeast Airlines, which made SkyWest a player on the national stage.

"Since the mid-1970s, SkyWest has grown from a company with annual revenue of under $1 million to a publicly held company with annual revenues of more than $1 billion and almost 15,000 employees. SkyWest is set for continued long-term growth.

UAL Corporation (NASDAQ: UAUA) opened at $36.24. So far today the stock has hit a low of $36.19 and a high of $38.13. As of 11:05, UAUA is trading at $37.77, up $2.44 (6.9%).

UAUA shares are leading the airline sector in a charge today as UAL subsidiary United Airlines forecast a rise in second-quarter revenue and UBS upgraded U.S. Airways (NYSE: LCC) after an extended performance slump. Many analysts from various investment banks had positive words for the stock and the sector this morning, further boosting the airlines. Recent technical indicators for UAUA have been neutral and improving slightly, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.

For a bullish hedged play on this stock, I would consider a September bull-put credit spread below the $30 range. UAUA hasn't been below $30 since October and has shown support around $33.90 recently. This trade could be risky if fuel costs make another big jump in the next 3 months, but even if that happens, the stock would have to fall by more than 21% before this position would be in trouble.

Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls a position in UAUA or LCC.