United Continental (NYSE:UAL) expects to add $1.2 billion to its combined revenue and cost savings in the next three years following a mega-airline merger last October.

In charge of that rationalization process is a former Continental attorney, Lori Gobillot’s who is now vice-president of integration management, and is trying to wring that money out of a network that flies into 373 airports in 63 countries, with hubs in New York, Chicago, Houston, San Francisco, Washington, Los Angeles, and Tokyo.

That means “combining 1,400 separate systems, programs, and protocols.” And their respective workforces are represented by different labor unions with different work rules flying different aircraft — while United’s fleet has first-class; Continental’s planes have just business and coach, reports Business Week.

Should the possibility of achieving these results spur you to invest? I think there are three reasons to wait:

• Downgraded 2011 airline industry profits. In June, the International Air Transport Association, cut its 2011 profit forecast in half to $4 billion — 78% below the industry’s 2010 profit of $18 billion. The $4 billion would represent a mere 0.7% margin of expected revenue of $598 billion.
• Disappointing first-quarter results. United Continental lost $213 million during its first quarter — its jet fuel costs were up 26.5% to $560 million despite only a slight increase in traffic. Higher airfares covered much of the higher fuel prices — with revenue up 10.8% to $8.2 billion. The good news was that its adjusted loss was 41 cents — seven cents narrower than analysts surveyed by FactSet had expected.
• Progress in trying to earn more than its capital cost. United Continental does not earn enough in operating profit to offset its cost of capital. But it is getting closer – it is producing positive EVA Momentum, which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales. In 2010, United Continental ’s EVA momentum was up 1%, based on 2009 revenue of $16.3 billion, and EVA that improved from negative $1 billion in 2009 to negative $991 million in 2010, using a 7% weighted average cost of capital.

The only good news is that the stock is cheap. United Continental trades at a price-to-earnings-to-growth (PEG) ratio of 0.69 (where 1.0 is considered fairly valued). United Continental’s P/E is 25 on earnings expected to climb 36% to $5.55 a share in 2012. With 2011 earnings expected to shrink 5%, this forecast hinges on a much better 2012.

Weighing the pros and cons of United Continental, my suggestion is to avoid this stock.

Peter Cohan has no financial interest in the securities mentioned.